Borrowing by a Pvt. Ltd. Co. in the name of Director

Yogesh Shah (Managing Corporate Finance) (1051 Points)
Replied 17 November 2010

Hi Dude,

There must be lot of things with reputed senior members to comment in this regard. But I am just sharing my opinion.

IN MY OPINION :-

Loans to Directors is regularized by Co Law but Loans from Directors is not prohibited.

In your case, director is subsequently routing that loan amount to company again hence procedure you have explainde SEEMS OK. According to Sec. 295 if company providing any security / guarantee to Director in respect of loan received by him from other person, Central Govt. approval is required. As this is NA to Pvt. Co., you can go ahead with your procedure.

Last but not least – If Im wrong, kindly rectify me.

mahee (ACS) (31 Points)
Replied 17 November 2010

My dear Friends,

As per as u r question is concerned, there is no prohibition in Companies Act or any other acts to get the money from the banks in the name of Directors, But here what we need to do is, director should enter into loan agreement with company to get interest along with principal amount. It also needs a Board resolution to get the loan from a Director.

It is a common practice to Banks to give loans on the names of Directors.....

CA.SKR (CA; CS-Final (One Group); DISA (ICAI); Insolvency Professional) (442 Points)
Replied 25 November 2010

More expert views are required on this matter for better understanding and clarity.

Shraddha Shukla (Corporate law Consultant) (346 Points)
Replied 25 November 2010

I would suggest you to approach other banks as well. and prepare a project report . Because getting loan on the financial credbility of the company which seems quiet sound in your case is better. You need to convince them about the viability and if possible then approach the bakers of teh company only.

Ronak (Trainee) (126 Points)
Replied 25 November 2010

Even I think approaching some different bank might give u a solution. Thereafter availing a loan under Section 292 would be the best way out.

CA.SKR (CA; CS-Final (One Group); DISA (ICAI); Insolvency Professional) (442 Points)
Replied 25 November 2010

Dear Shraddha & Ronak,

Going to another bank is no solution to my querry. As already mentioned by me, since the company has no income to repay principal amount and interest on loan, hence banks are insisting for taking loan in the name of one of the director against mortgage of company's immovable property.

My querry is whether it is permissible under Companies Act, 1956 for a Pvt. Ltd. Company to borrow in the name of one of the director (for and on behalf of company), who in turn will give entire money so borrowed to the company? If permissible, the Company will show this loan as company’s secured borrowing from Bank in its Balance Sheet. Company will make payment of processing charges, interest and principal installments directly to the bank.

Please advice whether this borrowing arrangement is permissible or not. If yes, what procedure is to be followed and what resolutions are to be passed in Board meeting and / or Shareholders meeting?

Thanks,

mahee (ACS) (31 Points)
Replied 26 November 2010

My dear Friend I already gave the solution, please read it. Bank may not give loans for the companies which r not credit worthy or which r in startup stage, hence they will insist directors to take loans on their names. What Ronak said is wasting of time in my opinion.

Neha Gupta (PCS) (377 Points)
Replied 26 November 2010

Well in my opinion here u r Mortgaging Companies land with Under construction building, as u said it is in the name of Company not in the name of Director, which as per bank is sufficient security for loan amount, then what is a need of taking a loan in the Directors name.

Although the Companies Earning capacity is not sound enough this time but here u are providing a security which is in the name of Company itself. So, take loan in the name of Company and authorised any director to sing the agreement on Companies behalf.

Regards

CS Ankur Srivastava (Company Secretary & Compliance Officer) (17853 Points)
Replied 26 November 2010

Originally posted by : Neha Gupta
	Well in my opinion here u r Mortgaging Companies land with Under construction building, as u said it is in the name of Company not in the name of Director, which as per bank is sufficient security for loan amount, then what is a need of taking a loan in the Directors name. Although the Companies Earning capacity is not sound enough this time but here u are providing a security which is in the name of Company itself. So, take loan in the name of Company and authorised any director to sing the agreement on Companies behalf. Regards

Agree with Neha...

You should take loan in the name of Company. Prepare good project report. If the bank is not cooperating. Then you can go through any of the Project Financing Agency or professional working in this field. They would also prepare project report and arrange for a good amount of loan...

Ronak (Trainee) (126 Points)
Replied 26 November 2010

Even i agree with nehas view. Further i would like to add that in your case certain practical queries may be raised such as:

1. What will be the process of availing the loan amount? Ans. In your case its like director taking from bank any paying it to the Co. Now what if the director doesnt pay it to the Co. after receiving from the bank.

2 What will be the procees of re-payment of loan? Say it will be like Co. paying it to the dire and the dire paying it to the bank. Again what if the dire does not pay to the bank.

In such a case ufcourse there may be some legal way out but the co's security is at a stake.Further also think from the dire personal Income Tax point of view.

Hence i still suggest that availing a loan under section 292 on the land or a mortgage on the bldg. would be legal route to go through. However as we seem to b confused an expert opinion will surely help us.

CA.SKR (CA; CS-Final (One Group); DISA (ICAI); Insolvency Professional) (442 Points)
Replied 29 November 2010

Originally posted by : mahee
	My dear Friends, As per as u r question is concerned, there is no prohibition in Companies Act or any other acts to get the money from the banks in the name of Directors, But here what we need to do is, director should enter into loan agreement with company to get interest along with principal amount. It also needs a Board resolution to get the loan from a Director. It is a common practice to Banks to give loans on the names of Directors.....

Dear Mahee,

I read some where (I do not recollect the relevant Section of Companies Act) that loan taken from directors should not be out of borrowed funds and the lender director has to give that undertaking also to the company. If this is correct than what will be the impact of this transaction of borrowing by director first in his own name (against mortgage of company's land & building) and thereafter lending it to the company.

How this transaction of loan from director will be reflected in the company's Balance Sheet i.e. as secured loan or as unsecured loan?

Whether members approval in EGM is required or not for this transaction?

Please clarify on these points and the proceedure, which should be followed by the company including draft of specimen resolutions of BOD meeting and EGM, if required.

Thanks,