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Loan to Director of Company

Companies Act, 2013 restrictions a company in India from providing to loan to a director or to a person connected with a director. Section 185(1) of the Companies Act, 2013 deals and in this article we review the section in detail including its applicability to private limited companies.

Section 185 of Companies Act

Section 185(1) of the Companies Act, 2013 provides that no company directly or indirectly provide any Director of the Company or such other person in whom the Director is interested in the following:

1. Advance any loan; or
2. Any loan represented by a book debt; or
3. Give any guarantee; or
4. Provide any security in connection with any loan taken;

This restriction is applicable to both a public limited company and private limited company.

Acceptable Loans Given to Director of a Company

The following loans given to a company are acceptable under the Companies Act, 2013;

• The loan is given to a Managing Director or Whole-Time Director which as a part of the conditions of employment are extended by the company to all its employees;
• The loan is given to a Director by a company which is in the business of providing loans and provides the loan to the Director with due repayment schedule and at an interest that is not less than the Bank’s rate of interest to customers.

Exemption for House Building Loan to Director

Through a Press Note No. 4/93. dated 20/8/1993, the Central Government of India has permitted private limited companies and limited companies to grant loans to its Managing Director of Whole-Time Director for house-building purposes. Further, the earlier exemption of Rs.5 lakhs home loan with a rate of interest of 10% per annum has now be changed and the following is allowed:

• Companies are allowed to make house building loans to their Managing Director or Whole-Time Director without obtaining prior approval of the Central Government if the terms and conditions are also applicable to the employees and officers of the company. It has also been clarified that the Central Government approval would still be required for loans to Directors for house building if the company does not have specific terms and conditions for similar schemes to employees and officers.

Exemptions to Private Companies

The MCA vide its notification dated 13th June 2017 (G.S.R. 583(E)) amended the notification of the Government, in the ministry of corporate of the affair, vide no G.S.R. 464(E) dated 05th June 2015 proposed that an exemption from the Internal Financial Controls to following the private limited companies:

• If one person Company (OPC) or a Small Company; or
• If the turnover of a company that not exceeds INR 50 Crore as per latest audited financial statement or which holds aggregate borrowings from any recognised banks or financial institutions or any body corporate at any time during the financial year not exceeding INR 25 Crore.

Applicability

The above exemption would be applicable to a private limited company which has not committed any default in filing its financial statements as per section 137 of the Companies Act 2013 or annual return according to section 92 of CA 2013 with the Registrar. The exemptions are applicable to the following companies:

• One Person Company (OPC), or
• Small Companies or
• Private companies with annual turnover not exceeding INR 50 Crore or
• Private Companies aggregate borrowings not exceeding INR 25 Crore

Section 185 will not be applicable to certain Private Limited Company:

• Where share capital no other body corporate has advanced/invested the money.
• If the borrowing of a Company from the recognised Banks or Public financial institutions or anybody corporate is less than twice the paid-up share capital or 50 Crores whichever is lower.
•  Such a Company has not done default in the repayment of such borrowings subsisting at the time of making transaction under section 185.

Special Resolution for Approving Loans

The purpose of passing the special resolution is to approve the loan/ guarantee/ security to persons in whom the director is interested or for the approval of the scheme of advancing loans to the managing director/ whole-time director.

For the loans and investments that re beyond the proposed limits, a special resolution is required to be passed. Such loans and investments are subjected to prior approval of a public financial institution where a term loan is subsisting unless the aggregate of loan to be provided/ guarantee or security to be granted or investment to be made does not exceeds the limit of 60% of its paid-up share capital, securities premium account and free reserves or 100% of its free reserves and securities premium account and no default is made in the premium account and also in the loan instalments and interest payments.

Transaction of Loans After Approval

Section 185(2) and section 185(3) allow the following transactions of loans after the approval of the members by means of special resolution:

• Advancing any loan that is represented by a book debt to any individual in whom any director of the company is interested, or
• Giving any guarantee or granting any security in connection with any loan obtained by any individual in whom any director of the company interested, or
• Giving of any loan to a whole-time director or managing director pursuant to any scheme.

Penalty for Providing Loan to Director

In case a company provides loan to its Director in contravention to the Companies Act, 2013, then the company will be punishable with a fine of not less than Rs.5 lakhs to Rs.25 lakhs. Further, the Director to who the loan was provided would also be punishable with imprisonment which may extend to 6 months or with fine which shall be not less than Rs.5 lakhs to Rs.25 lakhs, or both.