Can Company take Unsecured Loans from Directors?

Yes. A company can definitely take loan from its Directors. You might have frequently came across with the word “Directors”. Director is the one who gives direction to the company, carrying lot of responsibilities in managing the affairs of the company. Director of a company is the one who is elected by the shareholders of the company for the overall management of the company .Since a company is an artificial person created by law, it can operate only through a natural person and here comes the role of directors. To meet the financial need of the company also forms an important part of directors responsibility. Why would a company source finance from the third party if there is an option of accepting loans from their directors? A company can borrow unsecured loans from directors of the company. Thus opting unsecured loans from directors is also economical as compared to loans from any other financial institutions.

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I. Types of unsecured loans from directors

Unsecured loans from director can be classified into following two types-

1. Amounts received out of Director’s own funds and
2. Amounts received out of borrowed funds

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1. Amount received out of funds borrowed by the director

Case 1: Director is not a shareholder:

In Case 1 where director is not a shareholder then the funds received from such directors will be treated as Deposits and needs to company with sec 76 read with Companies (Acceptance of Deposits) Rules 2014. In such scenario these deposits can only be accepted Public Company having either-

1. Net worth of Rs. 100 crores or a
2. Turnover of Rs. 500 crores (i.e. Private limited companies and ineligible Public companies cannot receive loans/deposits from director’s borrowed funds).

Sec 76 of the Companies Act, 2013 requires such public company to obtain credit rating every year and to create a charge on its assets in favor of the deposit holders for an amount not less than the amount of Deposits accepted. Section 180 is also attracted in this case (Sec 180 explained at the end of this article)

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Case 2: Director is a shareholder:

In Case 2 where director is a shareholder then the funds received from such directors are also treated as deposits however, they are treated as deposits from a member and attract provisions of Section 73(2) read with Companies (Acceptance of Deposits) Rules 2014. Section 180 is also attracted in this case (Sec 180 explained at the end of this article)

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2. Amount Received from directors out of there own funds

In case of unsecured loan from director in form of amount received from director out of there own funds are treated as loans and do not require compliance with section 73(2) or Section 76. However, to avail this relief the director must furnish to the company at the time of giving the money, a declaration in writing, that the amount is not being given out of funds gathered or collected by borrowing or accepting loans or deposits from others. However, information regarding the loan should be disclosed in the Director’s Report as well as the notes to accounts of the Financial statements of the company. Section 180 (discussed below) is also applicable in the given case.

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II. Interest rate on unsecured loan from directors

Interest rate on unsecured loan ranges anywhere from 5% to 36%. It might completely depending upon the mutual agreement between the company and its directors.

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III. Can a company take unsecured loans from directors at zero rate of interest?

Yes. A company can take unsecured loan from the directors and there relatives too with zero rate of interest. But while accepting deposit from directors, they must give a declaration to the company that the amount is their own money and not borrowed.

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IV. Can Penal rate of interest be levied on companies if they fail to pay back unsecured loans to director?

Yes. If a company fails to pay back the unsecured loan amount if any to the directors of the company, a penal rate of interest of 18% shall be levied to this regard.

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V. Penalty under section 73 to 76 of companies act 2013

The penal provision for contravention of sec 73 or sec 76 of the Companies Act, 2013 should be-

Sr No	Particulars	Penalty
1.	On Company-	The company shall, in addition to the payment of the amount of deposit or part thereof and the interest due, be punishable with fine which shall not be less than- a.      1 crore rupees b.      but which may extend to 10 crore rupees;
2	On every Officer	Every officer of the company who is in default shall be punishable with imprisonment which may extend to seven years or with fine which shall not be less than a.      25 lakh rupees b.      but which may extend to 2 crore rupees, or with both:

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VI. Can director give loan to company in cash?

Yes, a director can give loan to Company in cash, keeping in view the Income Tax Act, 1961 provisions to this regards.

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VII. Treatment of Loan From Directors in Company

Any loan taken by the Company is ultimately a liability which need to be paid back after a certain specified period of time.

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a. Accounting Treatments for short term loan:

If the unsecured loan is raised for a short term ( payable within one year) then the same will be reflected as Current liability in the balance sheet.

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b. Accounting treatment for long term loan:

If on the other hand the same is payable over a period more than one year then it is classified as Term Liability or Long term liability.

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c. Accounting treatment for installments payable on unsecured loans:

Installments payable within a period of one year period have to be shown as Current Liabilities

Example: XYZ Pvt Ltd has raised a loan of Rs 700000.00 Of this Instalments amounting to Rs 80000.00 are payable within one year. Then the loan of Rs 700000 appears as below

1.Rs 620000 as Long Term Liability

2.Rs 80000.00 as Current Liability

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Section 180 of the Companies Act, 2013:

The Board of Directors of a company shall exercise the following powers only with the consent of the company by a special resolution, namely:—

(a) to sell, lease or otherwise dispose of the whole or substantially the whole of

the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings.

Explanation.—For the purposes of this clause,— 

(i) “undertaking” shall mean an undertaking in which the investment of the company exceeds twenty per cent. of its net worth as per the audited balance sheet of the preceding financial year or an undertaking which generates twenty per cent. of the total income of the company during the previous financial year;

 

(ii) the expression “substantially the whole of the undertaking” in any financial year shall mean twenty per cent. or more of the value of the undertaking as per the audited balance sheet of the preceding financial year;

 

(b) to invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation;

 

(c) to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital and free reserves, apart from temporary loans obtained from the company’s bankers in the ordinary course of business:

 

Provided that the acceptance by a banking company, in the ordinary course of its business, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise, shall not be deemed to be a borrowing of monies by the banking company within the meaning of this clause.

 

Explanation.—For the purposes of this clause, the expression “temporary loans” means loans repayable on demand or within six months from the date of the loan such as short-term, cash credit arrangements, the discounting of bills and the issue of other short-term loans of a seasonal character, but does not include loans raised for the purpose of financial expenditure of a capital nature;

 

(d) to remit, or give time for the repayment of, any debt due from a director.

 

(2) Every special resolution passed by the company in general meeting in relation to the exercise of the powers referred to in clause (c) of sub-section (1) shall specify the total amount up to which monies may be borrowed by the Board of Directors.

 

(3) Nothing contained in clause (a) of sub-section (1) shall affect—

 

(a) the title of a buyer or other person who buys or takes on lease any property, investment or undertaking as is referred to in that clause, in good faith; or

 

(b) the sale or lease of any property of the company where the ordinary business of the company consists of, or comprises, such selling or leasing.

 

(4) Any special resolution passed by the company consenting to the transaction as is referred to in clause (a) of sub-section (1) may stipulate such conditions as may be specified in such resolution, including conditions regarding the use, disposal or investment of the sale proceeds which may result from the transactions:

 

Provided that this sub-section shall not be deemed to authorise the company to effect any reduction in its capital except in accordance with the provisions contained in this Act.

 

(5) No debt incurred by the company in excess of the limit imposed by clause (c) of sub-section (1) shall be valid or effectual, unless the lender proves that he advanced the loan in good faith and without knowledge that the limit imposed by that clause had been exceeded.

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2.  Sec 76 of the Companies Act, 2013

(1) Notwithstanding anything contained in section 73, a public company, having such net worth or turnover as may be prescribed, may accept deposits from persons other than its members subject to compliance with the requirements provided in sub-section (2) of section 73 and subject to such rules as the Central Government may, in consultation with the Reserve Bank of India, prescribe:

Provided that such a company shall be required to obtain the rating (including its networth, liquidity and ability to pay its deposits on due date) from a recognised credit rating agency for informing the public the rating given to the company at the time of invitation of deposits from the public which ensures adequate safety and the rating shall be obtained for every year during the tenure of deposits:

Provided further that every company accepting secured deposits from the public shall within thirty days of such acceptance, create a charge on its assets of an amount not less than the amount of deposits accepted in favour of the deposit holders in accordance with such rules as may be prescribed.

(2) The provisions of this Chapter shall, mutatis mutandis, apply to the acceptance of deposits from public under this section.

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Conclusion:

The most vital factor in terms of unsecured loans from director is to understand well versed the nature of transaction whether it will a loan or a deposit. Once it is clarified, the upcoming step shall be to check the compliance and limitations requirement by the company to the corresponding section of the Companies Act, 2013 read with related Rules as amended up to date. Taking an unsecured loan from the directors is the most widely practiced era in todays modernized and economic world. It can serve as a great idea to opt an option of grabbing unsecured loans from directors of the company instead of the prioritizing financial institutions.

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