Live Course on Drafting of Appeal and Reply of Penalty Notice by CA Sachin Sinha. Register Now!!

Loan to firm where director is partner?

Anoop (Executive VP) (33 Points)

08 June 2014

Dear experts please help in following queries related to private limited company 1. Unsecured Loan by a company to a firm where director / relative of director is partner possible or not where the firm pays interest by 16%? Company's main activities are manufacturing and selling? 2. Question is same as no. 1 only change is this this company charges interest by 10%. Also company is self funded and all earnings are from interest. PLS give your opinion we can change the share holding pattern. But we want to give fund to same firm with option 1.

Reply
Follow
Share

11 Replies

C.A Chethan Acharya (Finance) (44 Points)
Replied 08 June 2014

Interested director should not participate and vote in the board meeting. Central Government approval not required. .

Vinay Garg (Service Tax Expert) (775 Points)
Replied 08 June 2014

Dear Mr.Anoop,

As per Sec.185 of Companies Act 2013, No Company can give any loan to a firm in which such director or relative is partner subject to exception that where company do that in Ordinary Course of its business and interest charged by it is not less than Bank Rate.

Your case does not fall in exception as the company is in business of Manufacturing. The rate of interest specified by you, i.e. 16% or 10%, is irrelevant.

So, making loan in your case will contavene sec.185 of Companies Act 2013.

Vinay Garg (Service Tax Expert) (775 Points)
Replied 08 June 2014

(in continuation)
What you can do is rearrange the directorship pattern by appointing new directors in company, who neither himself nor his relatives are partner in that firm. or convert company to LLP.

Anoop (Executive VP) (33 Points)
Replied 08 June 2014

Company is involved in lending from last 10 years and charges interest. And it's clearly mentioned in the nature of business from long ie 5 years...

Vinay Garg (Service Tax Expert) (775 Points)
Replied 08 June 2014

How to check Ordinary Course of its Business

a) Is the company engaged in lending activity regularly.

b) Lend not only to Directors and related parties but also to Arm Length Parties or unrelated parties

Anoop (Executive VP) (33 Points)
Replied 08 June 2014

A. Yes B. Rarely lends to unrelated parties Cannot be converted into llp because of profit criteria. If we change the director ship then can a manufacturing company give loan to a firm and earn interest.

Anoop (Executive VP) (33 Points)
Replied 08 June 2014

Vinay Garg (Service Tax Expert) (775 Points)
Replied 08 June 2014

Sec.185 of Companies Act 2013 applies where Company grants loan to Firm in which

any such Director is partner or
relative of such director is partner

So, if the company change the directorships by appointing new director who neither himself nor his relative is a partner in that firm, Company may grant loan without contavening the provisions of Company Act 2013.

Samir (Account Head) (207 Points)
Replied 09 June 2014

A Company can give loan to firm in which director is partner, subject to condition laid down under section 186 of Companies Act. 2013

Vinay Garg (Service Tax Expert) (775 Points)
Replied 10 June 2014

You may also check following link for Sec.186.

/articles/faqs-on-section-186-of-companies-act-2013-20499.asp#.U5Z8RVWSx2I

CA. Abhishek K. Pandey (Manager (Advance)) (901 Points)
Replied 16 June 2014

As per section 185, your company can't give such a loan since providing loan is not its primary business and even in that case interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.

Doing such will attract consequences as per Section 185(2).