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Directors F4 LAW
Association of Chartered Certified Accountants - ACCA (PAC150)
INTEC Education College
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ACCA LW-MYSPreview text
LOAN TO DIRECTOR
Zain is a EXECUTIVE director of two companies, MakroHard Berhad and Selkomp Sdn Bhd. Zain urgently requires a loan of RM300,000 partly for meeting his own medical expenses, whereby he requires to undergo an urgent operation and partly to finance the renovation of his house which was badly damaged by the recent landslide in the area.
Zain is considering obtaining a loan from MakroHard Berhad and Selkomp Sdn Bhd.
Required :
a) Does the Companies Act 2016 allow a company to give loan to its directors? (4 marks) b) b) Advise Zain as to the legality of such loan under the Companies Act, 2016. (2 marks)
Suggested answer :
(a) – THIS QUESTION ONLY REQUIRES STATEMENT OF THE LEGAL PRINCIPLE - no need to relate to facts of the question yet
Generally, s of the Companies Act (CA 2016) prohibits a company from giving loan to its director or from giving financial assistance (in the form of guarantee/securities) to its director. However, there are exceptions to this general prohibition
1- this prohibition is not applicable to a private exempt company. 2- a foreign company is not prohibited 3- funds to a director to perform his duties as a director (this loan must be approved in the general meeting (GM)) 4- loan to a director who is an employee of the company to enable him to purchase a home (this loan must be approved by the GM) 5- the company has an employee loan scheme – and the director is an employee of the company and the loan is approved by the GM
Therefore, the company generally cannot give loan to its directors unless it falls under any of the exceptions.
(b) The issue is whether Zain (Z) a non-executive director can be granted loan by
-MakroHard Bhd (MHB) and Selkomp Sdn Bhd (SSB)
For – expenses of his urgent surgery; and/or
For – renovation of his house
Applying s CA 2016 mentioned in (a) above, generally, Z cannot obtain any loan from MHB or SSB for any of the purposes. Z can only get loan from either MHB or SSB if the exceptions are applicable.
Loan from SSB (a private exempt company)
Assuming SSB is a private exempt company, then, Z can obtain the loan for expenses of his surgery and expenses of renovation of his house from SSB. In this circumstance, both loans will be legal under the CA 2016.
Loan from MHB (a public company) / SSB (a private company)
· Assuming his surgery is urgently necessary for him to carry out his duties as a director then he may get this loan from MHB or SSB (provided this loan must be approved in the general meeting (GM) of MHS or SSB). In these circumstances, the loan for the surgery will be legal under the CA 2016.
· The facts states that Z is a non-executive director, thus, most likely he is not an employee director of the company. Therefore, the exceptions for loan to a director who is an employee will not be applicable. Assuming he is an employee director, the loan is not to purchase a home BUT to renovate his house, thus, it may not fall under this exception.
· The facts also do not mention of any employee loan scheme in MHB or SSB. Assuming there is such scheme in MHB and SSB, if Z is not an employee director, he still cannot apply for any loan under the employee loan scheme.
In these circumstances, the loan for renovation will be illegal under the CA 2016.
(iii) The duty to avoid conflict of duty and personal interest
This duty requires the director not to use his position as a director to make a personal profit for himself or for another he cannot make secret profits nor usurp corporate opportunities. See: Regal (Hastings) Ltd v Gulliver; IDC v Cooley.
In the given problem the facts indicate that the directors had squandered the company’s funds on matters which were not beneficial to the company. The purchase of the Rolls Royce and the expenditure of RM1 million in entertainment expenses are possibly matters which are not in the best interest of the company.
In relation to the donation of RM1 million to the Blissful Old Folks Home, at first glance it seems to be within the scope of the power of the directors. However, as the facts indicate that such donations may have been given to ensure that Dira’s mother was well taken care of, it may be concluded that the directors had not acted in the best interest of the company and are therefore in breach of the fiduciary duty. See: Re W & M Roith Ltd.
With regard to the purchase of the piece of land from Isa for RM2 million, when its true market value was only RM1 million, it is clear that the directors have breached their fiduciary duty to act honestly and in the best interest of the company. They have taken a gift of RM200,000. This amounts to a secret profit. Hence they may also be considered to be in breach of their duty not to make secret profits. See also: Mahesan v Malaysian Government Officers Cooperative Housing Society (1978)
Dividend and Duties to get approval of members
Golshine Sdn Bhd, has four directors, Ali, Baba, Taj and Cho. Ali is the managing director. Together they hold 40% of the company’s issued shares. The company has been profitable but no dividends have been declared for the past three years. Last year the company made a net profit of RM10 million. Of this, a large part of the profits has been used on huge expansion purpose of the company. RM million was spent on the purchase of a dilapidated bungalow from Jena, the sister of Taj. The market value of the property(bungalow) is only around RM700,000. More recently, RM3 million was used to purchase a luxury yacht from Laya Sdn Bhd by the four directors.
Required:
Advise Tim and Tam, who each hold 10% of the issued shares of Golshine Sdn Bhd:
(a) whether they have the right to demand that dividends be declared and paid.
(2 marks)
(b) whether the directors have breached any provision(s) of the Companies Act 2016 in relation to the purchase of the bungalow from Jena and the luxury yacht from Laya Sdn Bhd. Assuming they did, state the consequences of breaching the provision(s).
(4 marks)
(6 marks)
This question tests the candidates’ ability to identify, analyze and apply the law on dividend and transaction of substantial value requiring approval.
Tim and Tam may be advised as follows:
(a) The general rule is that dividends must be declared before it becomes payable. The company in general meeting may declare a dividend but such dividend cannot exceed the amount recommended by the directors. Thus effectively the directors have the right to decide whether dividends may be declared and if so the amount. Under the CA 2016, the sole authority to authorize the payment of dividends is with the directors. Section 132(1) provides that “before distribution is made by a company to any shareholder, such distribution shall be autorized by the directors of the company”. Hence, company cannot be compelled to declare dividends even if it has made profit. The profit might also be used to repay debts or for expansion purposes. Individual shareholders cannot demand that dividends be paid. Therefore, Susie and Laily have no right to demand that dividends be declared and paid.
(b) With regard to the purchase of the bungalow from Jena, Taj’s sister, this transaction may be invalidated under s of the Companies Act 2016, while the purchase of the luxury yacht from Laya Sdn Bhd may be invalidated under s of the Companies Act 2016.
The purchase of the bungalow from Jena, Taj’s sister. By that section, a company may not enter into any arrangement or transaction with its director or person connected with such director to acquire from or dispose to such director or connected person any non-cash asset of the requisite value unless it is first approved by a resolution of the company general meeting. A non-cash asset will be of requisite value in any event where the value of the asset exceeds RM250,000. As the value of the bungalow clearly exceeds the above amount and the transaction was with a person connected with a director (Jena being the sister of Taj), the directors should have obtained approval of the company in general meeting. As they failed to do so the An arrangement or transaction which is carried into effect
Directors F4 LAW
Course: Association of Chartered Certified Accountants - ACCA (PAC150)
University: INTEC Education College
