When the lines blur between personal and corporate finances, questions about conflicts of interest and fairness arise. Loans from directors and their relatives pose intriguing challenges, emphasizing the need to navigate this terrain with care and comprehension.
The question here arises in the minds of an entrepreneur as to whether his company, which is a closely held private co. in category, can really borrow funds from him who is a director or spouse, father etc?
Well, the common sense doesn't really prohibit - if an entrepreneur who is director can invest in the form of equity, then why not in the form of debt? Of course, a director may have funds to run his business and he may infuse equity into it but is it necessary? Suppose, Mr Arpit wants to start a new business but he has lesser or no funds of his own and his brother is ready to infuse debt into his business, in this case would the law of the land really prefer to prevent him from moving ahead in his entrepreneurial journey just because capital infusion is in the form of debt? Obviously No!
However, there may be legal and regulatory requirement for such kind of borrowing, Let's unpack and comprehend the India's Corporate Law on this subject.
WHETHER A PRIVATE COMPANY CAN LOAD BORROWINGS FROM DIRECTORS/RELATIVVES OF DIRECTORS?
The Companies (Acceptance of Deposits) Rules, 2014 clearly exempts the money received by Co. from its directors or relatives from definition of deposits and Section 179 gives power to the Co.'s Board to borrow funds, the Companies Act, 2013 nowhere prohibits such borrowing. Hence, it can be extracted that the law allows the loans from such persons. However, the rules further impose certain transparency and disclosure requirements such as:
- The lender must be director at the time when the co. received such funds.
- The lender should not have acquired such funds by borrowing or accepting loans or deposits from others i.e., loan given to company is out of his own funds.
- A declaration to the point 2 should have been furnished to the company in writing.
- The Company shall have to disclose the details of such funding in its Board's Report.
WHAT ARE THE SECRETARIAL REQUIREMENTS?
They shall have to first call the Board Meeting, then conduct the board meeting and pass Board Resolution thereafter take declaration to the effect discussed above.
WHAT ARE COMPLIANCES REQUIREMENTS?
The company is required to file form DPT-3 up to 30th of June every year till the loan is subsisting indicating exact figures as mentioned in the audited financial statements of immediately preceding financial year under the head "Particulars not considered as deposits".
The fee may vary between INR 200 to 600 depending upon the quantum of share capital. However, higher fee may have to be paid between 2 times of nominal fee to 12 times depending upon the period of delay.
IN SUMMARY, comprehending the connection between family ties and corporate finances regarding loans from directors and their relatives is crucial. By acknowledging potential risks and implementing effective oversight measures, companies can ensure transparency and reduce conflicts of interest.
Striking a careful balance in navigating this terrain fosters trust, accountability, and sound corporate governance. The intention of the law maker is also to enhance accountability and not to prevent debt fund raising from individuals who are closed to the company.
The author is Mr Pankaj Devnani, a CS & Law Student. The information provided in this blog is based on the author's research, knowledge, and understanding of the subject matter at the time of writing. The content of this blog is intended for informational purposes only and should not be considered as professional or legal advice.
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