Loan from directors, members and their relatives

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Querist : Anonymous

Querist : Anonymous (Querist)

03 April 2015 whether a pvt. ltd. company take unsecured loans from:
1. Directors
2. Shareholders/Members
3. Directors' relatives

Thank You.

CS Mitesh Mehta

CS Mitesh Mehta (Expert)
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03 April 2015 private companies can borrow only from directors apart from banks and financial institutions provided the director gives a declaration that the amount that he is giving is not out of borrowed funds.

Querist : Anonymous

Querist : Anonymous (Querist)

07 April 2015 Whether a directors' HUF can give loan to pvt. co.?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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03 August 2024 Under the Companies Act, 2013, a Hindu Undivided Family (HUF) that is represented by a director can indeed lend money to a private limited company. However, there are specific considerations and compliance requirements that need to be met:

### **Key Considerations for Loans from HUF**

1. **Legal Capacity of HUF:**
- An HUF is recognized as a legal entity for tax purposes but not as a separate legal person for the purposes of borrowing and lending. Thus, it can enter into financial transactions including lending money to a company.

2. **Compliance with the Companies Act, 2013:**
- **Borrowing Limits:** The total borrowing by the company from all sources, including from HUFs, should not exceed the aggregate of its paid-up share capital and free reserves unless a special resolution is passed under Section 180(1)(c).
- **Disclosure:** The loan transaction must be disclosed in the company’s financial statements.
- **Terms of Loan:** The terms of the loan, including interest rates and repayment conditions, should be documented and transparent.

3. **Director's Interest:**
- **Conflict of Interest:** If the director of the company is also a member of the HUF that is lending money to the company, there should be no conflict of interest. The transaction should be on an arm's length basis.
- **Approval:** If the director's HUF is providing a substantial loan, the board may need to approve the transaction to ensure it is conducted on fair terms and in the interest of the company.

4. **Regulatory Filings and Documentation:**
- **Form MGT-14:** If the borrowing exceeds the paid-up capital and free reserves, the company must pass a special resolution and file it with the Registrar of Companies (ROC) in Form MGT-14.
- **Agreement:** A loan agreement should be drafted, detailing the terms of the loan and executed as per the law.

### **Summary**

- **Yes**, a director's HUF can provide a loan to a private limited company.
- Ensure that the borrowing limits and terms comply with the Companies Act, 2013.
- Proper documentation and disclosure are essential to comply with legal and regulatory requirements.
- Transactions should be conducted transparently and on arm's length terms to avoid any potential conflicts of interest.

### **Example of a Loan Agreement with HUF:**

- **Loan Amount:** Specify the amount being lent by the HUF.
- **Interest Rate:** Define the interest rate applicable.
- **Repayment Terms:** Outline the repayment schedule and terms.
- **Purpose of Loan:** State the purpose of the loan.
- **Security:** If applicable, mention any security or collateral provided for the loan.
- **Signatures:** Include signatures of authorized representatives from both the HUF and the company.

By adhering to these guidelines, the company can ensure that the loan from a director's HUF is properly handled and compliant with applicable laws.

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