LOAN TO DIRECTOR AND LOAN FROM DIRECTOR

In this post we will see all the provisions related to Loan to Director and Loan from Director

loan to director 

It has been a matter of discussion since very long time; different different professional has different interpretation on this topic that is why it is a one of the most hot and controversial topic in corporate world.

Let's go in the background of section 185 of Companies Act 2013

In earlier companies act there was no separate provisions for efficiently regulation of Director's loan related criteria. However to incorporate stringent director loan compliances the new act has brought up a separate section i.e. S. 185 of companies act 2013 dealing with directors loan.

To bring this section into existence there was a reason because directors of the company take the loan from company by using undue advantage of their position for using their own purposes, which affects the financial position of company simultaneously affect the interest of stakeholders.

Loan to Director as per section 185 of companies act 2013

Giving Loan, including representing in book debts, or giving gurantee/security in connection with loan taken by director is prohibited to directors and some specified Persons (any other person where director is interested), either directly or indirectly.

INTERPRETATION BY AUTHOR

Under whole companies act the word loan is nowhere defined, so we take the meaning of loan from Oxford dictionary which simply defines “Lending of any sum of money with promise to pay"

INTERPRETATION BY AUTHOR

Representing in book debts what does it means, it means No company  can convert loan given to its director into DEBTORS

However credit sales made by company to its director is completely allowed if it is in normal course then their is no question arise for representing in book debts. Because earlier section 295 of old act does not explicitly include the phrase  “any loan represent by book debts "  hence any kind of credit facility extended by company will not cover under the Loan to Director.

INTERPRETATION BY AUTHOR

Meaning of indirectly is same as decided in case of " Fredie Ardeshir Mehta v. Union of India " it can not be read as converting what is not a loan into loan if we explicit it further we can understand word indirectly means providing loan through agencies or any other medium  but does not qualify to be loan or loan represented by book debt or security  or guarantee  into loan , any loan represented by book debts or guarantee  or security.

Meaning of specified  person ( any person where director is interested)

1. Director of lending company

2. Director of ifs holding company

3. Any partner of any such director

4. Any relative of any such director

5. Any firm in which any such director is partner

6. Any firm in which any relative of such director is partner

7. Any private company of which any such director is director or member

8. Any body corporate in which any such director holds at least 25% of total voting        power

9. Any body corporate who’s BOD, manager, managing director, whereof is accustomed to act on the directions of director of lending company.

INTERPRETATION BY AUTHOR

In the point no.9 director of only lending  company  has been considered,  however for rest of the points  director of lending company and director of holding company  both has been considered.  In simple if BOD, manager or managing director of any body corporate is accustom to act on directions of director  of holding company it is not cover under section 185.

There is one important  thing to be notice that partner of relative of any director is not cover in above cases here law is completely silent it means loan can be given to him.

Reference Of Companies Amendment Act 2017.

Under this amendment still restrictions has been imposed by law maker for granting of loan to director. However loan can be granted in below specified cases by passing  special resolution in general meeting.

1)  Any private company of which any such director is director or member

2) Any body corporate  in which any such director holds at least 25% of total voting power

3)  Any body corporate who’s BOD manager, managing director, whereof is accustomed         to act on the directions of director of lending company

Who all are eligile to take loan from company.

* Managing director or manger in ordinary course of business by passing special resolution as per their terms of employment.

* A wholly owned subsidiary company is allowed to take loan, securities, guarantee from its holding company.

* A holding company can provide securities, or guarantee to its subsidiary company in connection with loan taken from bank or financial institutions.

Non Applicability Of This Section On Certain Cases.

* If advance salary is given to employee who is relative of director (because advance is not loan)

* If loan given to a trust where director is trustee

* If any flat or any accommodations given by company to any director under central government housing scheme

* Loan given to any public company or listed company where director of lending company is director or member of such company (restriction is only on private company)

* Any investment made for residential house for director.

* Any loan is made to registered  co-opeative society.

* A private company if following condition satisfied,

1) In whose share capital no other body corporate as invested any money;

2) If the borrowings of such a company form 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) Such a company has no default in repayment of such borrowings subsisting at the time of making transactions under this section.

All these conditions need to be fulfilled at the time of advancing of any loan or providing guarantee or security

Applicability Of Provisions In Relation With Loan Taken From Director

It is a misconception in the mind of various people that if loan is taken from director it will be treated as related party transaction as people use the logic that director is cover under the definition of related party.

However it is completely wrong because section 188 only applies where that 7 transactions mentioned in the section take place.

So here the secrets reveal.

If loan taken from director by the company first check whether such loan is given by director from its owned funds or it was borrowed one. if such funds are borrowed in that case applicability of  deposit sections (73 -76) will come to the picture.

However if not borrowed funds in that case company has to follow section 179(3).

Posted by LAWgicAL ARUSH