Loan to Directors In Private Limited Company (Amendments)

Loan to Directors In Private Limited Company (Amendments)

Companies are formed by the promoters who intern become the directs understanding Loans to Directors under the companies act is very cirtical

Loans to Directors is governed by Section 185 of the Companies Act 2013, which was amended by the Companies ( Amendment ) Act 2017.

This amendment is effective from 7 May 2018.  It is interesting to note that there is also a

1. What are the two types of transactions in relation to the new Section 185 (Loan to Directors) ?

The amendment Act seeks to categorise loans to directors in two parts namely those

1)loans which are prohibited by the Act and

2)those loans which are permissible subject to fulfilment of certain conditions

2. What are the categories of loan arrangements covered in Section 185 (Loan to Directors)

3. Advance of a Loan
4. Loan represented by a book debt
5. Guarantees provided
6. Security provided

3. What are the loans prohibited under Sec 185 (Loan to Directors) ?

 

No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by,—

1. any director of company or
2. director of a company which is its holding company or
3. any partner or relative of any such director; or
4. any firm in which any such director is a partner
5. or relative of the director is a partner.

4. What are the loans permissible under Sec 185 and what are conditions to be fulfilled ?

 

Loans to persons in whom the directors are interested is permitted.  A company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the director of the company is interested, subject to the condition that—

(a) a special resolution is passed by the company in general meeting:

(b) the loans are utilised by the borrowing company for its principal business activities

5. What are the inclusions in persons in whom the director is interested as per Sec 185 ?

 

(a) any private company of which any such director is a director or member;

(b) any body corporate at a general meeting of which not less than twenty-five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or

1. c) any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

6. What are the exclusions provided in Sec 185 (Loan to Directors) ?

 

To Whom	Conditions to be satisfied
(a) the giving of any loan to a managing or whole-time director—	i) as a part of the conditions of service extended by the company to all its employees; or   (ii) pursuant to any scheme approved by the members by a special resolution; or
b) a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the rate of prevailing yield of one year, three year, five year or ten year Government security closest to the tenor of the loan; or	Ordinary Course of business Rate of interest maintained as specified
c) any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company;	Loans, Guarantee, Security By holding to wholly owned subsidiary Utilised by the subsidiary company for its principal business activities
d) any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company:	Guarantee, Security ( no loan ) By holding to wholly owned subsidiary Utilised by the subsidiary company for its principal business activities

 

7. What is the content of the exemption notification in respect of Sec 185 (Loan to Directors)

 

Provisions relating to loans to directors have been made inapplicable to following category of private limited companies vide exemption notification in Jun 2015

1. a) In whose share capital no other body corporate has invested any money;
2. b) If 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 lower; and
3. c) Such a company has no default in repayment or such borrowings subsisting at the time of making transactions under this section.

 

8. Are there any special conditions attached to the above exemption notification

 

The Companies Act 2013 had stipulated stringent provisions in respect of Private Limited Companies too.  However some of these were relaxed subsequently and the key highlights relating to private limited companies and changes are summarized as under.  It is relevant to note that these are some of the important notifications which provided such relaxations

• Notification under Sec 462 on Jun 5, 2015
• Notification under Section 462 on  Jun 2017

The most important aspect of the Jun 17 notification is that there is an insertion of Clause 2A by which the entire set of exemptions contained in the Jun 2015 and 2017 notifications are conditional to the company having complied with the provisions of  Section 92 and Section 137 of the Companies Act.  The relevant para is reproduced as under

“2A. The exceptions, modifications and adaptations provided in column (3) of the aforesaid Table shall be applicable to a private company which has not committed a default in filing its financial statements under section 137 of the said Act or annual return under section 92 of the said Act with the Registrar.”.

Conclusion :

Under the Provision of Loan to Directors under the companies act is the is very important for all entrepreneurs who run a private limited company , it has to be understood that company that they run and manage cannot directly lend loans to directors

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