Loans to Directors: Sections 224 and 225 in Practice

The general prohibition: section 224

Section 224 of the Companies Act 2016 prohibits a company (other than an exempt private company) from:

• making a loan to its director, or to a director of a company deemed related to it under section 7;
• entering into any guarantee or providing any security in connection with such a loan;
• or, where the company is a holding company, making such a loan to a director of its subsidiary.

The breadth is deliberate. A “loan” includes any direct or indirect financial accommodation. A “guarantee or security” reaches arrangements where the company effectively backs the director's borrowing from a third party.

The connected-person extension: section 225

Section 225 extends section 224 to loans (and guarantees and security) to persons connected with a director. Connected persons include:

• the director's spouse;
• the director's children (including step-children and adopted children);
• the director's parents;
• the director's siblings; and
• spouses of the director's children or siblings.

A common misconception is that section 225 reaches “related companies.” It does not, that ground is already covered by section 224 read with section 7. Section 225 is the family reach.

What is allowed: the statutory exceptions

Sections 224 and 225 are not absolute. The exceptions in section 224(2) (mirrored in section 225) include:

• Advances for company expenses.The company may advance funds to a director to meet expenditure incurred or to be incurred in performing the director's duties.
• Housing loans for full-time executive directors. Where housing loans are made on terms generally available to employees of the company, and approved by the shareholders.
• Approved employee loan schemes. Loans made under a scheme available to employees generally and approved by shareholders.
• Money-lending companies.Where the company's ordinary business includes the lending of money, and the loan is on no more favourable terms than would be available to comparable customers.

Penalties for breach

Every director who authorises a transaction in contravention of section 224 or 225 commits an offence. On conviction:

• Fine of up to RM3 million and/or imprisonment of up to 5 years; and
• The director who has received the loan (or for whose benefit the security was given) must repay the amount or make good the loss, and may be jointly and severally liable with the authorising directors.

Where companies most often slip

• “Director's account” debit balances.Where a director draws against the company over time and the accounts treat it as a director's loan account, the cumulative balance is a loan within section 224 and needs to be addressed.
• Inter-company transactions where the borrowing company is connected to a director. Loans from operating company A to operating company B may be caught if B is a related corporation and the director sits on both boards.
• Guarantees of personal bank loans.Where the company guarantees a director's personal banking facility, even informally, section 224 bites.
• Housing loans without proper approval. A housing loan to an executive director can fall within the exception, but only if approved by shareholders and on the terms generally available to employees.

Practical steps to stay on the right side

• Run an annual review of director and connected-person balances with the company secretary and accountant.
• Document any housing loan or employee scheme approval at the AGM (for public companies) or by written resolution (for private companies).
• For exempt private companies (very limited category), confirm the exemption applies, most companies are not exempt private.
• For group reorganisations, check section 7's deemed-related rules before structuring loans between affiliates.

If your company is being asked to lend, guarantee, or provide security in favour of a director or a connected party, please contact us before the arrangement is documented. The sections 224 and 225 perimeter is unforgiving.