Loan to trust by private company

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Manisha (Querist)
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17 February 2011 Can anyone plz... tell me and refer the respective section .... whether a trust can provide loan to Pvt. or public limited if yes then how and what should be the rate of interest.

If a private company gives a loan to a Trust (which is a Related Party to the Company), with or without interest, which is created for the benefit of Employees, Does this transaction violate the provisions of Companies Act. Please inform me the various Compliance provisions under companies Act and which sections will apply.

Urgent

udit sharma

udit sharma (Expert)
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18 February 2011 In case of loan given by a Private Company to a trust created for the benefit of employees, to the best of my knowledge no provision of the Companies Act, 1956 i violated.

Experts your views please...

God Bless

CS Udit Sharma

Manisha

Manisha (Querist)
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18 February 2011 Thanks Mr. Udit but if it is permitted, plz refer the respective section.

Also please let know at what rate of interest can the loan be given.

Thanks..

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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03 August 2024 Providing a loan to or from a trust by a private company involves various compliance considerations under the Companies Act, 2013 and other applicable laws. Here’s an outline addressing the key aspects of such transactions:

### **1. Loans from a Trust to a Company**

**A. Provisions under the Companies Act, 2013:**

1. **Section 185:**
- **Restriction on Loans:** Section 185 prohibits a company from providing loans, including guarantees or security, to its directors or to entities in which the directors have an interest, without obtaining prior approval from the Board and/or shareholders.
- **Trusts as Related Parties:** If a trust is considered a related party to the company (e.g., the trust is set up for the benefit of the company’s employees and the directors have a substantial interest), Section 185 would apply.

2. **Section 186:**
- **Loans and Investments:** This section regulates loans and investments by companies and includes provisions related to limits and approvals required for loans. While Section 186 doesn’t specifically address loans from trusts, it sets out the framework for loans and could impact the terms of loans between a trust and a company if the loan is provided by or to a related party.

3. **Section 188:**
- **Related Party Transactions:** This section requires disclosure and approval of transactions with related parties. Loans to or from a trust would need to comply with related party transaction requirements, including obtaining Board and shareholder approvals if applicable.

**B. Rate of Interest:**
- **Market Rate:** There is no specific provision mandating the interest rate for loans provided by trusts to companies. However, it is advisable to charge an interest rate that is at arm's length and aligns with market rates to avoid any potential issues of transfer pricing or tax implications. The interest rate should reflect a fair market value.

### **2. Loans from a Company to a Trust**

**A. Provisions under the Companies Act, 2013:**

1. **Section 185:**
- **Prohibition:** As mentioned, Section 185 restricts a company from providing loans to entities in which its directors have a substantial interest. If the trust is a related party, then this section would apply, and loans to the trust would require Board and/or shareholder approval.

2. **Section 186:**
- **Loans and Investments:** If the company is providing a loan to the trust, it needs to comply with the limits and conditions set out in Section 186. The transaction should be within the limits prescribed and documented properly.

3. **Section 188:**
- **Related Party Transactions:** If the trust is a related party, the company must disclose the transaction and obtain necessary approvals as per Section 188.

**B. Rate of Interest:**
- **Fair Market Rate:** The rate of interest charged by the company to the trust should be at a fair market rate to avoid any issues related to transfer pricing or tax evasion. There’s no specific rate mandated, but it should reflect the prevailing market rates for similar transactions.

### **3. Compliance and Documentation**

**A. Approvals:**
- **Board Approval:** Obtain approval from the Board of Directors for the loan transaction. Document this approval in the minutes of the Board meeting.
- **Shareholder Approval:** If required, seek approval from shareholders, especially if the transaction falls under related party transactions or exceeds the limits prescribed under Section 186.

**B. Documentation:**
- **Loan Agreement:** Draft a formal loan agreement specifying the terms, interest rate, repayment schedule, and any other relevant terms. Ensure that the agreement complies with all legal requirements and reflects an arm’s length transaction.

**C. Disclosure:**
- **Financial Statements:** Disclose the loan transaction in the company’s financial statements, including related party disclosures and compliance with accounting standards.

### **Summary**

- **Loans from a Trust to a Company:** Must comply with Sections 185, 186, and 188 of the Companies Act, 2013, especially if the trust is a related party. The interest rate should be at a market rate.

- **Loans from a Company to a Trust:** Must also comply with Sections 185, 186, and 188, with appropriate approvals and documentation. The interest rate should reflect market conditions.

It is advisable to consult with legal and financial professionals to ensure full compliance with applicable laws and regulations.