Refining the Prohibition on Related Party Transaction Provision

Refining the Prohibition on Related Party Transaction Provision

The Existing Position of the law

Related party transaction is any financial transaction, agreement or relationship directly or indirectly involving director or executive officer or their immediate family members in return to benefit himself rather than the company. Any transaction involving related party not necessary to be void there are certain requirement must made to ensure that the agreement or contract is valid. One of the requirements is make a full and frank disclosure to avoid conflicts of interest. According to Section 133 of Companies Act 1965, any company other than exempt private company shall not make any loan to a director of the company or company that is related to the company; or make guarantee or provide security on the loan made by director. In the case of Heald v O’Connor (1971), the court held that the purchaser of the company’s share was not liable on the guarantee as the guarantee is an unenforceable debt guarantees.

In the word of shall not make does not means that the prohibited transaction is void, there are certain facts that need to be prove the prohibited transactions are made illegally by Act and subject to apply penalty on the officer that involved.

Under Section 122A, the person who is connected with the director when he/she is a member of that director’s family which shall include his spouse, parent, child, brother, sister and the spouse’s brother and sister; a body corporate which is associated with the director; a trustee of a trust under which that director or a member of his family is a beneficially.