Loans from the Directors, Shareholders And Relatives Of The Directors

Loans are an important source of funding for the companies apart from Equity. The Companies Act, 1956 permitted the companies to borrow from the directors, shareholders, or the relatives of the directors. With the Amendment of the act, the New Companies Act, 2013 has removed the shareholders, and the relatives of the directors are removed from such borrowings.

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Criteria Of Getting Loans By Companies In India

Criteria Of Getting Loans By Companies In India

Following conditions which are also taken into consideration:

  • Position of the directors or their relatives.
  • Director will give a declaration that the amount is not give from any borrowings or loans. After the declaration, only the company will accept the loan.

Loans From The Relatives Of The Director

Under the Companies Act, 1956 private companies were allowed to take loans from the relatives of the directors. But with the amendment in the new Act i.e. the Companies Act, 2013 company cannot take loans from relatives. Any amount which is taken from them is considered as deposits.

The Companies (Acceptance of Deposits) Second Amendment Rule, 2015 came as a savior for all the private companies by including the relatives of the directors under the exemption list off deposits in clause (8) of Rule 2(c) of deposits rules. The amount which is received from the relatives of the directors who satisfy the condition which is given below is exempted from the deposits:

  • At the time of receiving the amount by the company at that time, the lender should be the relative of the director.
  • He should give the declaration in written form.
  • The company should disclose the details of the money accepted in the board’s report.

Loan From Shareholders

Under the Companies Act, 1956, the companies are allowed to accept loans from the shareholders and consider such as non-deposits. With the amendment of the new Companies Act, 2013 companies are not allowed to accept deposits/loans from shareholders.

Ministry of Corporate Affairs issued exemption notification for private limited companies on 5th June,2015 states that:

“Chapter 5 Clause (a) to (e) of sub- section 2 of section 73 shall not apply to private companies which accept from its member’s monies not exceeding one hundred percent, of an aggregate of paid-up share capital and free reserves and such company shall file the detail of monies so accept to the registrar in such manner specified (i.e., form DPT-3).”

Ministry of Corporate Affairs issued exemptions notification for private limited companies on 13th June,2017 states that: “Chapter 5/Clause(a)to(e) of sub -section 2 of section 73 shall not apply to private companies which fulfill the following conditions namely :

  • Which is not an associate or a subsidiary company of any other company
  • If the borrowing such company from banks or financial institutions or any body corporate is less than twice of its paid-up share capital or 50 crores rupees whichever is lower and
  • Such company has not defaulted in repayment of such borrowings subsisting at the accepting deposits under this section.”

Loans From Directors

An amount which is received from the directors is the loans not the deposits. The director will give the loan amount from their own source not from the borrowed funds and such loans, can be with or without interest. The loans which are taken from the directors are more economical than taking it from the other financial institutions.

Amount Received Out Of Borrowed Funds

  • Director is not a shareholder: If the directors are not the shareholder then the amount which is received from the directors will be treated as deposits. According to section 76 read with Companies (Acceptance Of Deposits) Rule 14, Public Company will accept these deposits either having:
    • The net worth of rupees 100 crores, or
    • Turnover of rupees 500 crores ( Private Limited Company and ineligible Public companies cannot receive the loans/deposits  from the borrowed funds)

    According to this section, require Public Company to obtain a credit rating every year and to create a charge on the assets in favor of deposits holders for the amount not less than the amount of deposit accepted.

  • Director is a shareholder: If the directors are the shareholders then the company will treat such amount as a deposits from the members. Provision of Section 73(2) read with Companies (Acceptance Of Deposits) Rule 14  will apply.

Amount Received Out Of Directors  Own Funds

The amount which is received from the directors owns funds are treated as loans and do not require any compliance with section 73(2) or section 76. The directors will give a declaration to the company that the amount is their own fund, not any borrowing or loans. The declaration will be given under the director’s report as well as the notes of accounts of the financial statement of the company.

Procedure To Accept Loans From Director      

  • The company will hold a board meeting and will pass the special resolution for accepting loans from the directors. In that, they will approve the limit up to which they can accept the loans.
  • Before accepting a loan they will sign the declaration that the amount is not from any borrowings of the directors.
  • The company will take the loans after signing the terms and conditions with the directors.
  • The loan to the company can be with or without interest.
  • If the loan is converted into equity share after the expire of the loan period. Then such conditions or arrangements must be present in board resolution. Loan agreement and resolution shall be filed with the registrar of the company within 30 days in e-form MGT-14, from the date of passing such resolution.

Interest Rate On Loans From The Directors

The interest rate on loans can be in the range of 5% to 36%. Even the interest can completely depend on the mutual agreement between the directors and the company.

Penal Rate Of Interest If The Company Fails To Pay To Directors

If the company fails to pay back the return loan amount to the director the penal rate of interest of 18 % will apply on the company.

Circumstances Under Which The Company Can Accept Deposits Without Compiling Provisions Of Section 73(2)

  • The company should not be an associate or a subsidiary of any other company.
  • The company never fails to repay the borrowings subsisting at the time of accepting deposits under this section.
  • The private company which is a start-up for five years from the date of its incorporation.
  • The borrowing limits of the banks, financial institutions or any company is less than twice its paid-up share capital or 50 crores whichever is less.
  • The company who accepts deposits from its member should not exceed 100% of the aggregate paid-up capital, free reserve and Securities Premium Account.

Penalties Under Section 73 to Section 76 Of Companies Act, 2013

 S.no.  Particulars  Penalties
1. On Company The company in addition to the payment of the amount of deposit or part and the interest due will be punishable with a fine which shall not be less than

  • One crore rupees
  • But which may extend to 10 crore rupees
2. On Every Officer Every officer of the company who is in default shall be punishable with imprisonment which may extend to seven years or with a fine which shall not be less than

  • 25 lakh rupees
  • But which may extend to 2 crores rupees or with both

Conclusion

There are various situations in which companies need financial help. At the time of emergency, it is convenient for the company to take loans from the directors and the member of the company. Even it provides benefit to the company, as directors can give loans without interest on the amount. There are various provisions in the Companies Act,2013 which helps the private and public company to take loans from the directors of the company.

CategoryCompany Law

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