Can a Company take loan from directors and shareholders

India, there are multiple ways through which a company can avail or raise long term capital. It can be through issue of equity shares, debentures, preference shares or by accepting money through deposits. In most of the cases, such capital is utilized for the purpose of expansion and growth of the company which includes purchasing non-current assets like plant an equipment, property, tangible assets, intangible assets etc. Many times, companies might also require immediate or short term funding which can be provided by the directors or the shareholders of the company as short term finance. However, there are certain provisions in the Companies Act, 2013 which must be followed for raising such short term finance.

Can a Company take loan from directors and shareholders

Loan by Companies from different sources

A Company, especially a Private Limited Company can take loan from:

  • Directors
  • Relatives of Director
  • Shareholders

The directors and relatives of director can provide loan from their own fund i.e. Director’s fund or relatives from its own funds. On the other hand, shareholders can provide loan up to 100% of paid up share capital plus free reserves plus Security Premium Account.

Key Factors to be considered while taking loans from directors, their relatives or Shareholders

  • The position or the current standing of the director at the time of availing financial assistance will be considered
  • A Self declaration from the director will be required stating that the amount which he is going to provide to the company has not been taken by accepting or borrowing loans.
  • A Company is allowed to accept any amount of loan from the directors.

Acceptance of loan by a Private Company from its directors, their relatives or shareholders

  • A Self declaration from the director will be required stating that the amount which he is going to provide to the company has not been taken by accepting or borrowing loans.
  • Details of the money accepted by the company must be disclosed in the Board’s Report
  • Complete details regarding money received by the directors, their relatives or shareholders needs to be disclosed by the Private Company in its financial statement, by way of notes.

Acceptance of loan from a Director who is also a shareholder

Generally, in various Private Companies, the shareholders and the directors are the same when it comes to funding of the company. As per the limitations and compliances as mentioned in the law, it will be viable if the person providing the loan discloses the capacity in which he is providing loan to such company. In simple words, he needs to clearly disclose whether he is providing the loan in the capacity of shareholder or director. On the basis of this, the compliance will be ensured by the company which is very important with respect to acceptance of unsecured loans from the shareholders and directors of the company.

Compliances to be followed while accepting the Loans from Directors

  • The company has to file a return in e-Form DPT-3 on or before 30th June of every year with the Registrar of Companies (ROC) along with prescribed fees
  • The company also needs to furnish requisite information contained therein as on 31st March of that particular financial year.

Circumstances under which a Private Company can accept loan/deposit from members without complying provisions of Section 73(2)

  • The company that accepts deposits from its member not exceeding 100% of the aggregate of the paid-up capital, free reserve and Securities Premium Account or,
  • A Private Company which is a startup for 5 years from its incorporation date
  • When The Company is not a subsidiary or associate of any other company;
  • If The Borrowing limit from the banks or financial institutions or any company is less than twice of its paid-up share capital or fifty crore rupees, whichever is lower; and
  • A company has not failed in the repayment of such borrowings subsisting at the time of accepting deposits under the section.

FAQs

Can a company take a loan from its directors or shareholders?

Yes, in many jurisdictions, a company can take a loan from its directors and shareholders. However, there are usually regulations and guidelines governing such transactions to ensure transparency and prevent conflicts of interest.

Are there any restrictions on the terms of the loan?

Depending on the jurisdiction and the company’s governing documents (such as articles of association or bylaws), there may be restrictions on the terms of the loan. For example, the interest rate may need to be at a market rate to prevent preferential treatment.

How should such transactions be documented?

It’s crucial to document any loan transactions between a company and its directors or shareholders formally. This documentation typically includes a loan agreement outlining the terms of the loan, such as the principal amount, interest rate, repayment schedule, and any collateral provided.

Practice area's of B K Goyal & Co LLP

Company Registration Services in major cities of India

Complete CA Services

RERA Services

Most read resources