Question: For repayment of shareholders’ loans, do we need to pass resolution? There was no shareholders’ loan agreement entered into.
We received this question recently. If this was your Company, what would you do?
In this blog post, we wish to share our thoughts on this. Let’s break down the question into two aspects and analyse them from the perspective of preparing Board resolutions.
“For repayment of shareholders’ loans, do we need to pass resolution?”
Our reply was: Yes.
When the company obtained the shareholders’ loans, this would have been accounted for in the company’s financial statements as liabilities in the balance sheet. Likewise, when the company wishes to repay the loan, this reduction in the company’s liabilities has to be recorded in the balance sheet.
In order to record the repayment of shareholders’ loans, the company’s accountant or auditors would usually require supporting documents. Other than the journal entries to reflect the cash outflow, the company should also pass a Board resolution to approve this repayment before the cash outflow takes place.
“There was no shareholders’ loan agreement entered into.”
In view that there was no shareholders’ loan agreement entered into between the company and the shareholder(s), it was all the more important for the company to pass a Board resolution to record the repayment of shareholders’ loans.
The company must be able to account for its assets and liabilities as well as cash flows. Even if the company is able to reflect these in its financial records by way of journal entries, the rationale and terms of repayment should be tabled to the Board for consideration and approval, to ensure that the Board has considered this transaction and that it is in the best commercial interest of the Company.
Shareholder(s) might have charged an interest on the loans provided to the company. Again, to record the loan interest and interest payments, it is best to record accurately the terms of loan repayment as agreed with the shareholder(s).
At the starting point…
Taking a step back to where shareholders’ loans were first granted to the company, what if there was no Board resolution passed then?
In the first place, for good corporate governance, loans to be taken by the company should be approved by the Board of Directors. It would be better if the company records the reasons for taking on shareholders’ loans as compared to alternatives such as bank loans and that the shareholders’ loans were in the best commercial interest of the company.
If there was indeed no Board resolution passed at the point where shareholders’ loans were granted to the company, there are typically two approaches you could address this.
- If the company does not intend to repay the shareholders’ loans yet, it can pass a current-dated Board resolution to ratify and approve the shareholders’ loans. In the same Board resolution, it should record the rationale and terms of the loans in order to justify the purpose of the shareholders’ loans and that they are in the best commercial interest of the company.
- If the company intends to repay the shareholders’ loans, it can pass a Board resolution to approve the repayment. In the same Board resolution, it can set out the rationale and terms of the shareholders’ loans in the recital portion of the Board resolution in order to provide the context of the repayment.
Do things the right way
Whatever business transaction it might be, if you have questions as to whether there is a need to prepare Board resolution, remember “Good Corporate Governance”.
You must help your Company uphold good corporate governance so that there are proper records and controls within your Company to ensure transparency and accountability to relevant stakeholders on the financial, operational and other aspects of your Company.
Lastly, if you need resolutions relating to shareholders’ loan, you may wish to check out our Value Suite which covers typical corporate actions including matters relating to loans.
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