Directors of the Company are considered as its trustees. Directors are the trustees of the company’s money and property, and also act as agents in the transaction which they enter into on behalf of the company. The Companies Act, 2013, through its provisions, plays a very important role in keeping position of director intact as a trustee and prohibits directors from stepping out of shoes of Agent and trustee of the Company.

Financial Loan Negotiation or Discussion Among A Lender And Borrower

This comparative article explains provisions of Companies Act, 2013 governing grant of loan to its director by a company as well as accepting loan from its directors.

Loan to Director Loan from Director
Whether permitted under Companies Act, 2013 Not permitted Permitted
Governing section Section 185 Section 179(2)(d) and 180
Meaning of provision Section 185

A company shall not Advance loan or give guarantee or security in respect of loan taken by:

  • its director or director of its holding company or any partner or relative of any such director
  • any firm in which any director or relative is a partner

It is may be noted that a company in no circumstance can advance loan (or give guarantee/security) to its (and holding company’s) individual director or his relative or to the firm in which any such director or his relative is a partner.

However, it can advance loan (or give guarantee/security) to a body corporate in which a director has interest or concern. The same shall be dealt with in the next point.

Section 179(2)(d)

Board of a company has power to borrow fund from any person including its directors, up to aggregate of paidup share capital, free reserves and security premium. However, a company may borrow fund exceeding the aggregate of paidup share capital, free reserves and security premium under section 180 (1) (c) and the same is dealt with in the next point.

Exception with condition A company can advance loan or give guarantee or security in respect of loan taken by:

(a) any private company of which any such director is a director or member;

(b) any body corporate at a general meeting of which not less than twenty-five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or

(c) any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

Conditions

1. Pass Special Resolution in the general meeting.

2. Explanatory statement to the notice of the General Meeting shall disclose the following

  • Full particulars of loan/guarantee/security given
  • Purpose for which loan/guarantee/security is proposed to be utilised by the recipient company.

3. The loan is utilised by the recipient for its principal business activity.

A company may borrow an additional fund. Company needs to fulfil the following condition where additional fund together with the money already borrowed exceeds the aggregate of paid-up share capital, free reserves and security premium.

 

Condition:

1. Pass Special Resolution in the general meeting of members.

A company can grant loan/guarantee/security to its managing director or whole-time director.

Conditions:

1. If the loan/guarantee/security is extended pursuant to a scheme approved by the members by a special resolution or

2. Loan/guarantee/security given as a part of the conditions of service extended by the company to all its employees.

It is pertinent to note that company can not exclusively give loan/guarantee/security to its directors only unless the same is approved by the members.

Granting loan/guarantee or security is an ordinary business of the Company.

Condition:

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,

A holding company can give loan/guarantee/security to its wholly owned subsidiary.

Condition:

Loan should be used for principal business activities.

A holding company can give guarantee/security to its subsidiary.

Condition:

Loan should be used for principal business activities.

The key takeaway here is that a holding company can only give guarantee or security in respect of loan granted to its subsidiary by bank or financial institution and it cannot directly grant loan to its subsidiary.

Whether considered as deposits Not applicable Pursuant to Rule 2(1)(c)(viii) of the Companies (Acceptance of Deposits) Rules, 2014 any amount received from the 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.

Conditions:

1. The Director of the company or relative of the private company should give a declaration stating the fact that the amount is not being given out of funds borrowed by him.

2. The company shall disclose the details of money so accepted in the Board’s Report.

Important to note here is that only a private company can accept fund from a relative of director in the form non-deposits. Funds accepted by a non-private company from a relative of director shall be classified as deposits under Rule 29(1)(c)(viii) of the Companies (Acceptance of Deposits) Rules, 2014.

Disclosures Not Applicable The company shall disclose in its Board Report the details of money accepted from its director or relative of any such director.

*****

Disclaimer: Although reasonable care is been taken in drawing the above comparison, nothing mentioned above shall be considered as legal opinion of the author. The author is Associate member of Institute of Company Secretaries of India (ICSI). In case any further assistance is needed, the author can be contacted at [email protected] or +919702908418.

Author Bio

More Under Company Law

4 Comments

  1. Abhishek Wagh says:

    Pursuant to mca notification dated 5th June 2015

    1. Provisions of Section 185 are not applicable to the following Private companies:

    Private Company

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

    (b) If the borrowing of such a company from banks or financial institutions or anybody 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 borrowings subsisting at the time of making transactions under this section.”

    2. Provisions of section 180 are not applicable to private companies.

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

October 2021
M T W T F S S
 123
45678910
11121314151617
18192021222324
25262728293031