Background:

If Promoters are starting a business (Company) or trying to grow an existing business (Company), all certainly will need money. This money can come from various sources.

Source of Funding:

Roughly speaking, Investments break down into two different forms: Debt and Equity.

Debt Funding: Debt means money borrowed from lenders by the company and it pay the interest on that investment. Companies are required to repay the money with interest over time. Debt include debentures, loans and borrowing etc.

Equity Funding: Company can take on an equity investment – in which Company can sell a portion of the Company to an investor in return for cash or something else of value. Equity funding includes shares (Equity/Preference Shares).

Generally first source of capital will probably be the loan from promoters. Few businesses are entirely funded by parties other than the entrepreneur. There are definite advantages for promoters here: 100% control and ownership. Promoters own the whole company, control the show, and stand to reap the gains so that your venture become valuable.

In this article we will discuss funding of Private Limited Company by Debt .

As per sub-clause (iii) of Clause 68 of Section 2 of Companies Act, 2013 definition of Private Company “means a Company which by its articles prohibits any invitation to the public to subscribe for any securities of the Company;

Loan & borrowing:

A. [1]SECTIONS INVOLVED

  • Section 179(3) The Board of directors of the Company shall borrow money on the behalf of Company means of resolutions passed at meetings of Board of Directors.
  • Section 2(31) Includes any receipt of money by way of deposit or Loan or in any other form by a Company.
  • [2]Section 73 Prohibition on acceptance of deposits from public.

B. RULES INVOLVED:

C. CIRCULAR INVOLVED:

G.S.R. 464(E) dated 5th June, 2015

  • According to this circular there is no need to file MGT-14 by Private Limited Company on acceptance of loan.
  • Section 180 does not apply on the Private Limited Company.
  • Clause (a) to (e) of sub-section (2) of Section 73 shall not apply to Private Limited Company which accepts any monies from its members monies not exceeding 100% of aggregate of the paid up share capital and free reserves, and such Company shall file the details of monies so accepted to the Registrar in such manner as may be Specified.

G.S.R. 695(E) dated 15th September, 2015The Companies (Acceptance of Deposit) second amendment Rules, 2015’

D. FORMS INVOLVED:

No form is required to be filed with ROC in case of acceptance of Loan by Private Limited Company.

E. RESOLUTION INVOLVED:

  • For the acceptance of Loans by the Private Limited Company a [3]Board Resolution” shall be passed in the Board Meeting of the Company.
  • Board Meeting can be held through video conferencing also.

122121212355I. Loan From Directors:

As per Chapter V, The Companies (Share Capital and Debenture) Rules, 2014 , point VIII of definition of Deposit.

Any amount receipt from a person, who at the time of acceptance was a Director of the Company, will not be considered as Deposit.

Note:

  • Position at the time of acceptance of Deposit will be considered.
  • Director will submit a declaration with the Company that amount is not being given out of the funds acquired by him by borrowing or accepting loans or deposits from others.
  • Company can accept any amount of Loan from the Director.

II. Loan from shareholders:122121212356a. Private Limited Company can accept deposits from the Members upto 100% of aggregate of the paid up share capital and free reserves. (Clause (a) to (e) of Section 73(2) will not be applicable on Private Limited Company if deposit is upto 100% of paid up share capital and Free Reserve)

b. [4]If the Company wants to accept the deposits of more than 100% of paid up share capital and free reserve from the members of the Company then company can accept the same by following the procedure mentioned under Section 73.

III. Loan from Relatives of Directors:

As per Companies (Acceptance of Deposit) second amendment rules, 2015 in rule 2, in sub-rule (1), clause (c), of sub-clause (viii), the following shall be substituted, namely:-

(viii) any amount received from a person who, at the time of the acceptance of the amount, was a director of the Company or a relative of the director of the private limited company.

Any amount receipt from a person, who at the time of acceptance was a relative of director of the Company, will not be considered as Deposit.

Note:

  • Position at the time of acceptance of Deposit will be considered.
  • Relatives of directors will submit a declaration with the Company that amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others.
  • Company can accept any amount of Loan from the relative of director.
  • The Company shall disclose the details of money so accepted in the Board’s Report.

IV. Loan from other Company:

As per sub clause (vi) of clause (c) of rule 1 of the Companies (Acceptance of Deposits) Rules, 2014, Deposit doesn’t include any amount received by Company from any other Company (Inter corporate Loans).

Conditions:

The Company which is giving the loan complies with the conditions of Section 186 and Section 185 of Companies Act, 2013. These sections are not applicable on the Company accepting the loan.

♠ Allowable Loan Foreign Holding to Indian Subsidiary.

Section 185 is applicable only when a ‘company’ gives loan to its director or any person in whom the director is interested. However, the definition of a ‘company’ under Section 2(20) means only a company incorporated under 2013 Act or any previous company law. So, the restriction in Section 185 will not apply when a holding company incorporated outside India gives a loan, guarantee or security to its Indian subsidiary.

♠ Loan Holding – Wholly Own Subsidiary

Any loan made by a Holding Company to its Wholly own Subsidiary Company or any guarantee given or security provided by a Holding Company in respect of any loan made to its wholly own subsidiary Company. Condition: loan made under this clause utilized by the wholly own subsidiary company for its principal business activity only.

Company can accept Loan also from Section 8 Companies, one person Company.

Question: Whether LLP can give Loan to Company under this exemption: Solution: NO, LLP can’t give loan to Private Limited Company under this Clause. Because this clause cover only Company not Body Corporate.

V. Loan from employee of the company:

As per sub clause (x) if clause (c) of rule 1 of the Companies (Acceptance of Deposits) Rules, 2014, Deposit doesn’t include any amount received from any employee of the Company not exceeding his annual salary under a contract of employment with the company in the nature of non-interest bearing security deposit.

VI. Loan from government entities:

State/ Central Govt.

  • Any amount received from the Central Government or a State Government, or any amount received from any other source whose repayment is guaranteed by the Central Government or a State Government or any amount received from a local authority, or any amount received from a statutory authority constituted under an Act of parliament or a state legislature;

Foreign Government/ other Sources:

  • Any amount received from foreign Governments, foreign/ international banks, multilateral financial institutions (including, but not limited to, International Finance Corporation, Asian Development Bank, Commonwealth Development Corporation and International Bank for Industrial and Financial Reconstruction), foreign government owned development financial institutions, foreign export credit agencies, foreign collaborators, foreign body Corporates and foreign citizens, foreign authorities or persons resident outside India subject to the provisions of Foreign Exchange Management Act, 1999 and rules and regulations made there under

Loan from Banking Company:

  • Any amount received as a loan or facility from any banking company or from the State Bank of India or any of its subsidiary banks or from a banking institution notified by the Central Government under section 51 of the Banking Regulation Act, 1949 (10 of 1949), or a corresponding new bank as defined in clause (d) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (5 of 1970), or from a co-operative bank as defined in clause (b-ii) of section 2 of the Reserve Bank of India Act, 1934 (2 of 1934);

VII. Loan from other sources:

  • Any non-interest bearing amount received or held in trust;
  • Section 2(30) Debenture include debenture stock, bonds or any other instrument of a Company evidencing a debt. A Company may issue debentures under Section 71 of CA-2013.

6. Companies are not allowed to borrow from followings

I. [5]Loan to Companies fall under Section 185:

As per Section 185: No Company ( Private & Public)

  • Directly or Indirectrly
  • Advance any loan, including book debt,
  • to any of its directors or to any **other person in whom the director is interested

Other person in whom the director is interested:

i. Any private company of which director is a director or member

ii. Body Corporate in which 25% or more voting power rests with one or more directors

iii. Body Corporate whose Board accustomed to act on directions of BOD or Directorsof lending company.

It is clear from the above mentioned extract provision of Section 185 that, A Company can’t give the loan to Director and person in whom the director is interested.

Example:

  1. If Mr. A is Director of Company XYZ (Private Limited Company) and Director of Company PQR. Then Company PQR can’t accept loan from Company XYZ.
  2. If Mr. A is Director of Company XYZ (Private Limited Company) and member of Company PQR. Then Company PQR can’t accept loan from Company XYZ.

II. Loan from HUF:

The exemption under sub-clause [6](viii) of clause (b) of Rule 2 of the Companies (Acceptance of Deposits by Companies) Rules, 2014 would apply only to deposits received from directors or relative of director. The exemption will not apply to HUF in which all the members of HUF are Directors of the Company or Member of the Company.

Whether HUF can be treating as Relative of Director?

NO, It can’t be treated as relative of the Director. Because as per Companies Act Clause 2(77) “Relative with reference to any person, means they are member of HUF”.

Example: A, B, C, D being members of HUF (related to each other) are also the director of the Company. But HUF shall not be treated as relative of A,B,C,D.

Whether HUF can be Member?

As per Clause 2(55)(ii) of the Companies Act, 2013 “members in relation to a Company means-every other PERSON who agrees in writing to become a member of the Company and whose name is entered in the register of member of the Company.

In the case of a joint Hindu family, as it is not a person it cannot be a subscriber, though the Karta or manager may be one. A HUF can be member through its Karta or Manager.

Therefore, HUF can’t be a member directly; it can’t give loan to Company. If Company accept loan from HUF it will be treated as a deposit.

Whether Company can accept loan from HUF If, Karta is shareholder/Director of the Company:

No, Company can’t accept loan from a HUF even if its Karta is member /director of the Company. Because Company can accept loan only from person except Director/Member or Relative of the Director.

III. Loan from Partnership Firm:

The exemption under sub-clause [7](viii) of clause (b) of Rule 2 of the Companies (Acceptance of Deposits by Companies) Rules, 2014 would apply only to deposits received from directors or relative of director. The exemption will not apply to Partnership Firm in which all the Partners are Directors of the Company or Member of the Company.

Whether Partnership firm can be member?

Department’s Clarification.-“A firm, not being a person cannot be registered as a member of a company except where the company is licenced under section 25 of the Companies Act, 1956”. [Circular No, 4n2, dated 9-3-1972]

‘Person’ includes a company and on behalf of company as well as of any other person, an agent duly authorised may sign. But a ‘firm’ as such cannot sign, as a firm is not ‘person’. If the partners of a ‘firm’ subscribe, they become joint holders of the share or shares subscribed for. The Registrar will not accept the signature of the firm as a subscriber but only if the partners individually sign as joint subscribers. See Re, Land Credit Co. of Ireland, Weikersheim’s case, (1873) 8 Ch Appeal 83 1; Re, Glory Paper Mills Co., Dunster’s case, (1894) 3 Ch 473. Nor is a firm entitled to be registered as member in the name of the firm but only in the names of the individual partners. Re, Vagliano & Anthracite CDIlieries Ltd., (1910) 79 LJ Ch 769.

Partnership is merely an association of persons for carrying on the business of partners and ‘firm’, is a compendious method of describing the partners. A firm, however, is not a person. Bacha F. Guzdar (Mrs.) v. CIT, (1955) 25 Com Cases 1 : AIR 1955 SC 74. A pooling contract is not a partnership or an association, Madan Gopal v. Shewal Das, (1934) 4 Com Cases 339 (Lah), nor a chit fund, TP. Naidu v. A.S. Mudaliar, AIR 1919 Low Burma 102

Whether Company can accept loan from partnership Firm if, one or more partners are shareholder/Director of the Company:

No, Company can’t accept loan from a Partnership firm even if its partners are member /director of the Company. Because Company can accept loan only from person except Director/Member or Relative of the Director.

IV. Loan from Non Relatives:

Company can’t accept loan from relatives of the director as per Companies Act, 2013 But as per ‘The Companies (Acceptance of Deposit) second amendment Rules, 2015’ dated 15th September, 2015 G.S.R. 695(E) Private Limited Company can accept loan from the relative of the Director if relative furnish to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others.

LIST OF PERSONS TO WHOM COMPANY CAN ACCEPT OR CAN’T ACCEPT THE LOAN

Loans fromConditions, if any:
1.)Shareholder:

 

Member: Yes, can accept, but subject to the condition specified in deposit Rules
2.)Director/Relatives of DirectorYes, can accept, but the director/relative will give a Declaration in writing that money is not given out of borrowed funds and company will disclose it in the Board’s report.
3.)Employee

 

Yes, can accept up to the employee’s annual salary ( there should be a contract of employment with the company) in the nature of non- interest bearing security deposit.
4.)Any other IndividualCan’t accept because it is prohibited by the definition of Private Company.
5.)Proprietorship Firm ;Can’t accept because it can’t be director, Member or relative of Director.
6.)HUF

 

Can’t accept because it can’t be director, Member or relative of Director.
7.)Partnership Firm

 

Can’t accept because it can’t be director, Member or relative of Director.
8.)Any Company

 

Yes, can accept, but also comply with Sec 179(3) wherein the conditions are specified for the lender
9.)BanksYes, can accept
10.)Trust

 

Yes, can accept, but loan received should be non- interest bearing.
11.)Outside India

 

 

Yes, can accept, but subject to the provisions of the Foreign Exchange Management Act, 1999 and rules and regulations made there under.
12.)Govt. organization ( eg. SIDBI)Yes, can accept
13.)Any other Financial Institution which are not incorporated as Banks (eg. Religare, Fullerton, Barclays, Bajaj Finance).

Yes, can accept

OTHER SOURCES OF FUNDING FOR PRIVATE LIMITED COMPANY:

Except sources mentioned above private Limited Company can raise funds from the followings:

  • By issue of Debentures
  • By issue of Equity Shares
  • By issue of Preference Shares

I will discuss the provisions of issue of debentures/equity share/ preference shares in a separate article.

TERMS USED IN THE ARTICLE

Meaning of- ‘Relative’

The term ‘Relative’ defined under Section 2(77) read with Rule 4 of Companies (Specification of definitions details) Rules, 2014 of the Companies Act, 2013

  • Members of HUF
  • Husband and wife
  • Father, Mother,
  • Son, Son’s wife
  • Daughter
  • Daughter’s Husband
  • Brother
  • Sister

Meaning of-‘Person’

Meaning of word Person is not defined under Companies Act, 1956 & Companies Act, 2013.

General Clauses Act, 1899: The word ‘person’ is not defined in this Act but in the General Clauses Act, 1899 [s. 3 (39)] as including a company or other association or body of individuals. Notwithstanding this, it has been held that the expression ‘persons’ in this section means only individuals and not bodies of individuals, Senaji Kapurchand v. Pannaji Devichand, AIR 1930 PC 300 affirming ILR 50 Mad 175. See also Akola Gin Combination v. North Cote Ginning Factory, AIR 1914 Nag 26, This confusion has been cleared by the decision of Madras High Court in Sri Murugan Oil Industries (P.) Ltd. v. A. V Suryanarayan Chettiar, (1963) 33 Com Cases 833 : AIR 1963 Mad 128 where it was held that in case a company enters into a partnership, the company shall be taken as one person. There is no reason why incorporated bodies which are legal persons and each of which consists of more than twenty members cannot form themselves into partnerships for carrying on joint business, provided that they are authorised by their memorandum of association. Nor can there be any legal objection for companies and individuals forming partnership firms for purposes of trade. For the purposes of the next section (s. 12), the word ‘person’ has been held as including companies and corporations (Cf. HALSBURY’sSLAWS OF ENGLAND, 51 (Vol. 7, Para 75, 4th Edo.)

Income Tax Act: As per clause 2(31) of Income Tax Act, 1961 Person Include (i) an individual,(ii) a Hindu undivided family,(iii) a company,(iv) a firm,(v) an association of persons or a body of individuals, whether incorporated or not (vi) a local authority, and(vii) every artificial juridical person, not falling within any of the preceding sub-clauses. In other word the term person include the term ‘person’ includes Individual, Hindu Undivided Families [HUFs], Association of Persons [AOPs], Body of individuals [BOIs], Firms, LLPs, Companies, Local authority and any artificial juridical person not covered under any of the above.

Distinction between Loan and Deposits:

For the Purpose of provisions of public deposits, all borrowings are ‘deposits’ unless excluded

  • In V srinivas v. Saraswathi Finance Corporation (2002), It was observed, ‘While a loan may include deposit, every loan is not a deposit.
  • In Sharda Talkies Firm V. Smt Madhulata Vyas AIR 1996, it was held that there is subtle distinction between a deposit and a loan. In case of loan, the amount is given by creditor to debtor at the request of and for requirements and dues of the debtor under certain terms and conditions, In case of a deposit; the depositee receives money at the instance of depositor. In case of loan, the debtor has to request the creditor to advance certain amount for meeting his requirements.
I.Borrowings which are excluded from the definition of Deposits?
i. Amount from government and guaranteed by government.

ii. Amount received from foreign government or foreign Bank.

iii. Loan from Banks and Financial Institutions.

iv. Amount received against commercial paper.

v. Inter corporate borrowing.

vi. Subscription to securities and call in advance.

vii. Amount from Directors.

viii. Secured Bonds/debentures.

ix. Convertible bonds/debentures.

x. Non-interest bearing security deposit from employee.

xi. Amount in trust.

xii. Advance and security deposit received by company.

xiii. Unsecured loans from promoters.

xiv. Amount accepted by Nidhi Company.

II.If deposit in the joint name of director and other person then how it will be treated?
A deposit in joint names of director and another person, who may or may not be director, should be permissible, if name of director is first depositor, though there is no specific provision.
III.If a person ceases or resign from the post of director after giving loan then such loan will be considered as deposits or not?
Requirement of director will be check at the time of receipt of amount. Thus, later he may cease to be a director.
IV.If a person is director and shareholder of the Company and giving loan to Company whether it will be considered as loan from Director or Member
As per my understanding this should be treat as loan from the Director instead of the

Shareholder of the Company.

V.Question: Whether LLP can give Loan to Company under this exemption:
Solution: NO, LLP can’t give loan to Private Limited Company under this Clause. Because this clause covers only Company not Body Corporate.

[1] Private Limited Companies are exempted from the provisions of Section 180(1)(c) and 117(3)(g) w.e.f. 05th June, 2015.

[2] The word “Company” in Section 73 includes a public Company of any size and a private Company.

[3] Board resolution can’t be passed by Circular Resolution in case of acceptance of loan.

[4] Complete procedure for acceptance of Deposit from the Members are given in article Series No. 91. If anyone want that article drop me mail on csdiveshgoyal@gmail.com.

[5] **But after publication of Exemption Notification on Private Limited Companies (Dated 05.06.2015):

The above restriction will now no longer be applicable to the Private Companies which satisfies All The 3 Conditions mentioned below:

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

b. If the borrowings of such a company from banks or financial institutions or any body corporate is less than [lower of (i) Two times of paid up share capital or (ii) Rs. 50 Crore]; and

[6] any amount received from a person who, at the time of the receipt of the amount, was a director of the company or a relative of the director of the private company

[7] any amount received from a person who, at the time of the receipt of the amount, was a director of the company or a relative of the director of the private company

.CS Divesh Goyal(Author – CS Divesh Goyal, ACS is a Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com)

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  • S. Krishnamoorthy

    An excellent article. Very lucid and clear. All doubts that may arise in Management Personnel have been very clearly answered. My warm appreciation to the author.

    • Divesh Goyal

      Thank you very much sir for your appreciating words.

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