Loans are the major source of funding for most of the Companies apart from their Share Capital. Companies borrow from various sources like banks and various other financial institutions. Where public limited companies borrow from mass public by accepting public deposits private companies are strictly prohibited from accepting any loan or deposits from the public. The Companies Act,1956 permitted private companies to borrow from directors, shareholders and relatives of directors. However the Companies Act 2013 has brought a major change in the borrowing provisions for private companies and removed shareholders and relatives of directors from the list of lenders. Going forward the 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.
Let us analyze the various provisions pertaining to loans given and accepted by the Companies as per Companies Act 2013
Provisions pertaining to loans /deposits accepted by the company.
1) Section 73: It states that No company whether public or private can accept deposit from anybody without complying with the provisions mentioned in Section 73. Clause (viii) of Rule 2(c) specifically excludes loans from directors from the purview of deposit definition if the director gives a declaration that the amount he is lending is not out of borrowed funds. Clause (vi) of Rule 2(c) excludes loans received from any other company from the definition of Deposits.
To sum up any company whether public or private can accept loan or deposit from directors (subject to obtaining a declaration) and any other company whether private or public (subject to the restrictions imposed by S.180(1)(c),of the Act) apart from banks and financial institutions. If any company is desirous of obtaining loan from any other person then they have to comply with the Deposit rules which include obtaining credit rating, issuing circular, creating deposit repayment reserve account, etc.
2) Section 180(1)(c) : This sections corresponds to S. 293 of the Companies Act,1956 which was applicable only to public companies and private companies which are subsidiaries of public companies. The provision which is now applicable to private companies as well, states that if the amount to be borrowed by the company along with the amount already borrowed by the company exceeds the aggregate of its paid up share capital and free reserves then consent of the company by means of a special resolution shall be taken. The borrowings exclude temporary loans taken by the company i.e. loans repayable on demand or within 6 months from the date of such loan.
To sum up even though companies are permitted to borrow from companies, directors and financial institutions they have to obtain the consent of the company prior to obtaining further loans if the aggregate of such loans exceed the aggregate of its paid up share capital and free reserves. Obtaining temporary loans are excluded from the purview of this section.
Provisions pertaining to giving loans by the company
3) Section 185:- The section provides that no company shall directly or indirectly advance any loan to its director or to any other person in whom the director is interested or give any guarantee or provide security in connection with the loan taken by the director or any such other person. The term “any other person in whom the director is interested” includes firm in which director or his relative is partner and private companies in which the director may be director or shareholder.
To sum up advancement of loan to any individual or company or firm in whom the director of the lending company is related is strictly prohibited.
4) Section 186: – No company shall directly or indirectly give any loan to any other person or body corporate exceeding 60% of its paid up share capital, free reserves and share premium or 100% of its free reserves and securities premium whichever is more. If the company proposes to advance any such loan exceeding its limits then prior approval by means of a special resolution passed at a general meeting shall be required. Prior approval of the public financial institution shall also be required if there is any default in repayment of instalment or interest on the term loan.
To sum up prior approval of the shareholders shall be obtained by the company if any loan is advances exceeding the given limits.
Checklist for Lender Company
a) The borrower is in no way related to the director of the lender company.
b) The loan advanced is not in excess of the limits specified. If it is then prior approval of shareholders is obtained by means of a special resolution.
Checklist for Borrower Company
a) The lender is the director, bank or any other approved financial institution. For any other lender deposit rules are followed prior to acceptance of such deposit.
b) Prior approval of shareholders is taken if the borrowings exceed the aggregate of paid up share capital and free reserves.