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.
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:
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:
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:-
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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Hello Sir,
Thank for such elaborative useful info. I have few question.
1. Can a Director give Secured Loan to Company? If yes, what can be the Security of the loan? Can the Company hypothecate?
2. If in case of Secured Loan to Company by Directors and from Bank as well, whose right will come first?
3. How a Loan from Directors can be secured?
Thanks
Dear Reader,
Please find below our replies to your queries:
1) Since there is no explicit section under the Companies Act, 2013, which deals with the provisions concerning the loan from directors, thus general provisions of loan shall apply in case of a loan extended by a director. Therefore, per our understanding, the loan from director(s) can be secured or unsecured.
2) It will depend upon the terms and conditions of the loan agreement.
3) A loan from director can be secured by the company against its fixed assets as may be mutually agreed and decided by the director and company.
For assistance in this regard, you may seek professional advice in this matter.
Thanks for such information. Can you also elaborate, in case company is not able to pay back the director the loan he/she has given over years because the firm is in losses and wants to close. Its a private limited firm and Director is also a shareholder from day 1.
Dear Ravi,
It is understood that you want to shut down the operations of your company. You may contact us for professional advice in this matter.
Dear Author,
Thanks to enlighten us… But still, I have a question. Can you please enlighten it further, please?
1. Is it possible for the director to give a loan out of the borrowed funds with any exception or condition?
2. What if a directors give a loan to the company out of the borrowed funds???
Dear Reader,
As per Rule 2(1)(c) of Companies (Acceptance of Deposits Rules), 2014, any amount received from the director shall not be treated as deposits if he/she furnishes a declaration that the amount is not out of borrowed funds.
In view of this you may form an opinion that if the amount given by the director or his relative is out of borrowed funds, and declaration is received by the company to that effect then the transaction would fall under the category of “Deposits” and the company must comply with Deposit Rules.
Really appreciate concise and simple explanation in form of a FaQ
Very brief FAQ