Clerk Information Center
Loans and borrowing by Director from that Company
Introduction
A principal’s loan to a company can be with or without an interest rate, thus giving a better credit conditions option in the loan agreement. In addition, unlike the case of bank financing in which security must be compromised, there is always the option of obtaining an unsecured loan from the director.
Unsecured loans are generally granted at a much higher interest rate by financial institutions compared to secured loans. In addition, it sometimes takes a long time for lenders to decide whether to issue an unsecured loan to the company as they assess the company’s credit history, recent loans, and various other parameters.
There are circumstances in which a company urgently needs funding. As a contingency plan, it may be relevant to take out the loan from the directors. This type of agreement has its own benefit from borrowing at a low or zero interest rate in the hands of a company. Directors, who are often founders, can park available funds in order to expand the business.
Do the principal’s loans fall into the category of related party transactions?
It is explicitly stated in section 2 (76) of the Companies Act 2013, that any key director or administrative staff is a related party, except the managing director or full-time director. However, the money loan does not meet the criteria for transactions with related parties under section 188 of the Company Act 2013. Therefore, it is not necessary to follow the compliance and legal requirements of section 188.
Loans Vs Deposits
There must be clarity as to whether the amount granted by the director to the company falls within the category of a CREDIT or deposit. In accordance with Chapter V Rule 2 (1) (c) (viii) of the companies (acceptance of deposit) of 2014, if the director submits a written statement that the amount given to the company by him/her is not being given. off the borrowed funds, then the transaction would not fall into the deposit category. Therefore, it can be considered as a loan to the company.
2014 Chapter V Rule 2 (1) (c) of companies (acceptance of deposit) states that a deposit includes any receipt of money in the form of a loan or deposit, except in some cases. The exception covered under this rule does not mention the amount given by the director to the company, in case the director has given the borrowed funds.
Therefore, in that case, in which the director has delivered the money from the borrowed funds, the transaction would fall into the category of “DEPOSIT”.
Compliance requirements in case of loan of directors in public companies
1) Total loans (amount to be borrowed + existing loans from the company)
4) According to Sec 179 (3) of the Companies Act, the Board of Directors shall approve the resolution to approve the principal’s loans.
Private companies are exempt from Sec 180 as notified of 5 June 2015, so there is no need to approve a special resolution in this case.
In the event that the director is also a shareholder in the company, then he is eligible to grant the loan to the company subject to the director’s statement that the amount has not been loaned.
Compliance requirements in case of DEPOSIT by directors in public companies.
Under Section 76 of the Companies Act 2013, eligible companies, i.e. public limited companies that have an annual turnover of more than INR 500 Crores, or a net worth of INR 100 Crores may take deposits from the public. Therefore, if a director lends an amount to the borrowed funds company, then that will be considered as the deposit, and this will be considered on par with the public deposit, which is only allowed in the case of eligible companies.
If the director is also a shareholder in the company, the director’s contribution will be counted as a shareholder’s deposit. Therefore, the provisions of Section 73 (2) would have to be followed along with the company rules (acceptance of deposit) of 2014. The company will issue circular, present its credit rating, provide the certificate that there has been no default in the company’s refund of deposits, file annual deposit statement on FORM DPT 3 with the registrar and other compliance requirements as mentioned in section 73 (2) of the Companies Act 2013.
Compliance requirements in case of deposit by directors in private companies
As discussed above, a director’s contribution can also be classified as a deposit in a private company if he/she is also a shareholder in the company. In that case, this will be treated as a deposit of the company’s shareholder to be governed by the Sec provision. 73 (2) of the companies operating in conjunction with the Company Rules (acceptance of deposit) of 2014.
If you are not a shareholder, once you submit the required return, the amount borrowed will not be considered a deposit at all.
According to the Companies’ Second Amendment Rules 2017 (Acceptance of Deposit), there are no restrictions on the number of deposits of members/shareholders provided
The private limited company in the discussion is not an associate/subsidiary of any other company.
The limited liability company’s loans are less than double the share capital paid from INR 50 Crores, whichever is less.
There are no cases of non-compliance with loan repayment at the time of acceptance of
Deposits
Most private companies that are family or newly created entities will escape the first two conditions, however, the third condition should be met, as even the smallest entities may have resorted to loans.
General compliance requirement to be followed in the case of loan and deposit for public and private companies
Under the recent amendment to the company rules (deposit acceptance) of 2014, all companies (except government companies) must file a return on Form DPT-3 of deposits, transactions that are not considered deposits or Both.
In addition, the single return of the outstanding receipt (for the previous financial year) of money or loan but not considered as deposits will be specified on Form DPT-3 within 90 days of the start of the next financial year.
Information to be disclosed in the financial statements
According to Chapter V Rule 16A, Company Rules (Acceptance of Deposits), 2014, for both public and private companies, it is mandatory to disclose the amount received from the director as unsecured in their financial statements.
Punishment
Failure to comply with the requirements of Section 73 or Section 76 of the Companies Act 2013 in the event of deposits may result in a fine of one rupees in the company that may extend to ten rupees. The company’s failing officials may face imprisonment of up to seven years and a fine of between twenty-five rupees lakh up to two crore rupees. In addition, according to company rules (acceptance of deposits) of 2014, the official who fails and the company is punishable by a fine of five thousand rupees and a fine of five hundred rupees per day in case of continuous violation.
Conclusion
It is important to understand the nature of the transaction, whether it’s a loan or a deposit. Once clarified, the next step should be to verify limitations and compliance requirements by referring to the relevant sections of company law and acceptance of deposit rules. If the loan granted by the principal is short-term, it will be treated as a current liability. However, if it is long-term, then the IAS39 accounting standard should be followed.
