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Interest free loans from directors in private limited company

Karthik C (1 Points)

21 February 2025

Interest free loans from directors in private limited company is acceptable?

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Rama chary Rachakonda (Master in Accounts & Lawyer email ID:ramachary64@gmail.com voice no:9989324294) (6501 Points)
Replied 21 February 2025

Interest-free loans from directors in a private limited company are generally acceptable, but there are certain conditions and considerations to keep in mind: Conditions for Acceptance 1. *Loan Agreement*: A formal loan agreement should be executed between the company and the director, specifying the loan amount, repayment terms, and interest-free nature. 2. *Authorized by Articles*: The company's Articles of Association should authorize the acceptance of loans from directors. 3. *Approved by Board*: The loan should be approved by the company's Board of Directors, and the minutes of the meeting should reflect this approval. 4. *Disclosure in Financial Statements*: The loan should be disclosed in the company's financial statements, including the balance sheet and notes. Considerations 1. *Arm's Length Transaction*: The loan should be an arm's length transaction, meaning it should be on commercial terms and not influenced by the director's position. 2. *No Conflict of Interest*: The loan should not create a conflict of interest for the director or the company. 3. *Repayment Terms*: The loan should have clear repayment terms to avoid any potential disputes. 4. *Tax Implications*: The company and the director should consider the tax implications of the interest-free loan, as it may be treated as a taxable benefit. Regulatory Framework The Companies Act, 2013, and the Rules made thereunder govern the acceptance of loans from directors. Specifically: 1. *Section 180*: This section requires the company to obtain special resolution approval from shareholders for certain transactions, including loans from directors. 2. *Section 185*: This section prohibits companies from providing loans to directors or their relatives, but allows for certain exceptions, including interest-free loans. In conclusion, interest-free loans from directors in a private limited company are acceptable if they meet the conditions and considerations outlined above. It is essential to ensure compliance with the regulatory framework and to maintain transparency and accountability in such transactions.

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