Can a Hong Kong Company Lend Money to Its Directors?

Part 11 of the Companies Ordinance regulates dealings between companies and their directors.

The core rule (s.500). Without the prescribed approval of its members, a company must not make a loan to a director (or to a body corporate controlled by a director), or give a guarantee or security for such a loan. Similar rules cover loans to directors of a holding company, and quasi-loans and credit transactions for certain specified companies (ss.501-503).

Exceptions include

• aggregate transactions that do not exceed 5% of net assets (or of called-up share capital if there are no relevant statements) (s.505);
• funds to meet expenditure for the company's purposes or to perform duties as an officer (s.506);
• defence-of-proceedings costs in defined cases (s.507);
• certain home loans (s.509);
• lenders acting in the ordinary course of business on arm's-length terms (s.511);
• intra-group transactions (s.512).

Approval (s.496). The members' resolution must be passed before the loan, after every member is sent a memorandum stating the nature, amount and purpose of the loan. Section 518 covers loss-of-office payments, not loans.

Breach (ss.513-514). Part 11 attaches civil consequences, not a fine: the loan is voidable at the company's instance, and the director concerned and any director who authorised it can be liable to account for any gain and to indemnify the company for loss. Members can affirm the loan within a reasonable period.

Disclosure. Loans and quasi-loans to directors must be disclosed in the notes to the financial statements (s.383).

In practice: a debit balance on a director's current account can amount to a loan. Take advice before the company funds a director personally, and document member approval where it is needed.

This is general information, not legal advice or a substitute for your statutory audit.