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Chain holding in family owned business

Jayanta Bandyopadhyay (310 Points)

16 September 2024

One Director (holding 85% shares in Unlisted Public Ltd Co) has given one high value loan to one Pvt Ltd Co, which in turn, has invested the entire loan amount in this Unlisted Public Ltd Co. Ultimately, that director directly/indirectly control both the companies. Is it lawfully correct?

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Rama chary Rachakonda (Master in Accounts & Lawyer email ID:ramachary64@gmail.com voice no:9989324294) (5140 Points)
Replied 16 September 2024

This situation raises several red flags and potential legal issues. While I'm not a legal expert, I can point out some concerns: 1. Related-party transactions: The director's loan to the private limited company, which then invests in the unlisted public limited company, may be considered a related-party transaction. This can create conflicts of interest and potentially violate corporate governance norms. 2. Shareholder approval: Did the unlisted public limited company's shareholders approve the loan and investment? If not, it may be a violation of shareholder rights and company law. 3. Director's duties: The director's actions may contravene their fiduciary duties to act in the best interests of the unlisted public limited company. 4. Money laundering and circular transactions: The high-value loan and subsequent investment may raise suspicions of money laundering or circular transactions. 5. Tax implications: There may be tax implications and potential evasion if the transactions are not properly disclosed and accounted for. 6. Regulatory compliance: Depending on the jurisdiction, there may be regulatory issues with the transactions, especially if the director is indirectly controlling both companies. It's essential to consult with legal and financial experts to ensure that the transactions are lawful and compliant with relevant regulations. Additionally, the companies' articles of association, shareholder agreements, and other governing documents should be reviewed to ensure that the transactions align with the companies' internal rules and procedures.

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Rama chary Rachakonda (Master in Accounts & Lawyer email ID:ramachary64@gmail.com voice no:9989324294) (5140 Points)
Replied 16 September 2024

This situation raises several red flags and potential legal issues. While I'm not a legal expert, I can point out some concerns: 1. Related-party transactions: The director's loan to the private limited company, which then invests in the unlisted public limited company, may be considered a related-party transaction. This can create conflicts of interest and potentially violate corporate governance norms. 2. Shareholder approval: Did the unlisted public limited company's shareholders approve the loan and investment? If not, it may be a violation of shareholder rights and company law. 3. Director's duties: The director's actions may contravene their fiduciary duties to act in the best interests of the unlisted public limited company. 4. Money laundering and circular transactions: The high-value loan and subsequent investment may raise suspicions of money laundering or circular transactions. 5. Tax implications: There may be tax implications and potential evasion if the transactions are not properly disclosed and accounted for. 6. Regulatory compliance: Depending on the jurisdiction, there may be regulatory issues with the transactions, especially if the director is indirectly controlling both companies. It's essential to consult with legal and financial experts to ensure that the transactions are lawful and compliant with relevant regulations. Additionally, the companies' articles of association, shareholder agreements, and other governing documents should be reviewed to ensure that the transactions align with the companies' internal rules and procedures.

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