FAQs on Loan from Directors

12 January 2022 • Muskan Sinha

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FAQs on Loan from Directors

12 January 2022 • Muskan Sinha

There is no explicit section under the Companies Act, 2013 (“the Act”) which specifically deals with the provisions concerning the loan from directors. However, the subject needs to be understood and manoeuvred through restrictions that the law imposes on borrowings by the company. Most of the borrowings by the company which are unsecured are seen as deposits and there are stringent provisions prescribed. Therefore, the important question, in this case, would be whether the loan from directors is a deposit as per the Act? There are other aspects, let’s find out.

 

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1. Will the loan from Directors be treated as a deposit?

Loans from Directors are not considered as deposits [Rule 2(1) (vii) of the Companies (Acceptance of Deposits) Rules, 2014].Amount received as a loan from a director of the company is not considered as a “deposit” as the same is covered under the list of exempted deposits.

2. Can the Company accept loan from a relative of a Director?

The loan from relatives of the director is exempted only in the case of a private company. However, the money given by the relative of a Director should not be out of borrowed funds.

3. What are the reporting requirements for loan from Directors?

As per Explanation to Rule 16 of the Companies (Acceptance of Deposits) Rules, 2014, a company shall be required to file e-form DPT-3 for the transactions not considered as deposits i.e. “Exempted Deposits”. Since, loan from Directors is not considered as deposit, same needs to be reported as Exempted Deposits.

4. What are the other disclosures applicable to the company accepting a loan from Directors or relative of Directors?

A company accepting a loan from directors of the company or a relative of the director shall comply with the following:

  • The Director of the company or his/her relative, shall furnish in writing a declaration to the effect that the amount is not being given out of borrowed funds; and
  • Disclosure of the details of money so accepted by the Company in the Board’s Report.
  • Disclosure in its financial statement, by way of notes, about the money received from the directors, or relatives of directors.

5. Is there any limit upto which monies can be borrowed from the Director?

The law has prescribed an overall limit up to which money can be borrowed by a company under Section 180(1) (c) of the Act and not any specific limit for loan from directors. The board would be required to take consent of the members of the company by way of Special resolution if the money to be borrowed, together with the money already borrowed by the company exceeds the aggregate of:

  • its paid-up share capital,
  • free reserves, and
  • securities premium

 

6. Is the borrowing limits as stated above is applicable to a Private Limited Company?

Pursuant to Notification by the Ministry of Corporate Affairs dated 05th June, 2015, provisions of Section 180 of the Companies Act, 2013 do not apply to a private company. For other companies (public limited), this limit plays out only in terms of additional requirement of shareholders’ approval by way of special resolution.

7. Can the resolution to borrow funds be passed by circulation?

Borrowing Power is to be exercised by the board in the Board meeting only [Section 179(3)].The Board can exercise the power to borrow monies only in a duly convened board meeting. This implies that the resolution according the consent of directors cannot be passed through circulation.

8. What is the step-by-step procedure to accept a loan from Director or his /her relative?

The step-by-step procedure to accept a loan from Director or his / her relative is as follows:-

  1. Board meeting to pass the resolution for accepting a loan and approval of limit.
  2. Get a signed declaration from the Director or his / her relative that the money given is not out of borrowed funds. Get the loan agreement with all terms and conditions signed.
  3. File e form DPT-3.
  4. Disclose the details of such amount in the Board’s Report.
  5. Disclosure of amounts received from relatives of directors out of their own funds, in Financial Statements (in Notes to the Accounts).

9. Is a loan from a Director considered as a Related Party Transaction (RPT)?

A Director or a KMP is considered as a related party in terms of Section 2(76) of the Act and hence any transaction with the director or KMP shall be regarded as a related party transaction.

However, only those transactions are considered as related party transactions that are enumerated in Section 188(1) of the Act. The transactions specified in Section 188 are primarily in the nature of sale and purchase of goods, properties and services. Since the borrowing of money is not covered under Section 188 of the Act, the acceptance of a loan from the director shall not be considered as RPT.

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