Taking Loan from Company

A private limited company or limited company can provide loan or give guarantee or security in connection with a loan to any other company or person. In this article, we look at the procedure for taking loan from company or granting loan from a company.

Is the Company a NBFC?

If the company is a NBFC, routinely and in the ordinary course of its business involved in the granting of loan and providing any securities, then Section 185 of the 2013 Act would not be applicable. In such a case where the company is not a NBFC, then the Section 185 Test must be used to check if the company is barred from providing loan or guarantee or security to such person or company.

Section 185 Test

There is no bar in granting loan to directors to a managing or whole-time director, as a part of the conditions of service extended by the company to all its employees; or in pursuance of any scheme approved by the members by a special resolution.
The statutory bar would not apply to any company which in the ordinary course of business provides loans or gives guarantees or securities for the due repayment of any loan at an interest rate charged not less than the rate declared by the Reserve Bank of India.
There is no bar for any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company to its wholly owned subsidiary.
There is no bar to grant of loans or provision of guarantee or security to any director of a private limited company or any person in whom any director of a private limited company is interested only if the lending private limited company meets all of the following criteria:
- No other body corporate should have invested in the share capital of the private limited company.
- The borrowings of the private limited company from banks and financial institutions or any other body corporate is less than twice of its paid up share capital or Rs.50 crores, whichever is lower.
- Private limited company should not have defaulted in repayment of borrowings or subsisting at the time of granting of loan or providing of guarantee or security.

Loan to Person whom Director is Interested

The following persons are termed as persons whom a director is interested:

Any director of the lending company, or of a company which is its holding company or any partner or relative of any such director.
Any firm in which any such director or relative is a partner.
Any private limited company of which any such director is a director or member.
Any body corporate at a general meeting of which not less than 25% of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together.
Any body corporate, the Board of directors, managing director or manager, would act in accordance with the directions or instruction of the Board, or of any director or directors, of the lending company.

The granting of loans or providing guarantee or security to directors of holding company or to their relatives will not be barred by Section 185 of the Companies Act, if such person are not coming under the category of person in whom a director of the lending company is interested.

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Frequently Asked Questions

Common questions about Company Loan Policies and Section 185 Compliance.

Yes, if a company is an NBFC and is routinely involved in granting loans and providing securities as part of its ordinary course of business, Section 185 of the Companies Act, 2013, which restricts companies from providing loans or securities to certain entities, would not be applicable to the NBFC.

The Section 185 Test refers to the criteria laid down in Section 185 of the Companies Act, 2013, which companies must satisfy to be able to provide loans or give guarantees or securities to certain entities, such as directors, companies in which directors are interested, or related parties.

Yes, a company can provide a loan to its managing director or whole-time director if the loan is a part of the conditions of service extended by the company to all its employees or if it is granted pursuant to a scheme approved by the members through a special resolution.

There is no bar on a holding company providing loans or giving guarantees or securities to its wholly-owned subsidiary company under Section 185 of the Companies Act, 2013.

A private limited company can provide a loan or give a guarantee or security to a director or a person in whom a director is interested, provided the private limited company meets certain criteria specified in Section 185, such as having no other body corporate as a shareholder, limited borrowings, and no default in repayment of existing borrowings.

Persons in whom a director is interested include relatives or partners of the director, firms or private companies in which the director or their relatives are partners or members, companies where the director can exercise substantial voting power, and companies whose board acts on the instructions of the director.

The statutory bar under Section 185 would not apply to any company that, in the ordinary course of its business, provides loans or gives guarantees or securities for the due repayment of any loan at an interest rate not less than the rate declared by the Reserve Bank of India.

Yes, one of the criteria for a private limited company to provide loans or guarantees to directors or persons in whom directors are interested is that the company's borrowings from banks, financial institutions, or other body corporates should be less than twice its paid-up share capital or Rs. 50 crores, whichever is lower.