Loan from directors

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siddhi08 (Querist)
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02 May 2012 Dear All,

Can a Public Company take a loan from its Directors?

if yes then whats the limit and in which section it comes?

can anyone explain me in detail...?

Thanks & Regards,
Siddhi
C.S.Trainee

Ajay Mishra

Ajay Mishra (Expert)
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02 May 2012 Hi

Section 295 of the Companies Act, 1956 deal with loan to directors.This section apply to public company.

Section 58A read with Acceptance of Deposit Rules deal with acceptance of deposits from directors.

Rule 3 of Companies (Acceptance of Deposits) Rules, 1975 deal with the limit upto which a company can accept deposits/ loans. Private company exempted this limit.

For any invitation and acceptance of unsecured loan/deposits from relatives of directors and member, the company will have to file a statement in lieu of advertisement in accordance with the provisions of Rule 4A of the Companies (Acceptance of Deposits) Rules, 1975. The company will also have to file annual return of deposits in accordance with Rule 10.

Ajay Mishra

Ajay Mishra (Expert)
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02 May 2012 Hi

Money received from directors:
Rule 2(b)(ix) says "any amount received from a person who at the time of receipt of the amount was a director of the company". The director shall furnish a statement to the company at the time of bringing in the money that the money has not been borrowed or accepted from another person. If a person ceases to be a director of the company after the money has been brought in, the exemption continues.

It should be noted that no fresh amount should be received by the company after cessation of office of director from such person.

Ajay Mishra

Ajay Mishra (Expert)
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02 May 2012 Distinction between Loan and Deposit:

1. In the case of a deposit, the delivery of money is usually at the instance of the giver and it is for the benefit of the person who deposits the money. Deposits could be for safe keeping or as a security for the performance of an obligation undertaken by the depositor. In the case of a loan, however, it is the borrower at whose instance and for whose needs the money is advanced.
2. The borrowing is primarily for the benefit of the borrower although the person who tends the money may also stand to gain thereby by earning interest on the amount lent ordinarily, though not always, in the case of a deposit, it is the depositor who is the prime mover while in the case of a loan, it is the borrower who is the prime mover.
3. The other and more important distinction is in relation to the obligation to return the amount so received. In the case of a deposit which is payable on demand, the deposit would become payable when a demand is made. In the case of a loan, however, the obligation to repay the amount arises immediately on receipt of the loan.
In the case of Ram Ratan Gupta v Director of Enforcement, Foreign Exchange Regulation (1966) 36 Comp Cas 49: AIR 1966 SC 495, the Supreme Court made a distinction between a loan and a deposit. It said:
"It is settled law that the relationship between a banker and a customer qua moneys deposited in the bank is that of a debtor and creditor. Though, ordinarily a deposit of an amount in the current account of a bank creates a debt, it does not necessarily involve a contract of loan. The question whether a deposit amounts to a loan depends upon the terms of the contract under which the deposit is made."
The Supreme Court considered even Bank deposit as distinct from a loan. It is therefore clear that "loan" and "deposit" are not identical in meaning and cannot always be interchanged. Some loans may be deposits and some deposits may be loans. But all loans are not deposits or vice versa.

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Ajay Mishra

Ajay Mishra (Expert)
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02 May 2012 Limit of amount for acceptance of deposits:

As per rule 3(2) a company may accept deposits from the public upto the following limits subject to fulfillment of the conditions of the Companies (Acceptance of Deposit) Rules, 1975:—
(a) upto 10% of its paid-up capital and free reserves from its shareholders (other than a shareholder in a private company). These deposits may also include any deposit from any person guaranteed by a director of the company or against unsecured debenture issued by a company;
(b) upto 25% of the paid-up capital and free reserves of the company from public.

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