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UNDERSTANDING LOANS FROM DIRECTORS AND SHAREHOLDERS IN COMPANY OPERATIONS

The provisions regarding acceptance of loans from directors and shareholders under the Companies Act, 2013 have undergone several amendments in recent years. These changes have caused confusion among professionals and corporations regarding the treatment of such loans. This article aims to shed light on the provisions related to loans from directors and shareholders and address common queries surrounding this topic.

LOAN FROM DIRECTORS:

The Companies Act, 2013 does not have a specific section dealing with provisions for loans from directors. However, the following provisions are typically applicable when a company accepts a loan from directors: Section 179(3), Section 180(1)(c), and Rule 2(1)(vii) of the Companies (Acceptance of Deposits) Rules, 2014.

Power to exercise by the board in the Board meeting only [Section 179(3)]:

The board can exercise the power to borrow money only in a duly convened board meeting, implying that the consent of directors cannot be passed through circulation.

Conditions to be fulfilled for loan [Section 180(1)(c)]:

If the money to be borrowed from the director, together with the money already borrowed by the company, exceeds the aggregate of its paid-up share capital, free reserves, and securities premium, a special resolution from the members of the company is required.

If the borrowing amount is within the mentioned limit, a board resolution is sufficient.

However, please note that section 180 (1) (c) of the Act is not applicable on private companies, hence, special resolution is not required even if borrowing limits mentioned above exceeds.

Not Considered as Deposits [Rule 2(1)(vii) of the Companies (Acceptance of Deposits) Rules, 2014]:

Amount received as a loan from a director of the company (or a relative of the director in the case of a private company) is not considered a "deposit" as per the exempted deposits list. Provided, the director or their relatives providing the funds must furnish a declaration to the company stating that the funds are from their own sources and not borrowed funds.

The company should disclose the loan details in the Board's Report.

Loan from relatives of directors is exempted only in the case of a private company.

Not considered as Related Party Transaction (RPT) under the Companies Act, 2013:

Acceptance of a loan from a director is not considered a related party transaction under Section 188 of the Act, as long as it falls outside the purview of Section 188.

LOAN FROM SHAREHOLDERS:

Under the Companies Act, 2013, the companies were initially prohibited from borrowing funds from shareholders. However, certain exemptions have been provided for private companies to raise funds from shareholders via loans. The following provisions apply:

Power to exercise by the board in the Board meeting only:

Similar to loans from directors, the board can exercise its power to borrow money in a duly convened board meeting.

Conditions as per Section 180 (1) (c):

The conditions of board resolution or special resolution, as mentioned above for loans from directors, are applicable for loans from shareholders as well.

Considered as Deposits:

Loans from shareholders are not covered under the exempted deposits list provided under Rule 2(1)(vii) of the Companies (Acceptance of Deposits) Rules, 2014. Hence, such loans are considered as "deposits," requiring compliance with the deposit provisions.

However, exemptions have been provided to private Companies if it is a start-up company (for 5 years from the date of incorporation) or subject to the fulfilment of the following conditions:

It is not an associate or a subsidiary of any other company.
Borrowings from banks, financial institutions, or anybody corporate is less than twice of its paid-up share capital or 50 Crore Rupees, whichever is less.
It has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under section 73.

Conclusion:

In private companies, where directors and shareholders are usually the same, it is advisable for individuals providing funds to disclose the capacity (shareholder or director) in which the money is given. Based on this, the company can ensure compliance with the applicable provisions.

Understanding the provisions and distinctions between loans and deposits is crucial for companies accepting funds from directors.

CS Pooja Dhiman
Author

Privileges and Exemptions for Section 8 Companies

Section 8 of the Companies Act, 2013 allows for the registration of companies with charitable or social objectives. These companies are known as Section 8 companies, and they are exempt from several requirements that apply to other types of companies.

Some of the privileges and exemptions that apply to Section 8 companies include:

The definition of "company secretary" does not apply. This means that any person can be appointed as company secretary of a Section 8 company, regardless of whether they have the qualifications required for other types of companies.
The requirement of having minimum paid-up share capital does not apply. This means that Section 8 companies do not need to have any share capital, which can make them easier and less expensive to set up.
The company name does not need to include the word "Limited" or "Private Limited". This can make it easier for people to identify the company's charitable or social objectives.
The company does not need to hold its annual general meeting during business hours on a weekday. The company can instead decide on the time, date, and place of the meeting.
The company does not need to give 21 days' notice of a general meeting. Instead, the company can give 14 days' notice.
The section 118 (Minutes of proceeding of general meeting, meeting of board of Directors and other meeting and resolutions passed by postal ballot) shall not apply as a whole except that minutes may be recorded within thirty days of the conclusion of every meeting in case of companies where the articles of association provide for confirmation of minutes by circulation.
The company does not need to appoint independent directors. This can save the company time and money.
The provision related to maximum number of directors on the Board and the requirement of special resolution to increase the limit of maximum number of directors shall not apply.
The auditor of a section-8 company shall not include CARO report with his report
The company does not need to form a nomination and remuneration committee or a stakeholders' relationship committee. This can also save the company time and money.
Section 8 company shall not be counted while calculating the maximum number of directorships of any person.
The Board of Directors, of such companies shall hold at least one meeting within every six calendar months
The quorum shall be either 8 members or 25% of its total strength, whichever is less provided that the quorum shall not be less than 2 members

These are just some of the privileges and exemptions that apply to Section 8 companies. If you are considering setting up a company with charitable or social objectives, then you should consider registering as a Section 8 company.

Note: The exemptions listed above apply to Section 8 companies that have not committed a default in filing their financial statements or annual returns with the Registrar of Companies.

I hope this article has been helpful. Please let me know if you have any other questions.

Author
CS Kamal Wadhwani

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