Most Read Contributor in Hong Kong, September 2016
Keywords - new companies ordinance, forgivable loans,
quasi-loans, company directors, service contracts
Do you offer loans or quasi-loans to your directors in your
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
Read on to find out what your company can do under the new
Under the old law
Subject to certain exceptions, loans and provision of securities
in connection with loans to directors were generally
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
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
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
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This article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
legal advice before taking any action with respect to the matters
discussed herein. Please also read the JSM legal publications
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