Unlike share capital, a Loan is also one of the important sources of financing for a company. The term “loan” is not defined under the Companies Act, 2013. In general parlance, a loan means any transaction wherein money is given to returning with or without interest.
To meet larger or small financial requirements, companies do approach financial initiations or banks. But what if there is an urgent requirement of funds, can a company approach its Directors or shareholders for meeting such requirements?
This article will try to understand whether a private limited company can accept loans and deposits from its shareholders and directors and its compliance under the Companies Act, 2013.
The answer to our fundamental question, i.e. can a private limited company accept loan from its shareholders and directors?, is yes, a private limited company can accept loans
- from its directors
- From its shareholders, and
- From the relative of the director, subject to the conditions specified under the Act.
Section 73 to 76 of the Companies Act, 2013 read with Companies (Acceptance of Deposits) Rules, 2014 explain provisions and compliance to be undertaken by a company to accept Deposits from its Directors and shareholders.
Loans Vs Deposits
Rule 2(1)(c) of Companies (Acceptance of Deposits) Rules, 2014 states that the deposit includes any receipt of money by way of loan or deposit, except
(viii) any amount received from a person who, at the time of the receipt of the amount, was a director of the company or a relative of the director of the Private company:
Provided that the director of the company or relative of the director of the private company, as the case may be, from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others and the company shall disclose the details of money so accepted in the Board’s report.
From above it is understood that to categorise any amount under loan it is important to determine whether the loan given by the director or his relative is out of his/their own funds and the declaration is received by the company to that effect.
If the amount given by the director or his relative is out of borrowed funds, and declaration is received by the company to that effect then the transaction would fall under the category of “Deposits” and the company must comply with Section 73(2) of the Companies Act, 2013 read with Companies (Acceptance of Deposits) Rules, 2014.
A loan from Director or any relative of the Director of a private limited Company
According to Rule 2(1)(c)(viii) of the Companies (Acceptance of Deposits) Rules, 2014 the term deposit shall include “any amount received from a person who, at the time of the receipt of the amount, was a director of the company or a relative of the director of the Private company:
Provided that the director of the company or relative of the director of the private company, as the case may be, from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others and the company shall disclose the details of money so accepted in the Board’s report;"
Hence, a loan accepted by a private limited company from its directors or their relatives is allowed and is considered as an exempt category deposit.
Step by step procedure to accept a loan from Director or his relative:
- Hold a board meeting and pass the necessary resolution for accepting a loan from the Director or their relatives. Approve a limit, up to which the loan can be accepted by the company.
- Before accepting such a loan signed declaration that the money given is not out of the borrowed funds must be obtained from the Director or his relative.
- The company may enter into a loan agreement with the Director or relative, undersigning the terms and conditions.
- The loan may be provided with or without interest.
- If the loan is to be converted into equity shares after the expiry of the loan period, then such condition or arrangement must be present in the Board Resolution and such resolution and loan agreement shall be filed with Registrar of Companies in e-Form MGT-14 within 30 days entering into such agreement or in case no agreement is entered, from the date of passing board resolution.
The company shall make detailed disclosure of the loan in the Board’s Report and Financial Statements.
Annual Compliance for accepting a loan from director or relative of the director
Even though the loan accepted from the director or their relatives, comes under the Exempt Category of Deposits, the same is required to be reported in e-Form DPT-3 annually.
The company accepting such loan is required to report on or before 30th June every year, in e-Form DPT-3, the position of loan as on 31st March of that year, duly audited by the auditor of the company.
A loan from Members or shareholders by a private limited company
The provisions of Section 73(2) of the Companies Act, 2013 read with Rule 3 (3) of the Companies (Acceptance of Deposits) Rules, 2014, restrict a company to accept or renew any deposits from its members, if the amount of such deposits together with the amount of other deposits outstanding as on the date of acceptance or renewal of such deposits exceeds 35% [thirty-five per cent] of the aggregate of the Paid-up share capital, free reserves and securities premium account of the company.
But for the private limited companies, which fall under the below-mentioned categories the restriction of a maximum limit of 35% do not apply and they can accept a loan from its shareholders/members beyond the maximum limit:
- a private company which is a start-up, for ten years from the date of its incorporation;
- a private company which fulfils all of the following conditions, namely:-
A. which is not an associate or a subsidiary company of any other company
B. the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid-up share capital or fifty crore rupees, whichever is less, and
C. such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under Section 73:
Provided also that all the companies accepting deposits shall file the details of monies so accepted to the Registrar in e-Form DPT-3.
Compliance with Section 180 of the Companies Act, 2013
According to Section 180 (1)(c) of the Companies Act, 2013 the company is required to pass a Special Resolution, “to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed the aggregate of its paid-up share capital, free reserves and securities premium, apart from temporary loans obtained from the company’s bankers in the ordinary course of business.”
Notification GSR 464(E) dated 5th June 2015 provides an exemption to the private limited companies from the requirement of passing a special resolution to borrow money beyond the aggregate of paid-up share capital, free reserves and securities premium account of the company.
Therefore a private limited company can borrow funds from its shareholders/members or director or relative by passing a Board Resolution and executing a loan agreement, if necessary.
Accepting a Loan from a Director who is also a shareholder of the company
In the case of private limited companies, it is obvious that the person from whom the company is accepting loan is Director and shareholder as well. Therefore, identifying & determining the capacity (i.e. as Director or shareholder) in which the loan is given, plays a very crucial role.
Post receiving disclosure (whether the loan is given in the capacity of Director or in the capacity of shareholder), the company shall take all the necessary steps to complete the compliances under Act.
Failure to comply with the provisions of Section 73 to 76 of the Companies Act, 2013 will attract the penalties as below:
It is very important to understand the transaction whether it is a loan or a deposit. Once that is clear, the next step will be to determine whether the transaction fits into the limitations and provisions of the Act, following the Compliance requirements.
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