Appellate Court

Do you wish to give loans to your directors ?

The following persons/entities come under the category of persons in whom a director is interested.

(i) any director of the modified company or  any partner of a company or which is its holding company or relative of any such director.

(ii) any firm in which any such director or relative is a partner.

(iii) any private limited company of which any such director is a member or director.

(b) loans securities or guarantees cannot be granted directly or indirectly to any of its directors or to any other person in whom the director is interested. Even a loan represented by a book debt cannot be given to any such person. Even a corporate guarantee or security of the company cannot be given as security for any loan borrowed by any such person.

(c) There are only a few exceptions to the above statutory prohibition. Therefore granting any loan to any director of the lending company is supposed to be taken as generally prohibited under law. Company’s funds cannot be used for granting loans or company cannot give guarantee or security in connection to any loan obtained by any such person.

(d) Still, there is no bar in permitting the loans to a whole-time director or  managing as a detail of the improvements of service increased by the company to all its employees.

(e) There is no bar to grant of loans or provision of guarantee or security to any director of private limited company or any person in whom any director of a private limited company is interested provided the lending private limited company meets the following “Tri Criteria” :

i. no other body corporate should have invested in the share capital of that private limited company.

ii. Such private limited company transactions are from financial institutions and  banks or any other body corporate is less than twice of its paid up share capital of Rs.50 crores.

iii. private limited company should not have failed in repayment of dealings existing at the time of permitting the loan or security or providing the guarantee .

(f) The granting of loans or providing guarantee or security to directors of holding company or to their relatives. It will not be hit by the statutory bar contained in section 185 of the 2013 act. If such persons are not coming under the category of “person in whom a director of the lending company is interested.

(g) Inter-corporate loans must be checked from another angle too.

(h) However, even if the exemption is available, it applies to lending company only. So far as borrowing company is concerned, two major aspects have to be checked.

(i) If your company proposes to lend money to a director of your company’s holding company or to any relative of a director or any other individual. The first thing to check would be to see if your company in its ordinary course of business provides loans or give guarantees or securities for the due repayment of any loan.

(j) In any case, where it is proposed to grant any loan or offer any security or guarantee. A resolution of the Board of Directors or a committee of directors must authorize the granting loans etc.

(k) The board may, by a resolution passed a meeting, delegate to any committee of directors, the managing director, the manager or any other principal officer of the company.

(l) Save as aforesaid, in view of specific provision under section 179 of the 2013 act, any such decision can be taken only at a meeting of the board of directors.

(m) Therefore, it is necessary to follow the usual procedures relating to calling and holding a meeting of the board of directors as per SS-1 issued by the Institute of Company Secretaries of India.

(n) Coming back to the borrowing company, in addition to checking whether a board resolution is necessary in terms of section 179 of the act. If the borrowings proposed to be made from any other company will exceed its paid up capital and free reserves.

(o) In this respect, please note the following :

i. Every such resolution is required to be filed with the ROC within 30 days of passing the resolution.

ii. Section 403 of the 2013 act grants in its proviso to sub-section (1) additional time limit of 270 days from the date by which it should have been submitted, filed, registered or recorded.

iii. Thus in the case of e-Form MGT-14 from the date of event, a total 300 days is available for completing the filing or registration needs.

(p) Where the person to whom the loan is granted is a company. It must be noted that the power to borrow must be exercised only at a meeting of board of directors or a committee of directors.

(q) Please ensure that

(i) Loans and advances from related parties should be shown separately in the balance sheet under the head ” Loan Term Loans and Advance

(ii) Loans and advances due by directors or other officers of the company or any of them either severally or jointly with any other person or accounts due by firms or private limited companies respectively in which any director is a partner or a director or a member. It shall be separately stated in the balance sheet under the head “Short Term Loans and Advances”.

(iii) ” Debts due by directors or other officers by the company or any of them either severally or jointly with any other person or accounts due by firms or private limited companies respectively in which any director is a partner or a director or a member. It should be separately stated under the head Trade Receivables in the balance sheet as required under schedule 3 of 2013 act.

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