Can Director take loan from private limited company? 

Introduction of Companies act, 2013 had major impact on working pattern of companies and its compliance requirement, in the erstwhile act there was no separate provision dealing specifically with loan to directors. However to incorporate stringent director loan compliance’s the new act has brought up a separate section i.e. S.185 of Companies Act, 2013 dealing with director loans.

Loans to director under Companies Act, 2013

No company in general can directly or indirectly,

• advance any loan (including book debt) (L)
• give any guarantee (G)
• provide any security (S)
  (LGS) used for brevity
  to any director of company, holding company, any partner of director, relative of any such director or firm where director or relative is a partner.

Exemption to certain private companies

Though in general no company can give loans to its directors, it has however exempted certain private companies from this section; these are private companies satisfying following conditions-

1. Who doesn’t have any investment from other body corporate in its share capital
2. If borrowings of such company < (2 times it’s paid up share capital (or) 50 crores whichever is lower)
3.  Such company has not defaulted in repayment of borrowings subsisting at the time of making transactions.

Compliance for loan to directors

A company may advance such LGS to “any person in whom any of the directors of the company is interested” only on fulfilling certain conditions, these director loan compliance are –

1.  a special resolution passed in general meeting
   (Explanatory statement should be annexed to notice – disclosing full particulars of such LGS and its utilization by the recipient of such LGS and other relevant fact)
2.  Utilisation of loan by the borrowing company for its principal business activities.

Concern in which Director of Company is interested

1. any private company in which he is a director
2. any body corporate in which director has at least 25% of total voting power
3. any body corporate, the Board of directors, managing director or manager, which acts in accordance with the directions of the Board, or of any director of the lending company.

Exemptions

The following company loans are however exempted from director’s loan compliance –

1. Directors Loans given to a managing or whole-time director—

• as a part of service extended to all its employees;
• pursuant to any scheme approved by a special resolution; or

2. If a company provides LGS in ordinary course of its business

• where it charges rate close to 1,3,5,or 10 years rate of government security

3. Company Loans from holding to wholly owned subsidiary, if used for principal business activities.
4. Holding company providing Guarantee security for loan to its wholly owned subsidiary company, if used for principal business activities.
5. Holding company providing Guarantee security for bank loans to its subsidiary company if used by subsidiary for principal business activities.

Fines and Penalties

If LGS is given contravening the provisions of the act then Company and officers have to face the following penal provisions

• Company – 5lakh to 25lakhs
• Officer –
  • Imprisonment – upto 6 months or
  • Fine – 5Lakhs to 25Lakhs

the director or the other person to whom any company loan is advanced shall be punishable with

• imprisonment upto 6 months or
• Fine – 5 Lakhs to 25 lakhs or both.

Conclusion

In general no company whether private or public, can advance loan to its directors, if so it has to obtain special resolution. However certain specified private companies are exempted from this provision on satisfying certain conditions.

Don’t forget to get your Directors KYC done before 30 April  2019. Click here for more information.