12 March 2014
Do you offer loans or quasi-loans to your directors in your service contracts?
Under the old Companies Ordinance, loans and provision of securities in connection with loans to directors were generally prohibited subject to certain exceptions.
Under the new Companies Ordinance however, new exceptions to the above general prohibitions have been introduced.
In this legal update, we focus on the granting of loans and quasi-loans to directors (or executive directors) employed by the company.
Read on to find out what your company can do under the new law.
Under the old law
Subject to certain exceptions, loans and provision of securities in connection with loans to directors were generally prohibited.
One of the main relevant exceptions was where a loan or quasi loan entered into by a private company (not being part of a group of which another member company is listed) was approved in a general meeting of shareholders (the "Members' Approval Exception").
Under the new law – the new exceptions
Under the new Companies Ordinance, the Members' Approval Exception is now available not only to private companies but to all companies, including listed companies. For a listed company and a private company (or a company limited by guarantee) being a subsidiary of a listed company however, the loan or quasi-loan must be approved by "disinterested members".
For HR professionals, the good news is that two new exceptions have been introduced. Employer companies are no longer prohibited by the law from providing its executive directors and "shadow directors"1 with the following funds:
- Loans, quasi-loans and credit transactions of value not exceeding 5 percent of net assets or called-up share capital of the company; and
- Funds to meet expenditure, incurred or to be incurred by a director on defending proceedings or in connection with an investigation or regulatory action2.
There are other exceptions to the general prohibition, and these include home loans and leasing of goods and land.
Forgivable loans and quasi-loans
The use of "forgivable loans" and "quasi-loans" is common in the financial services industry and is often used to lure senior executives to join the company from its competitors.
An example of this is where a company offers a "forgivable loan" or "quasi-loan" to a senior executive such that the payment or reimbursement of expenses would be waived by the company when certain conditions are met. Typically, a forgivable loan is made up of several equal annual payments, each of which is forgiven as they become due if the senior executive continues to work for the company.
Another example is where a company provides a corporate guarantee or certain securities to a bank in support of a bank loan to its senior executive.
However, the prohibition under the old Companies Ordinance on granting loans meant that provision of such perks to company directors could be difficult.
With the introduction of the new loan/quasi loan exception however, the good news is that employer companies may now consider providing such perks not just to senior executives but to directors employed by the company if the loan, quasi-loan and credit transaction is of value not exceeding 5 percent of net assets or called-up share capital of the company! Such perks in conjunction with other benefits could help retain talent and boost the company's stability.
1 A "shadow director" is defined in the new Companies Ordinance to mean a person in accordance with whose directions or instructions the directors, or a majority of the directors of the Company are accustomed to act.
2 Note the defence cost loan must be restricted to defence costs for proceedings or investigations in connection with alleged misconduct relating to the company or associated company. Defence costs loan cannot be "forgiven" even if it is less than 5 percent of net assets if the director loses the case.