Loans from Directors : Detailed Analysis

As we all know that any business requires funding for its smooth operations, a immediate source of funds can be to take Loans from Directors. Borrowing from the Directors is a very common and popular method for the Companies.

Here in this article we will discuss the procedure of how can a company takes loans from its Directors and all the cases and situations where it's treatment may get changed.

Procedure 

Procedure is not too much complex, the Company just need to convene a Board Meeting and pass a Board Resolution (special resolution in cases specified) regarding acceptance of Loans from Directors & file MGT-14 to RoC.

Please take note that Private Companies have been given exemption to Comply entire section 180. (Notification dt. 5th June 2015)

Private Companies have also given exemption from filing of MGT-14.

Board report disclosure is also necessary.

The relevant sections of Companies act which requires compliances are Sec. 179(3), Sec. 180(1)(c) & Rule 2(1)(vii) of Companies (Acceptance of Deposits) Rules, 2014

So here can be two cases come:

1.Loans from Directors and which are not shareholders at the time of giving loan ;

2.Loans from Directors and which are also shareholders at the time of giving loan

Loans from Directors and which are not shareholders

It can come under the purview of Deposits but will not cover into that if the director 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, Form MGT-14 required to be file for Loan from Director.

Case When only Board Resolution will suffice:

If loan accepting from director along with borrowing already made by Company is within the limit of Paid up share capital + Free Reserve+ Securities Premium then Board Resolution required to be filed u/s 179(3) and form MGT-14 required to be filed with ROC.

Case When Special Resolution will be required:

If loan accepting from director along with borrowing already made by Company is exceeds the limit of Paid up share capital + Free Reserve+ Securities Premium then Special Resolution required to be filed u/s 180(1)(c) and form MGT-14 required to be filed with ROC.

Procedure

I.Company will Hold a Board Meeting to pass BR & to call General Meeting.

II.Company will then pass a Special Resolution for Higher limit.

III.Company will file MGT-14 for Special Resolution passed in General Meeting.

IV.Company will hold another Board Meeting and Board of Directors will pass resolution for acceptance of loan from Director.

V.Now Company will file MGT-14 for Board Resolution.

Loans from Directors and which are also shareholders

Actually there would not be any so much difference occur if the Director is shareholders or not but for the sake of compliances we will see this point also.

So normally what happens that private companies are usually closely held, in which Directors and shareholders are same person. 

So it is desirable that the individual should discloses the capacity in which the money is given to such companies i.e. whether the amount is being given in the capacity of shareholder or director, it is also necessary in case any changes are made in the Law regarding this in future and also to ensure good corporate governance.

Another case: When Amount received out of funds borrowed by the director

As we know that if the Director gives declaration that the funds being so given are not from the borrowed money, then technically it will not be treated as deposit. But, what will happen if the Loans are from borrowed funds.

Here two situations can be

1. Director is not a shareholder

If the Director is not a shareholder and giving loans from borrowed funds then the funds received from such directors will be treated as Deposits and needs to comply with Sec 76 & Deposits Rule.

In that case these deposits can only be accepted Public Company having either

• Net worth of Rs. 100 crores or 
• Turnover of Rs. 500 crores

So for Private limited companies and ineligible Public companies cannot receive loans/deposits from director’s borrowed funds.

2. Director is a shareholder

In Case where director is also a shareholder then the funds received from such directors are also treated as deposits but that would be treated as deposits from a member and attract provisions of Section 73(2) read with Companies (Acceptance of Deposits) Rules 2014. 

What will happen to the Loan amount if Director has resigned now and the loan amount is still with the Company.

Ans. In normal case, if the Director has given loans then it cannot be treated as deposit if they have submitted a declaration that the funds are not borrowed.

Now what will happen to the funds when the Director have resigned or disqualified or for any reason he can't be on the Board of Directors of the Company

So, in this case the funds WILL NOT BECOME DEPOSIT, reason being

Rule 2(1)(vii) says "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"

So we can conclude here that it is immaterial the subsequent position of Directors. The subsequent position will not trigger it as the Deposits.

Please note here we are discussing compliances of Private Limited and Public Limited Companies for loans.

For listed Companies, there could be just one additional compliance, is there if they wish to comply (because it is not mandatory), i.e. to give disclosure under Reg. 30 of LODR, just for a safer side. In this they can also attach a declaration obtained from that director under Rule 2(1)(c).

FAQs on loans and borrowing from Directors

Q. Can director give loan to Company in Cash?

Ans. No, the restriction is nowhere mentioned in the Companies Act, but think about Income Tax act, cash transactions are strict.

Q. Can start-up companies accept loans from Directors?

Ans. Yes, no restriction has been prescribed for start-ups.

Q. Can a director give interest free loan to company?

Ans. Yes, generally interest free loans are given.

It can be with or without interest.

Q. Can Company take Unsecured Loans from Directors?

Ans. Yes.

Q. Can a company take loan from HUF of director?

Ans. No, Company can't accept loan from a HUF even if its Karta is member or director of the Company. Because Company can accept loan only from person except Director/Member or Relative of the Director.

Q. Is loan from director a related party transaction?

Ans. Sec. 188 defines 7 transactions to be considered as related party transactions, taking loans from Directors does not come under RPT.

Q. How long do you have to repay a directors loan? Any time limit specified?

Ans. No time limit specified. One thing to note if the loans are repayable on demand then show it is as short term borrowings in the Balance Sheet.