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Loan from Directors or Relatives of Director

Priyanka Bajpayee

| Updated: Dec 24, 2019 | Category: Compliances

Loan from Directors or Relatives of Director

There are several ways by which a company can raise long-term capital, e.g. issue of equity shares, preference shares, debentures or accept money by way of deposits. Generally, such capital is utilized for expansion purpose e.g. purchase of non-current assets, such as property, plant and equipment, tangible assets, intangible assets, etc. Sometimes, the companies especially closely-held companies need short –term and immediate funding requirements which is provided by the directors or shareholders as short-term finance. Per the Companies Act, 2013, there are some important provisions for raising such short-term finance.

This article is all about the analysis of various relevant provisions of the Act which provides for compliance checklist for accepting loans from directors and shareholders by private companies.

Criteria of Availing loan from Directors

The Private Company can avail loan from-

  • Directors
  • Shareholder
  • Relative of Director

Either from their own fund i.e. Directors from its funds, Relative from its funds or Shareholders up to (100% of Paid-up share capital plus free reserves, plus Security Premium Account).

Further, the following key features are also taken into consideration for availing loans from Directors, their relatives or Shareholders.

  • The position of the director at the time of acceptance of a loan or deposit will be considered.
  • A declaration will be submitted by the director with the Company, that the amount given by the director is not being given out the amount obtained by him by borrowing or accepting loans. However, the company can accept any amount of loan from the director.

Private Company accepting a loan from Directors or Relative of Directors

A private company can accept money as a deposit or loan from a director of the company or a relative of the director. However, in such instances, the following conditions shall be met:

  • The Director of the company, during the dispersal of a loan, shall furnish in writing a declaration to the effect that the amount is not being given out of amount obtained by him by borrowing or accepting loans or deposits from others; and
  • Disclosure of the details of money so accepted by the Company in the Board’s Report.

A proper disclosure by a Private company in its financial statement, by way of notes, about the money received from the directors, or relatives of directors.

Compliances required to be done for accepting the Loan from directors

  • The company needs to file a return in e-Form DPT-3 (along with prescribed fees) on or before June 30, of every year with the Registrar of Companies, as the amount under Rule 2(1)(c) of Companies (Acceptance of Deposits) Rules, 2014, lay under the category of Exempted deposits.
  • Furnishing the requisite information contained therein as on the 31st day of March of that financial year.
NOTE:On 22nd January 2019 an amendment was passed by the MCA i.e. Companies (Acceptance of Deposits) Amendment Rule 2019 which shall come into effect from 22nd January 2019.

Every company to which deposit rules apply shall on or before the 30th day of June, of every year, file with the Registrar, a return in Form DPT-3 mentioning the details of the deposit.

(Here Loan considered as deposits)

Accepting Loan from Director who is also the Shareholder:

In Private companies, the directors and the shareholders are the same in terms of funding the company. Per the compliances and pecuniary limits, it is suitable that the person providing the loan discloses the capacity in which the loan is given to such companies (i.e. whether the amount is given in the capacity of shareholder or director). Based on this, the company shall ensure compliance.

The compliance is very crucial with respect to the acceptance of unsecured loans from directors and shareholders of the private company. As the person or company is required to comply and make disclosures.

NOTE: The unsecured loans accepted by a private company from directors and shareholders are considered to be “exempted deposits” under the Companies (Acceptance of Deposits) Rules, 2014.

Under what circumstances the Private company can accept the deposits from members without complying with the provisions of Section 73(2)?

Below is the list of circumstances under which the Private company can accept the deposits from members without complying with the provisions of Section 73(2)-

  1. The company which accepts deposits from its member not exceeding 100% of the aggregate of the paid-up capital, free reserve and Securities Premium Account or,
  2. The private company, which is a start-up, for 5 years from the date of its incorporation.
  3. The Company is not an associate or a subsidiary of any other Company;
  4. The Borrowing limit from the banks or financial institutions or any company is less than twice of its paid-up share capital or fifty crore rupees, whichever is lower; and
  5. A company has not failed in the repayment of such borrowings subsisting at the time of accepting deposits under the section.
NOTE: All the Companies accepting deposits shall file the details of monies so accepted to the Registrar of Companies in Form DPT-3.


Conclusion

A director’s loan to a company can be given with or without the interest rate unlike in the case of bank financing. There comes a situation where the company is in urgent need of funding, in that case, it is always relevant to take the loan from the directors of the company to meet the short term crisis of the company.

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Priyanka Bajpayee

Priyanka Bajpayee has done Masters in International Business Law and well versed in content writing covering the area of legal and finance. Also, she has practical experience of almost 1.5 years in Legal compliance and secretarial work.

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