Loans to Directors and Related Party Transactions in Malaysia: What Sections 224, 225 and 228 Prohibit
In many Malaysian companies, especially family-owned ones, money moves freely between the company and its directors. A director borrows from the company to buy a car. The company buys land from the director’s brother. The director’s wife’s company supplies goods at a generous margin. Each of these transactions is regulated by the Companies Act 2016, and each can be unwound, with the director ordered to account for the profit and prosecuted, if the statutory rules are not followed. This article explains the three provisions that matter most.
Section 224: no loans to directors
Section 224(1) prohibits a company from making a loan to a director of the company or of a related company, and from giving any guarantee or security in connection with a loan made to such a director by any other person. A related company includes the holding company and subsidiaries. The prohibition covers the common situation where a director draws money from the company and books it as an “advance” or “director’s account”.
The Act provides limited exceptions. The prohibition does not apply to an exempt private company, which is a private company with no more than 20 members none of whom is a corporation. It also does not apply to a loan to a director to meet expenditure incurred or to be incurred for the purposes of the company or to enable the director to perform his duties, provided the company gives prior approval at a general meeting, or to a loan to a full-time director to purchase or improve a home, or under an employee loan scheme approved by the company. Outside these exceptions, the loan is unlawful.
Section 225: no loans to persons connected with directors
Section 225 extends the prohibition to loans, guarantees and security in favour of persons connected with a director. A person is connected with a director under section 197 if that person is a member of the director’s family, meaning the spouse, parent, child (including adopted and step-children), brother, sister, and the spouse of the director’s child, brother or sister, or a body corporate associated with the director, broadly one in which the director or the director’s family controls at least 20 percent of the voting shares or the composition of the board, or a trustee of a trust under which the director or family members are beneficiaries. The exceptions mirror those for section 224.
Consequences of an unlawful loan
A director who authorises a loan in breach of section 224 or 225 commits an offence punishable by imprisonment of up to five years, a fine of up to RM3 million, or both. The company can recover the amount lent, and the directors who approved it are jointly and severally liable to indemnify the company for any loss. Auditors are required to report such loans, and a liquidator reviewing a failed company’s books will look for them first.
Section 228: substantial value transactions with directors and substantial shareholders
Section 228 addresses a different mischief: the sale or purchase of assets between the company and its insiders. A company shall not enter into or carry into effect any arrangement or transaction with a director of the company, its holding company or its subsidiary, a substantial shareholder of the company or its holding company, or a person connected with such a director or substantial shareholder, to acquire or dispose of shares or non-cash assets of the requisite value, unless the arrangement is first approved by a resolution of the company, and of the holding company where the counterparty is a director or substantial shareholder of the holding company.
An arrangement is of the requisite value if the value of the asset is not less than RM250,000, or exceeds 10 percent of the company’s asset value provided it is not less than RM10,000. The company’s asset value is taken from its latest audited accounts. The interested director or shareholder must abstain from voting on the resolution. Recent decisions of the Malaysian courts have applied section 228 strictly: the approval must be prior approval, and a resolution passed after the transaction has been carried into effect does not cure the breach.
Consequences under section 228
Where a transaction is entered into in breach of section 228, it is voidable at the instance of the company unless restitution is no longer possible or a third party has acquired rights in good faith for value. The director, substantial shareholder or connected person who was party to it, and any director who authorised it, are liable to account to the company for any gain and jointly and severally to indemnify the company for any loss. In addition, every director who authorised the arrangement commits an offence punishable by imprisonment of up to five years, a fine of up to RM3 million, or both.
Listed companies: related party transactions under the Listing Requirements
Companies listed on Bursa Malaysia must additionally comply with Chapter 10 of the Main Market Listing Requirements on related party transactions. Depending on the percentage ratio of the transaction, the company may need to announce the transaction, appoint an independent adviser, obtain shareholder approval with the related party abstaining, and obtain a mandate for recurrent related party transactions. These requirements apply in addition to, not instead of, section 228.
Practical guidance
Before any transaction between a company and a director, a shareholder or their relatives and associated companies, ask three questions. Is it a loan, guarantee or security caught by sections 224 and 225? Is it an asset transaction of the requisite value caught by section 228? Has the interest been declared under section 221 and the required shareholder resolution passed before the transaction is entered into? Where the answer to the first two is yes and the third is no, the transaction should not proceed until it is. Cleaning up historic director’s loans and unapproved asset transfers is also a common exercise before a sale of the company, a fundraising or a dispute among shareholders, and it is far cheaper to do it voluntarily than in litigation.
Frequently asked questions
Can a Sdn Bhd give a loan to its director?
Generally no. Section 224 of the Companies Act 2016 prohibits loans to directors except for exempt private companies, loans for company expenditure approved at a general meeting, home loans for full-time directors and approved employee loan schemes.
Who is a person connected with a director in Malaysia?
Under section 197, the director’s spouse, parents, children, siblings and their spouses, a body corporate in which the director or family controls at least 20 percent of the votes or the board, and a trustee of a trust benefiting the director or family.
When does a transaction with a director need shareholder approval?
Under section 228, where the company acquires or disposes of shares or non-cash assets worth RM250,000 or more, or more than 10 percent of the company’s asset value (minimum RM10,000), with a director, substantial shareholder or connected person, prior shareholder approval is required.
What happens if a director’s loan was made without approval?
The loan is recoverable by the company, the directors who approved it are liable to indemnify the company, and each of them commits an offence punishable by up to five years’ imprisonment or a fine of up to RM3 million.
How NZSK Legal can help
NZSK Legal advises boards and shareholders on structuring transactions with directors and related parties so that they comply with sections 224 to 228, and acts in litigation to set aside unapproved insider transactions and recover director’s loans. We regularly handle these issues in shareholder disputes, company sales and liquidations.
