Loans from director

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Querist : Anonymous

Querist : Anonymous (Querist)

26 July 2013 Can a director of company A who is also an auditor of combany B give loan to company B??

Jiten Gupta

Jiten Gupta (Expert)
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26 July 2013 Lets come to the explicit conclusion of the query which may be briefed as below:

Can Mr. X, who is an Auditor of Company M/s B, grant loan to M/s B?

Ans: No, Pursuant to the provisions of section 226(3) (d) of Indian Companies Act 1956, a company can not appoint any person/firm to be its auditor who/which owes amount exceeding INR1000 by way of direct Indebtness OR Guarantee OR Security in connection with Indebtness to third party..

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CA UMESH DULAL

CA UMESH DULAL (Expert)
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26 July 2013 No, if he wants to continue to be the auditor of company B

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Ajay Mishra

Ajay Mishra (Expert)
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26 July 2013 Agreed with expert, an auditor of the company can not give loan , if it give loan it will be treated as deposits.

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Ajay Mishra

Ajay Mishra (Expert)
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26 July 2013
Deposits in case of Private Limited Company

Private Company is prohibited to accept any invitation or acceptance of unsecured loans/deposits from the persons other than its members, directors or their relatives. Therefore a private company can accept deposits through private arrangement from its members, directors and their relatives.

Rule 2(b)(ix) exempt any unsecured loan money received from directors and shareholders from the definition of deposits. According to Rule 2(b)(ix), any amount received from members of a private company limited by guarantee are not exempt.

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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26 July 2013
Consequences of acceptance of deposit by Private Limited Company

If a private company acceptance an amount, which may be classified as deposit under section 58A read with Companies (Acceptance of Deposits) Rules, 1975, it will cease its status of a private company and has to make all the compliances for such deposits as per the requirement of said rules, as well as to comply with all the provisions as may be applicable on public limited company such as section 58A, 58AA, 58AAA, 81, 256, 257, 198, 268, 269, Schedule XIII, 274(i)(g), 295, 297, 300, 301, 372A, etc

Querist : Anonymous

Querist : Anonymous (Querist)

26 July 2013 Thank u so much Experts, your reply is very much appreciated.Can company A give loan to Company B where director of cCompany A is auditor of company B??

CA UMESH DULAL

CA UMESH DULAL (Expert)
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26 July 2013 answer is same

Ajay Mishra

Ajay Mishra (Expert)
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26 July 2013 Hi

Yes a company can give loan to inter company.

You pass a Board Resolution under section 292 of the Companies Act, 1956.

CA UMESH DULAL

CA UMESH DULAL (Expert)
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26 July 2013 but the auditor could not take up the audit of company B

Ajay Mishra

Ajay Mishra (Expert)
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26 July 2013 Dear Umesh ....

A company A can give loan or take loan from company be whether director or auditor are same in both companies.

Querist : Anonymous

Querist : Anonymous (Querist)

26 July 2013 I should mention this earlier, Company B is Public Limited Co.Sorry for inconvenience.

Ajay Mishra

Ajay Mishra (Expert)
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26 July 2013 Company A is private limited company which is giving loan, so the provision of section 372A will not apply on it. Section 292 is applicable for both Company A and Company B.

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CA UMESH DULAL

CA UMESH DULAL (Expert)
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26 July 2013 Ajay Ji

In above case, auditor of company B is also a director of Company A.

and director is responsible for giving loan ( i mean to say he has a say while deciding the loan to other company)

If he is in a board for a company which is providing loan to the company where is auditor, how could we say the auditor will exercise his duty independently ?

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Ajay Mishra

Ajay Mishra (Expert)
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26 July 2013 Hi

The provision of interested director will not apply to private limited company.

In case of public limited company, he will not participate in the meeting and other director will proceeds the loan procedure.

The opinion of auditor will not be considered in it. Other partner of of Audit Firm will be taken for compliance purpose.

CA UMESH DULAL

CA UMESH DULAL (Expert)
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26 July 2013 This transaction will comprise his professional integrity so he should not take audit duty of company B if loan is given by the company where he is director.

CA UMESH DULAL

CA UMESH DULAL (Expert)
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26 July 2013 In above case, company A (along with directors) have vested interest on company B (as soon as the loan is sanctioned) and future of company B has become interest of company A so in my opinion the director should not take audit duty of company B as long as the loan is outstanding.

Ajay Mishra

Ajay Mishra (Expert)
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26 July 2013 Dear Umesh Sir.........

The question was can a Company A give loan to Company B..........my answer is yes, because the Companies Act 1956 not restrict Company A to give loan to Company B. (This is my opinion as per my knowledge).

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CA UMESH DULAL

CA UMESH DULAL (Expert)
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26 July 2013 I complete agree with you Ajay Ji

No one can stop anybody from doing legitimate business dealing

but every except of such transaction will have to be looked in. If the company provides loan to other company, audit work should not be taken

anyway good debate on a good topic
thank you Ajay Ji

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Ajay Mishra

Ajay Mishra (Expert)
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26 July 2013 I appreciate you for discussing this issue and refreshing me on this topic.

Thanks For sharing valuable experiences.