The Word “Loan” is not defined anywhere in Companies Act, 2013. However in normal parlance any transaction in which money is given with the intention to be returned, with or without interest is loan.

SECTIONS APPLICABLE FOR THE MATTER

• Loans Taken By Company : 179,180,185
• Loans Given By Company : 185 186

DIFFERENCE BETWEEN LOANS, ADVANCE AND DEPOSIT

There is a difference between Loan, Advance and Deposit under Companies Act 2013. A deposit includes a loan, but every loan may not be a deposit. An advance may be deemed to be a deposit but it may not be a loan. We should understand the difference between Loan, Deposit and Advance for the purposes of Companies Act 2013 and related compliances.

A deposit is a much wider term in the Companies Act and includes loans as well as advances. All amounts of money received as loans and advances are deposits except as mentioned in Rule 2(1)(c) of Companies (Acceptance of Deposit) Rules, 2014.

For accepting amount of money as Advances which are NOT Deposits, no procedure is to be followed under the Companies Act 2013.

For accepting amount of money as Loans which are NOT Deposits, procedures have to be followed under the Companies Act 2013.

For accepting amounts of money as Loans or Advances or Deposits, which ARE Deposits, procedure has to be followed under Companies Act 2013.

LOAN FROM DIRECTORS

Amounts received from directors are loans and not deposits if the directors give the amount out of his own sources and not borrowed funds and give a certificate to that effect to the company. In such a case a company may accept loans from directors without interest too.

However, if the director gives the money out of borrowed funds, it would be deposit and provisions of section 76 read with Companies (Acceptance of Deposit) Rules 2014 would be applicable and only eligible companies can take such a deposit within the specified limits. An Eligible Company is a Public Company which has either minimum Net-Worth of Rs. 100 crores or Turnover of Rs. 50 Crores. A private company cannot accept such loan from the director.

In such a case if the director is a shareholder also then, section 73 (2) read with Companies (Acceptance of Deposit) Rules 2014 would be applicable and it would be treated as deposit from shareholder.

LOAN FROM FRIENDS AND RELATIVES OF DIRECTORS

Amounts received from relatives of directors prior to 1st April 2014 by a private company are not deposits, but Loans. A public company could not have received any loans from relatives of directors under 1956 Act.

Amounts received from relatives of directors with effect from 1st April 2014 are deposits even for a private company and if received would be in contravention of the Companies Act 2013.

However, such restriction would not be applicable to private company with effect from 15th September 2015 provided if the relative of directors give the amount out of his own sources and not borrowed funds and give a certificate to that effect to the company.

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

LOAN TO DIRECTORS (SECTION 185)

A company cannot directly or indirectly give any loan or any loan represented by a book debt to the following:

1. Director
2. Partner of its director
3. Relative of its director
4. Director of its holding company or his partner or relative
5. Any firm in which its director is a partner
6. Any firm in which relative of its director is a partner
7. Any Private Company in which its director is a director
8. Any Private Company in which its director is a member
9. Any company in which its director individually or along with one or more of its directors exercises or controls not less than 25% of its voting rights; or
10. Any company whose Board of Directors, MD or Manager is accustomed to act in accordance with the directions or instructions of the Board, or any director or directors of the lending company.

However, such restriction would not be applicable to a specified private company with effect from 5th June 2015, which is discussed below.

RELAXATION GIVEN TO SPECIFIED PRIVATE CO. U/S 185 W.E.F. 5TH JUNE 2015

A Private Company which satisfies the following conditions w.e.f. 5th June 2015 would not invite restrictions contained in section 185:

• In its capital no other body corporate has invested any money, i.e., its shareholder does not include any body corporate;
•  If the borrowings of the lending company from banks or financial institutions or anybody corporate is less than twice its paid up capital or Rs. 50 crores, whichever is lower; and
• Such a company is not in default in repayment of such borrowings subsisting at the time of making transactions under this section.

In such a case the private company can give loan to anyone without any restriction of section 185.

RESTRICTIONS ON GIVING LOANS u/s 185

• Prior to 5th June, 2015:                                      2. 5th June onwards

Any Company (Whether Public or Private)      Specified Private Company           Other Companies
    
                Restriction Apply                             No Restriction                              Restriction Apply  

PENALTY FOR DEFAULT u/s 185

In contravention of section 185 – the company shall be punishable with fine ranging between Rs.5, 00,000/- to Rs.25, 00,000/-. Also the concerned director shall be punishable with imprisonment for six months or fine ranging between Rs.5,00,000/- to Rs.25,00,000/- or with both.