Loan for Private Limited Company

The term loan for private limited company is no longer jargon in the finance sector. It is a household word in today’s society. Apart from banking companies and NBFCs, other legal entities also provide loans in times of need. These legal entities include cooperative societies, public limited companies, private limited companies, and other body corporates. In this article, we will discuss “Loan for Private Limited Company” through the lens of the Companies Act, 2013.

How do I get a loan for a private limited company?

The word “loan” is not defined under the Companies Act, 2013. In the absence of any such definition. The loan for private limited company has to be understood in the context of common sense. Thus, the loan can be said to be money provided with the intention of being repaid.

Loan for Private Limited Company and the Companies Act, 2013:

The term loan for private limited company has been mentioned under the Companies Act, 2013 in the definition of deposit. Which is in the context of the receipt of money. This means that certain loans are treated as deposits.

The word loan for private limited company is reiterated in Section 179 of the Companies Act 2013. This section is specifically about the power of the board. It indicates boards also have the power to give loans.

Regulatory provisions to regulate loans as given under The Companies Act, 2013

Whenever a private limited company loan is discussed, sections 185 and 186 of the Companies Act, 2013 come into play. This section regulates the acceptance and giving of the loan. Section 185 of the Companies Act 2013 is substituted by the Companies (Amendment) Act, 2017. This new section provides restrictions, conditions, and exemptions for loans by companies in India.

Loan for Private Limited Company, Section 185:

 As per section 185(1) [Loan to Director, etc.], No company, directly or indirectly, advances any loan, including any loan represented by a book debt to, or gives any guarantee or provides any security in connection with any loan taken by,

1. Any director of the lending company.
2. Any relative of the director of the lending company.
3. Any partner or director of the lending company.
4. Any firm in which the director of lending or a relative is a partner. 
5. Any director of its holding company.
6. Any partner of the director of the holding company.
7. Any relative of the director of the holding company.
8. Any firm in which the director of the holding company or its relative is a partner.

On perusal of subsection (1), it is pertinent to note that it applies to all companies. Including private companies, and the restriction is limited to only individuals and firms. 

This subsection bars private companies from providing loans. Like directors, their relatives, or partners, and firms in which such a director or relative is a partner. 

Conditional:

Further, subsection (2) states that the loan for private limited company or body corporate. In which directors of lending companies are interested in the manner provided below:

(a) any private company of which any such director is a director or member.

(b) Any body corporate in which at least 25% of the total voting power is held. It is controlled by any such director alone or together with other such directors.

(c) Any body corporate whose board of directors, managing director, or manager is accustomed. Acting by the directions of the board or of any director or directors of the lending company.

Thus, private companies can extend loans to other private companies and body corporates. Their directors are related, as prescribed above, subject to passing a special resolution in the general meeting. An explanatory statement annexed to the notice of such a meeting states the following:

1. Particulars of loan 
2. purpose of loan 
3. Any relevant fact 

One more condition that’s included is that loans are not used for any purpose. Other than the principal business activity of the borrowing companies,

Section 185:

Further subsection 3 of Section 185 indicates restrictions of subsections 1 and 2 are not effective. When the loan is provided to the managing director (MD) or whole-time director (WTD),

Thus, private companies can provide loans to their (MD) managing director and (WTD) whole-time director. Subject to the condition that this loan is part of the conditions of service extended to all employees. Under a scheme sanctioned by a special resolution.

Further restrictions are also ineffective for companies engaged in financial activity, subject to the condition that the interest charged is equal to or greater than the interest charged in government securities closer to the tenure of the loan. The doors are also open for holding companies to provide loans to their wholly-owned subsidiaries, provided that the loan is used for their principal business activity. A wholly owned subsidiary of a company means one whose 100% share is held by such a company. 

Exemption

As per notification dated 5.6.2015, a loan for private limited company that satisfies the following triple conditions would not invite restrictions contained in Section 185:

Condition 1:

(a) No other body corporate is its shareholder.

Condition 2:

(b) If the borrowings of the lending company from banks, financial institutions or any other corporate entity are less than twice its paid-up capital or Rs. 50 crores, whichever is lower.

Condition 3:

(c) No default in repayment of borrowing at the time of granting the loan.

Loan for Private Limited Company, Section 186:

Now, after section 185 of The Companies Act, 2013, we have to go through Section 186 for a clear understanding of regulations for granting loans. Section 186 applies to all companies, including private companies. The rationale behind this section is to prevent the misuse of funds by companies and to protect the interests of the shareholders and creditors of the company. This section is also called a section of inter corporate loans. 

Section 186(2) sets a limit that loans can be given to any person or other body corporate if it do not exceed 60% of paid-up share capital, free reserve, and security premium account, or 100% of the free reserve and Security premium Account, whichever is more, only by passing a unanimous board resolution. As per secretarial standard-1, Such board resolution shall not be passed By circulation However, in the case of IFSC-specified private company, the same can be passed by circulation A unanimous resolution means a resolution passed with the consent of all directors present and entitled to vote at the meeting. The Ministry of Corporate Affairs issued General Circular No. 4/2015 to clarify any person who excludes employees of the company. 

Further, 186(3) provides that where the loan already given and the loan proposed to be made crosses the aforesaid limit, in addition to a unanimous resolution, a special resolution is required to be passed. The board shall specify in the resolution the total amount up to which the Board of Directors is authorised to give such a loan. In the calculation of loans already made, only consider loans which are made to body corporates. This means loans to individuals are avoided while calculating the limit under subsection 3. [as per the Company (Amendment) Act, 2017].

Subsection 3:

The first provision of subsection 3 kept loans by companies to their wholly owned subsidiaries (WOS) and joint venture companies (JVC) out of the purview of any restriction. 

Further, section 186(4) brings more transparency by mentioning the condition to disclose in the financial statement the particulars and purpose of the loan. In general practice, it is disclosed in a balance sheet or footnote As per secretarial standard 4, reference of the same should be given in the Board report. 

In this connection, 186(5) prescribes that the confirmation of a public institution is to be taken if any loan from the institution is subsisting in case the loan exceeds the limitations set out in 186(2), and the provision also mentions that there is no requirement for such a confirmation if loans made or proposed to be made are within the limit and there is no default on loan installment or interest thereon. There is no requirement for the approval of banks and NBFCs, as they are not in the ambit of public financial institutions.

Section 185(6) deals with companies registered under Section 12 of the SEBI Act, 1992, i.e., stock broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser, and such other intermediary who may be associated with the securities market. The intercorporate loan for private limited company of such an intermediary is governed by the regulation under which the registration certificate is issued to them. 

Section 185(7) stipulates that rates of interest charge shall not be less than the prevailing bank rate on government securities whose tenure is close to the tenure of the loan.

Section 186:

Now Section 186(8) bars all the companies that defaulted in respect of deposit repayment or payment of interest thereon from making any loan for private limited company if a default exists at that time.

According to Secretarial Standard 4, every company should maintain one or more registers of inter-corporate loans. The form prescribed under the Companies (Meeting of Board and its Power) Rules, 2014 for such a register is MBP-2.

Apart from Section 186(1), all other provisions of the section are ineffective on a banking company, an insurance company, a housing finance company on their day-to-day operations, or a company whose object is and is engaged in the business of financing industrial enterprises, or providing infrastructural facilities. The expression “business of financing industrial enterprises shall include, concerning a non-banking financial company registered with the Reserve Bank of India in the business of giving any loan for private limited company to a person in the ordinary course of business.

Conclusion 

On one hand, the nature of Section 185 is exclusive, and it talks about only prohibition; on the other hand, Section 186 is more exhaustive and not restricted in providing loans; rather, it sets terms and conditions subject to which loans can be given. 

Section 186 is mandatory, whereas the application of Section 185 can be exempt if the loan for private limited company passes the tests of the triple condition. 

On interpreting both sections following the principle of harmonious construction, we can conclude that private companies can grant loans to other private companies, bodies corporate, employees, and directors by complying with the provisions of regulations 185 and 186. 

In respect of any violation of Section 185, “the company shall be punishable with a fine which shall not be less than Rs. 5 lakh but which may extend to Rs. 25 lakh. The director or any other person related to the director, to whom any loan for Pvt Ltd company, guarantee, or security is given, shall be liable to be punished with imprisonment, which may extend to six months, with a fine, which shall not be less than Rs. 5 lakh but which may extend to Rs. 25 lakh, or with both.”.

 In case of failure to comply of 186, “the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees’’ The intention of the legislature while drafting these sections is to strike a perfect balance between transparency and business compulsions.               

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Content Writer                                                                               

Rahul Ingole                       

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