Loans to private limited companies

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

10 May 2014 Hello,

Under the Companies Act, 1956 loans to Private Companies were allowed from non-members..does the same apply under Companies Act, 2013 as well?

Thanks in advance

Nikhil Kaushik

Nikhil Kaushik (Expert)
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10 May 2014 very much. rather the borrowing provisions have become much more restrictive.

Querist : Anonymous

Querist : Anonymous (Querist)

12 May 2014 Could you please explain in detail giving relevant sections under which a non-member of a company could provide the loans to a Private Company? Thanks!

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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03 August 2024 Under the **Companies Act, 2013**, the provisions relating to loans to private companies have been updated from those under the **Companies Act, 1956**. Here's a detailed explanation of how loans to private companies from non-members are regulated under the 2013 Act:

### **1. Loans to Private Companies under Companies Act, 1956:**

Under the Companies Act, 1956, private companies had more flexibility in terms of borrowing from non-members compared to public companies. There were no specific prohibitions against private companies taking loans from non-members, subject to the provisions of Section 295, which required prior approval from the Central Government for loans to firms or private companies where directors were interested.

### **2. Loans to Private Companies under Companies Act, 2013:**

The Companies Act, 2013 introduced several changes and updated provisions regarding borrowing and loans. Here are the key sections relevant to loans from non-members:

**A. **Section 185 – Loans to Directors and Other Related Party Transactions**

- **Prohibition on Loans:** Section 185 prohibits companies from giving loans to directors or any other person in whom the director is interested, except in specific circumstances. The exceptions include loans to companies in which the director or his relative is a director or a member, provided certain conditions are met.

- **Applicability to Private Companies:** Private companies are not completely exempt from these provisions but do have certain relaxations. Section 185 still applies to private companies but provides some relaxations compared to public companies.

**B. **Section 186 – Loan and Investment Restrictions**

- **Restrictions on Loans and Investments:** Section 186 restricts the ability of companies to make loans, investments, or guarantees beyond specified limits. It requires board and shareholder approval for loans exceeding prescribed limits.

- **Applicability to Private Companies:** This section applies to both private and public companies. It stipulates the need for board resolutions and, in some cases, shareholder resolutions if the loan amount exceeds the prescribed limits.

**C. **Section 2(76) – Definition of a Related Party**

- **Related Parties:** For the purpose of loans and other transactions, related parties include directors, their relatives, and entities in which they have an interest. This affects how loans from non-members are evaluated if there is any indirect link to directors.

**D. **Section 372A – Loans and Investments by Companies**

- **Inter-Corporate Loans and Investments:** This section, though largely superseded by Section 186, still outlines the rules for loans and investments by companies, including restrictions and approval requirements. For private companies, this section is less restrictive compared to public companies but still mandates board approval.

### **3. Loans from Non-Members:**

Under the Companies Act, 2013:

- **Loans from Non-Members:** Private companies can receive loans from non-members. There are no specific prohibitions against such loans, provided that the loan transactions comply with other relevant provisions of the Companies Act, 2013, particularly Section 185 (if any related party transactions are involved) and Section 186 (for loan limits and approvals).

- **Compliance:** Ensure compliance with the general borrowing limits and procedural requirements outlined in the Companies Act, 2013. This includes proper board resolutions and compliance with the limits specified in Section 186.

### **Summary:**

1. **Loans from Non-Members:** Private companies can receive loans from non-members under the Companies Act, 2013, provided they comply with the relevant provisions of the Act.
2. **Relevant Sections:**
- **Section 185:** Regulates loans to directors and related parties.
- **Section 186:** Regulates loans, investments, and guarantees.
- **Section 2(76):** Defines related parties.
- **Section 372A:** Provides general rules on inter-corporate loans and investments.

For detailed compliance, always refer to the latest amendments and consult with legal or company secretarial experts to ensure adherence to all regulatory requirements.

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