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Loan to Director & Loan from Director

Loan to Director:- The Companies Amendment Act, 2017 has made significant Amendments to Companies Act, 2013 which includes amendment to Section 185 of Companies Act, 2013 related to Loans to directors, etc. In this Article we have tried to analyze the amendments to Section 185 of Companies Act, 2013.

Section 185(1) of the Companies Act, 2013

No company private or public

Directly or indirectly

Advance any loan including book debt

Or any guarantee or security in connection with any loan taken by

  • Any Director of company, or of a company which is its holding company
  • Any partner or relative of any such director; or
  • Any firm in which any such director or relative is partner.

Section 185(2) of the companies act, 2013
Following loan can be given by company to any person in whom directors are interested after fulfilling the conditions mentioned below:

  • Advance any loan, including loan represented by a book debt
  • Give any guarantee
  • Provide any security in connection with any loan taken          

Conditions:-

a) Special Resolution passed by the Company in General Meeting

b) The loans are utilised by the borrowing company for its principal business activities.

To any other person in whom director is interested means:

a) Any Private Company of which director is a director or member;

b) Body corporate in which 25% or more voting power rest with one or more director;

c) Body corporate whose board accustomed to act on directions or instuctions of board, or of any director or directors of lending company.

Section 185(3) of the Companies Act, 2013:-

Nothing contained in sub-section (1) and (2) shall apply to–

a) Loan to Managing Director & Whole Time Director

  • Loan can be given to a Managing or Whole-Time Director as a part of the condition of their service extended by the company to all its employees; or
  • Loan can be given to a Managing or Whole-Time Director pursuant to any Scheme approved by the members by a special resolution.

Example: The Companies pass a resolution for appointment of Managing Director and it approves the terms and conditions of its appointment and if as a part of its terms, there is a loan which can be given to that director, then it falls under the exception given in section 185 of the Act.

b) Loan in Ordinary Course of Business:

A company which in the Ordinary Course of its business provides:
– Loans or
– Gives guarantees or
– Securities for the due repayment of any loan and
– In respect of such loans an interest is charged at a rate not less than the rate of prevailing yield of one year, three year, five year or ten year government security closest to the tenor of the loan.

S.No.

Questions

Answers

1.

Can a company give loan/ guarantee/ security to director of company/ director of holding company/ partner or relative of such director?

No, it is prohibited under section 185(1)

2.

Can a company give loan/ guarantee/ security to any firm in which any such director or relative is partner?

No, it is prohibited under section 185(1)

3.

Can a company give loan to a private company in which such director is director or member?

Yes, safter passing Special Resolution in General Meeting.

4.

Can a company give loan/ guarantee/ security to a body corporate in which not less than 25% of total voting power may be exercised or controlled by such director or two or more such directors?

Yes, after passing Special Resolution in General Meeting.

5.

Can a company give loan to its Managing Director/ Whole-time Director?

Yes,

  •  if it is as per condition of service extended to all employees of the company; or
  • Pursuant to  any scheme approved by the members by Special Resolution

6.

Can a company give loan to its directors in the Ordinary Course of its business?

Yes, if interest is charged at a rate not less than the rate of
prevailing yield of one year, three years, five years or ten years Government security closest to the tenor of the loan

Important Note: As per exemption notification dated 05.06.2015 provision of section 185 shall not apply to a private company if:-

a) In whose share capital no other body corporate has invested any money;

b) The borrowing of such company from banks or financial institution or any body corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower, and

c) Such a company has no default in repayment of such borrowing subsisting at the time of making transaction under this section.    

Example. If person A is Director in Company XYZ Pvt. Limited and PQR Private Limited. In such situation XYZ limited are allowed to give loan and guarantee to PQR limited after passing of special resolution provided that PQR limited will use such amount of loan or guarantee in principal business activity of the company.

Example. Company A has two Directors Mr. X and Mr. Y. Both holds 50% share each of Company. Company A wish to give loan to following-

1.) Loan to Director X.

2.) Loan to relative of Director Y

3.) Loan to a private company in which Mr. X is a member

4.) Loan to Partner of director of holding company

5.) Loan to Director X if he is a Managing Director

6.) Loan to a firm in which relative of Mr. Y is a partner

Solution:- According to section 185 of the Companies Act, 2013, company A can give loan in situation 3 & 5 only, other categories are prohibited.

Example: ABC private limited wishes to give loan to its directors, following are the details of ABC private limited:

Paid up share capital of company- Rs. 10 crore
Total borrowing of the company- Rs. 15 crore
Note: No body corporate has invested money in this company and no default has been made in repayment of borrowing.

Solution: ABC private limited can grant loan to its directors because-
the company does not have borrowing more than twice of its share capital and
No body corporate has invested any money in ABC private limited.

And no default has occurred in the repayment of borrowing.

Example: XYZ private limited wishes to give loan to its directors, following are the details of ABC private limited:

Paid up share capital of company- Rs. 30 crore
Total borrowing of the company- Rs. 56 crore
Note: No body corporate has invested money in this company and no default has been made in repayment of borrowings.

Solution: XYZ private limited can not give loan to its directors because-

1.) Although total borrowing of company is less than twice of its share capital but the amount of borrowing is more than 50 crore, thus the provision of section 185 will be applicable on XYZ private limited.

Loan from Directors

Loan from director

Private Company

Public Company

1.) Loan from Directors by Private Company:- Yes private limited company can accept loan from directors.

 For accepting loan from directors or their relative, "The director or relative of the director of the private company from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing, that the amount is not being given out of funds gathered or collected by borrowing or accepting loans or deposits from others and the company must make a full disclosure of the details of money so received in the board’s report."

Note:-After Amendment loan received by a private limited company from its directors or relative of directors does not fall under the category of “Deposits”, hence there is no need to comply with the provisions relating to accepting deposits under companies act, 2013.

2.) Loan from Directors by Public Company:- Yes a public company can also accept loan from its directors, but not from the relative of  the director. The following provisions have to be complied for accepting loan from the director.

a.) Director will give a Declaration in writing that money is not given out of borrowed funds.

b.) If Proposed + Existing borrowings (exclude temporary borrowings) > (paid up capital +Free Reserves), the Company shall have to pass Special Resolution in General Meeting.