What is a director’s loan account (DLA)?

DLA is an account on the company financial records that reports all transactions between the director and the company. Amounts due to the director from the company should be recorded in the company’s books as a creditor while the amounts due from the director to the company should be recorded as a debtor.

You lend money to your company: director’s loan account in credit

If you lend your company money (for example by paying money into your company’s bank account as opposed to, say, buying shares) your director’s loan account is in credit.

You can draw some or all of this money out at any time. There are no tax implications for your Company Tax Return.

Your company lends money to you: director’s loan account in debit or overdrawn

If you take money out of your company’s bank account over and above money you’ve loaned to the company – and that money is not a salary or a dividend – then it’s a loan from the company to you. Your director’s loan account is overdrawn.

The Act considers any such loan or advance drawn out of the business as a director’s loan whether or not you have set up any type of account in the company’s books.

A director’s loan account can include:

• cash payments other than your salary or dividend
• expenses that you may have paid for using company funds that are actually for personal use
• money withdrawn for your personal use – for example, pay personal Income Tax

Your company’s accountant or auditor will normally transfer any such expenditure identified as personal from company expenditure to your director’s loan account. However this is only possible in closely held companies.

Restriction on Loan to directors

Companies Act, 1956 (the Act) has imposed certain conditions and restrictions for giving loan to director. The Act also exempted private limited companies from the ambit of the section relating to loan to directors. Now, the Companies Bill (the Bill) has taken away the exemption provided to private limited companies. Shareholders’ democracy has been introduced in this provision too. Shareholders have to pass a special resolution for any scheme for giving loan to directors, and the Central Government’s approval has been done away with. Accordingly, no company, whether it is public or private company can give any loan or provide any security or guarantee in connection with a loan to director or any other person in whom he is interested.

The Bill, however, provides some relaxation to working directors. The Government has already relaxed the providing of housing loans to working directors. Accordingly, a company can give loan to its managing director or whole-time director as a part of the conditions of service extended by the company to all its employees. The relaxation of housing loan further extended to any type of loan, provided such a loan facility is available to all the employees of the company. Loan can also be given pursuant to any scheme approved by the members by a special resolution.

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