Funding in a company is a query that we are often asked of, especially in case of start-ups. Gathering funds through loans is one of them and through the mode of directors and also their relatives is another one which is freshly introduced by the Act. Loan from a director is an important and integral part for any Start-up company.

The director or relative of the director of the private company from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing, that the amount is not being given out of funds gathered or collected by borrowing or accepting loans or deposits from others and the company must make a full disclosure of the details of money so received in the board’s report.

Any amount received in view of a loan, received from directors, is a loan and not a deposit. If the director(s) give the amount out of his/their own funds and not by borrowing funds along with a certificate, the director might not even charge any interest on such sums given as loan. However it is required that a director charges interest at a rate not more than the rates prevailing in the market for similar loans.

If the director gives the money out of borrowed funds, it would be a deposit as per Companies (Acceptance of Deposit) Rules 2014. Only eligible companies can take such a deposit within the specified limits.

If the director is a shareholder then, section 73 (2) of The Companies (Acceptance of Deposit) Rules 2014 would be applicable and it would be treated as deposit from shareholder.

A special amendment from The Companies Act, 2013 is available which extends the changeability also to the relatives of directors. Thus Companies can now accept funds from relatives of directors. However the definition of ‘deposit’ excludes money received from a director or a relative of the director of the private company.

Any amount received from relatives of director(s) prior to 01.04 2014 by a private company are not deposits but loans. The previous  Companies Act 1956 did not allow loans from relatives of directors.

Loan from friends were neither allowed in Companies Act,1956 nor in Companies Act, 2013 Act. A company cannot accept loans from friends of the directors.

Conclusion:

The latest amendments are positive in nature and it is expected to be very helpful in future. Also in the recent times the government has made various changes and also constructed various rules keeping to the Companies Act, 2013 apart from changing certain provisions and bringing in amendments in The Companies Act,2013. They are aimed at making it easier for companies (whether private or public) to make business in the country.

We at Taxmantra.com provides assistance to the startups in respect to Loan from Directors.

Do drop a line at Start-Up Business. We will get back to you.