Loan to a Company from a Director

Gaurav Shanker    |   

Any receipt of money by way of deposit or loan or in any other form, by a company shall be treated as a ‘deposit’. The definition specifically excludes certain events wherein it shall not constitute a ‘deposit’ under law.

A private limited company incorporated in India cannot accept a deposit from any person except its members subject to fulfillment of conditions specified under law. Therefore, it is pertinent to read the exclusions of ‘deposit’ and evaluate the permissible events for a private company. Unlike the loan to a person by the company in which that person is a director, the process is quite simple incase of a loan to a company from a director. However, law prohibits such loan advancements from a director in the event such facility provided is pursuant to further borrowing by concerned director.

If the loan is advanced to the company by a person who is a director in that borrower company, the director needs to furnish a declaration (in writing) to the company that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others. Such a case it does not fall within the ambit of a ‘deposit’ under the law.

The company will require a resolution is to be passed at the meeting of board of directors. An amount upto the aggregate paid up share capital and free reserves is permissible and any sum in excess of the aforesaid aggregate amount will mandate a special resolution to be passed at the shareholders’ meeting.

Such director advancing the facility will have to disclose his interest in the board meeting and will not to be considered for the purposes of want of quorum. The incidence will also require submission of necessary form (MGT 14) with the concerned registrar of companies.

You may direct all your queries or comments at gaurav@businesslawchamber.com

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