loan made by one company to another under the same managemen

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

04 June 2011 there are two private companies in which directors are same and one company want to make loan to another,then what compliances are required to be fulfilled in this respect.

prasad

prasad (Expert)
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04 June 2011 Such transactions shall be approved by the General Body of both the companies. Such transactions fall u/s 297. These transactions shall be noted in the register maintained u/s 301. And shall be reported in the annual accounts.

CA Sumat Singhal

CA Sumat Singhal (Expert)
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06 June 2011 It should be noted that sec 295 would be applicable in case loan is given by a company to another pvt company in which director of first company is director or member of other company. As a result prior approval of CG shall have to be taken for such loan...
I think sec 297 have no role in thisregard....
Refer sec 295, 283, etc
Sumat Singhal

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CA Sumat Singhal

CA Sumat Singhal (Expert)
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Querist : Anonymous

Querist : Anonymous (Querist)

15 July 2011 thanks prasad and Sumit,I alos think that sec 297 has no role in this matter but as per section 295, it is mentioned that sec 295 shall not apply to any loan made by a pvt co unless it is subsidiary oF PUBLIC CO and in my query a pvt co give loan to a pvt co so i think that only Board's approval is required in this matter, section 372A also not applicable on pvt co.

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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03 August 2024 When one private company gives a loan to another private company where the directors are the same, several legal and compliance aspects must be considered under the Companies Act, 2013. Here’s a detailed overview of the requirements and considerations:

### **1. **Legal Framework:**

#### **A. **Companies Act, 2013:**

1. **Section 295 (Old Act) / Section 180(1)(c) (New Act):**
- **Old Act (Section 295):** Under the Companies Act, 1956, Section 295 regulated loans to companies by other companies.
- **New Act (Section 180(1)(c)):** For private companies, under the Companies Act, 2013, the provisions of Section 180(1)(c) apply, which pertain to borrowing powers. It requires the board’s approval for borrowing money exceeding the company's paid-up capital and free reserves.

2. **Section 185:**
- **Restrictions on Loans to Directors:** This section restricts loans to directors or their relatives. However, it specifically applies to loans to directors, their relatives, or any other person or body corporate in which a director is interested.
- **Applicability:** If the loan is between two companies and not directly to a director or relative, Section 185 may not apply.

3. **Section 186:**
- **Loans and Investments:** This section deals with loans, guarantees, and investments. While Section 186 is more relevant to public companies, its principles may still be considered for private companies, especially regarding limits and approval.

#### **B. **Regulatory Compliance:**

1. **Board Resolution:**
- **Approval:** A board resolution is required for the loan transaction. The board must approve the loan and the terms of repayment.
- **Documentation:** Ensure that proper documentation of the board resolution is maintained and that it clearly specifies the amount, terms, and conditions of the loan.

2. **Disclosure in Financial Statements:**
- **Related Party Transactions:** If the companies are considered related parties due to common directors, the loan should be disclosed in the financial statements as a related party transaction.
- **Notes to Accounts:** Ensure proper disclosure in the financial statements, including the nature and amount of the loan.

3. **Compliance with SEBI Regulations (if applicable):**
- **Listed Companies:** If either company is listed, ensure compliance with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, for related party transactions.

### **2. **Key Points to Consider:**

1. **Ensure Compliance with Limits:**
- Verify that the amount of the loan does not exceed any borrowing limits set by the board or applicable provisions under the Companies Act.

2. **Interest Rate:**
- Ensure that the interest rate (if any) is reasonable and reflects commercial terms to avoid issues related to transfer pricing or regulatory scrutiny.

3. **Documentation:**
- Draft and execute a formal loan agreement detailing the terms and conditions, including the repayment schedule, interest rate, and any security or collateral involved.

4. **Avoid Conflicts of Interest:**
- Ensure that the loan arrangement does not lead to conflicts of interest among the directors, and proper disclosure is made.

### **3. **Formalities and Steps:**

1. **Board Meeting:**
- Convene a board meeting of the lending company to approve the loan.
- Pass a board resolution detailing the terms and conditions of the loan.

2. **Loan Agreement:**
- Draft a loan agreement specifying the loan amount, interest rate, repayment terms, and any security or collateral.

3. **Record-Keeping:**
- Maintain proper records of the loan transaction, board resolutions, and related party disclosures.

4. **Audit and Compliance:**
- Ensure that the loan transaction is compliant with all relevant provisions and is reflected accurately in the financial statements.

### **Summary:**

For a private company loaning to another private company with common directors, the key compliance requirements include obtaining board approval, documenting the loan agreement, and disclosing the transaction in financial statements. While Section 297 (Old Act) and Section 372A (New Act) do not directly apply, compliance with Section 180(1)(c) and proper disclosure of related party transactions are essential. Ensure all documentation and board resolutions are properly handled to maintain compliance.