Loan from directors, members and their relatives

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

03 April 2015 whether a pvt. ltd. company take unsecured loans from:
1. Directors
2. Shareholders/Members
3. Directors' relatives

Thank You.

CS Mitesh Mehta

CS Mitesh Mehta (Expert)
Follow

03 April 2015 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.

Querist : Anonymous

Querist : Anonymous (Querist)

07 April 2015 Whether a directors' HUF can give loan to pvt. co.?

Upgrade to CAclubindia Pro. Subscribe Now!

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
Follow

03 August 2024 Under the Companies Act, 2013, a Hindu Undivided Family (HUF) that is represented by a director can indeed lend money to a private limited company. However, there are specific considerations and compliance requirements that need to be met:

### **Key Considerations for Loans from HUF**

1. **Legal Capacity of HUF:**
- An HUF is recognized as a legal entity for tax purposes but not as a separate legal person for the purposes of borrowing and lending. Thus, it can enter into financial transactions including lending money to a company.

2. **Compliance with the Companies Act, 2013:**
- **Borrowing Limits:** The total borrowing by the company from all sources, including from HUFs, should not exceed the aggregate of its paid-up share capital and free reserves unless a special resolution is passed under Section 180(1)(c).
- **Disclosure:** The loan transaction must be disclosed in the company’s financial statements.
- **Terms of Loan:** The terms of the loan, including interest rates and repayment conditions, should be documented and transparent.

3. **Director's Interest:**
- **Conflict of Interest:** If the director of the company is also a member of the HUF that is lending money to the company, there should be no conflict of interest. The transaction should be on an arm's length basis.
- **Approval:** If the director's HUF is providing a substantial loan, the board may need to approve the transaction to ensure it is conducted on fair terms and in the interest of the company.

4. **Regulatory Filings and Documentation:**
- **Form MGT-14:** If the borrowing exceeds the paid-up capital and free reserves, the company must pass a special resolution and file it with the Registrar of Companies (ROC) in Form MGT-14.
- **Agreement:** A loan agreement should be drafted, detailing the terms of the loan and executed as per the law.

### **Summary**

- **Yes**, a director's HUF can provide a loan to a private limited company.
- Ensure that the borrowing limits and terms comply with the Companies Act, 2013.
- Proper documentation and disclosure are essential to comply with legal and regulatory requirements.
- Transactions should be conducted transparently and on arm's length terms to avoid any potential conflicts of interest.

### **Example of a Loan Agreement with HUF:**

- **Loan Amount:** Specify the amount being lent by the HUF.
- **Interest Rate:** Define the interest rate applicable.
- **Repayment Terms:** Outline the repayment schedule and terms.
- **Purpose of Loan:** State the purpose of the loan.
- **Security:** If applicable, mention any security or collateral provided for the loan.
- **Signatures:** Include signatures of authorized representatives from both the HUF and the company.

By adhering to these guidelines, the company can ensure that the loan from a director's HUF is properly handled and compliant with applicable laws.