One company has money, the other has none: how to move funds inside a group

Hook

The boss has three companies. Company A has a million sitting in the account this month, doing nothing. Company B has payroll next week and is three hundred thousand short. Same boss, same person signing. Transfer three hundred thousand from A to B — is that allowed? Most people answer: "They are all my companies, of course it is." That answer is half right, and half of it will put you in court. Because the line is not drawn around "the same boss". It is drawn around the shareholding.

Section 225: no lending to a "connected person"

Section 225 of the Companies Act 2016: a company other than an exempt private company must not lend money to a person connected with a director, and must not give a guarantee or provide security for such a loan. Everything turns on the words "connected person". Most people assume a connected person means a person — the wife, the children, a brother. Not only. A connected person includes companies. So which companies count? The definition is in section 197.

The line: twenty per cent of the voting power

Section 197 says a company is connected with that director in a few situations. One: that company, or the majority of its directors, is accustomed to act on that director's instructions. Two: that director has a controlling interest in that company. Three — and this is the important one, because the threshold is startlingly low — that director, or his connected persons, or the two of them together, is entitled to exercise or control not less than twenty per cent of the voting power in that company. Twenty per cent. So back to the question at the top: as long as the boss, together with his family, holds more than twenty per cent of the voting power in company B, company B is a person connected with a director of company A. A lending to B falls squarely inside section 225. The penalty is the same as the one for lending to a director: the director who authorised it faces five years, or three million ringgit, or both.

But: inside a group there is an express exemption

At this point you might think the whole group is frozen. It is not. The provision gives an express exemption. Section 225(2) is very clear: a loan made to a subsidiary, to a holding company, or to another subsidiary of the same holding company is not caught by this section. So the whole thing compresses into one sentence. And that is exactly why the phrase "associated company" is a dangerous one. In your books, a subsidiary consolidated into the group and a sister company you hold personally both look like family. Under section 225, they are two different things.

Company B is short of money: four proper routes

So company B really is short. What do you do? Four routes. Route one: an inter-company loan. Pass the connection test we just went through first. If you pass it, do it properly: board resolutions on both sides, a written loan agreement, a reasonable rate of interest, a repayment date. ⚠️ One tax point to flag here: a loan between related parties has to carry a reasonable rate, and zero interest will be adjusted. And once interest expense reaches a certain size, the deductible amount is capped — the figures are on the episode page, because they do get revised. Route two: subscribing for new shares. Company A subscribes for new shares in company B. The money goes in as share capital and is not repayable. Note that a director issuing new shares normally needs prior shareholder approval. Route three: declare a dividend first, then inject. B's sister company declares a dividend to the common holding company, and the holding company injects it into B. But a dividend has two gates: it can only be paid out of distributable profits, and the directors must be satisfied that the company will still be able to pay its debts within twelve months of the payment. Route four: no cash, just a guarantee. Let B borrow in its own name with A as guarantor. ⚠️ Remember that this is a contingent liability and has to be disclosed in the accounts — and if what is being guaranteed is a director's personal borrowing, you are back in section 224, and the answer is no.

The short cut: lend to the director, then move it on

Now the one bosses ask about most. "So what if I do it like this — company A lends to me first, and then I put the money into company B. That is all right, surely?" It is the worst of the four routes. Five reasons. First, the company's money becomes your personal debt. What was cash in company A's books is now "amount due from director". If company B goes under, that is not company A's loss — it is you personally owing company A, and you have to repay it. You have moved the company's risk onto yourself. Second, the first leg is itself a section 224 breach. A lending to you is a loan to a director. Unless you are an exempt private company, it is simply unlawful. Third, the deemed interest still runs. For as long as that money sits under your name, the deemed interest keeps accruing every month. Going round the houses does not save anything; it adds a layer of tax. Fourth, it will be dug up in a liquidation. Money moved to a director before the company went down is the first thing a liquidator looks at. And the Companies Act already requires it — a director must act in the best interests of the company. Fifth, you cannot hide it. Related-party transactions have to be disclosed in the accounts by the auditor anyway. Going round the houses only makes the note look worse; it does not make it disappear.

One extra no-go area

There is one more thing. It has nothing to do with lending, but it turns up alongside it all the time. If the purpose of the money is to buy shares in the company itself, or in its holding company — that is another matter altogether. It is called financial assistance. The Companies Act prohibits it outright — whether or not you are one group, and whether it is by way of a loan, a guarantee, or the provision of security. An unlisted company has one exception route it can take, but that route has seven conditions and not one may be missing: a special resolution, a directors' resolution, a solvency statement, a cap on the amount, fair value, a time limit, and notice to every shareholder. Those seven conditions are not a formality. Miss one and the whole thing is void. If you are going to take that route, get a professional in first. Do not do it yourself.

To close

One line to close: if money has to reach company B, send it down the share-ownership chain, or send it in as share capital. Do not use the boss's personal account as a staging post. That is not saving trouble; that is moving the company's problem into your home. Three companies owing each other money and you want to work out how it should be arranged? Grab a coffee first and talk about your business. For the accounting, come to LTT. I am LTT, helping SME bosses get their accounts straight. Follow us, and see you next time.