loans under companies act 1956/2013

Loans under Companies Act 1956/2013

P C Agrawal B.Com., LL.B., CAIIB, FCS

[email protected]

20/2/2014 Download Source- www.taxguru.in

http://www.taxguru.in/

ContentsMCA notification notifying 98 new sections under CA 2013

Sections relating to loans

Loans to directors & related parties

Inter-corporate loans & investments

Borrowings

Practical questions

MCA Notification dated 12.9.2013 In exercise of the powers conferred by sub-section (3)

of section 1 of the Companies Act 2013 (18 of 2013), the Central Government hereby appoints the 12th day of September 2013 as the date on which the following provisions of the said Act shall come into force, namely:

…..….

Sd/-RENUKA KUMAR

Joint Secretary to the Government of India

MCA circular dated 18.9.2013 on notification of 98 new sections

This Ministry had issued a notification on 12.09.2013 bringing into force to 98 sections or part thereof of the Companies Act 2013. The said notification is available on Ministry’s website. This Ministry has been receiving requests for clarification as to whether the provisions of the Companies Act 1956 corresponding to such 98 sections would continue to apply or not.

It is hereby clarified that with effect from 12.09.2013, the relevant provisions of the Companies Act 1956, which correspond to provisions of 98 sections of the Companies Act 2013 brought into force on 12.09.2013 cease to have effect from that date.

This issues with the approval of the competent authority.

Sections relating to loansCA 1956

CA 2013 Date of notification

Loans to directors etc.

295, 296 185 12/9/2013

Definitionsa) Body corporateb) Relatives

2(7), 2(41)

2(11)2(77)

--do—--do--

Restrictions on powers of Board

293 180 --do--

Powers of Board 292 179 Yet to be notified


372A 186 --do--

Acceptance of deposits

58A 2(31), 73, 74

--do--

Sections 295/296 of CA 1956 (upto 11.9.2013)

Sec. 185 of CA 2013

Specified related parties (SRPs)

1. Any director of the lending co. or of a co. which is its holding co.

2. Any partner or relative of any such director

3. Any firm in which any such director or relative is a partner

4. Any private company of which any such director is a director or member

5. Any body corporate at a general meeting of which not less than 25% of total voting power may be exercised or controlled by any such director or by 2 or more such directors together

6. Any body corporate, the Board, MD or Manager whereof is accustomed to act in accordance with the directors or instructions of the Board or of any director(s) of lending company

No change.



Sec. 185 of CA 2013

Applicability

1. Direct or indirect loans (including loans represented by book debts) to specified related parties (SRPs)

2. Guarantee/security in connection with loan made by any other person to SRPs

3. Guarantee/security in connection with loan to any other person by SRPs

Nos. 1 and 2 are same. But No.3 deleted.

Procedure Approval of Central Govt. required. E-Form 24-AB to be filed.

Sec.292: Power to make loan can be exercised only at Board meeting (and not by circulation)

a) If covered in exemptions:

Board resolution.2) If not covered in exemptions: Strictly prohibited. No provision for CG approval.



Sec. 185 of CA 2013

Exemption

a) Loan made or guarantee/security given:

i. By Private companies (unless subsidiary of public co.)

ii. By banking companiesb) Loan by holding co. to subsidiaryc) Guarantee/security by holding co. for loan to subsidiary co.

[As per Notification No.GSR 729 dated 24.5.1978 not applicable to Govt companies if approval of concerned Ministry is obtained.]

a) Loan to MD or WTDi. As a part of conditions of

service extended by co. to all its employees, or

ii. Pursuant to any scheme approved by members by special resolution

b) A company which in the ordinary course of business provides loans or gives guarantee/ security for due repayment of loan and interest is charged at not less than bank rate declared by RBI.



Sec. 185 of CA 2013

Penal provisions

1. Fine upto Rs.50,000 or simple imprisonment upto 6 months [Sec.295(4)]. Exemption from imprisonment in case loan has been repaid.

2. Office of the director concerned will become vacant u/s 283(1)(h).

Imprisonment upto 6 months or fine not less than Rs.5 lacs but may extend to Rs.25 lacs or with both.

No provision for exemption from imprisonment even if loan has been repaid.


Mere inclusion in the Objects Clause of Memorandum is not sufficient

Lending by a banking company or an NBFC could be in the ordinary course of business (but not in case of purely an investment company)If the company lends not only to SRPs but also to unrelated parties on arms’ length basis, this could be considered as ‘in the regular course of business’.

Regularity and frequency of transactions could be an important criteria

Meaning of ‘in the ordinary course of business’

in Section 185 of CA 2013

Meaning of ‘Save as otherwise provided in this Act’

in Section 185 of CA 2013Only other Section dealing with loans in CA 2013 is Section 186 which is yet to be notified. Its corresponding Section 372A in CA 1956 is in force.Both Sections 372A of CA 1956 and 186 of CA 2013 do not deal with specified related parties and hence conflict of interest may or may not be there.

Since Section 185 deals with cases where conflict of interest is there, it will prevail over provisions of Sec.372A of CA 1956.

Hence it may be said that there is no impact of the term ‘Save as otherwise provided in this Act’ in Section 185 of CA 2013.

Definition of ‘body corporate’

Section 2(7) of 1956 Act:

“body corporate” or ‘corporation’ includes a company incorporated outside India but does not include—

a) A corporation sole;b) A cooperative society

registered under any law relating to cooperative societies; and

c) Any other body corporate (not being a company as defined in this Act) which the Central Govt. may by notification in the Official Gazette, specify in that behalf.

Section 2(11) of 2013 Act:

Same

[except that (a) – a corporation sole deleted]

General characteristics:

- Incorporated under some law- Perpetual succession- Common seal- Legal entity apart from the

members

Definition of ‘body corporate’

Examples of ‘body corporates’:

1. All companies registered under Indian Companies Act

2. All companies registered under any Act outside India

3. Any Corporation registered under any special law in India or abroad

4. Public financial institutions u/s 4A of Companies Act 1956

5. Nationalised banks incorporated under Banking Companies (Acquisition & Transfer of Undertakings) Act 1970

6. LLPs

These are not bodies corporates:

1. Proprietorship concerns2. Partnership firms (other

than LLPs)3. HUFs4. Societies registered

under Societies Registration Act

5. Mutual funds managed by trustees (except UTI)

Definition of ‘relatives’ under CA 1956

Section 2(41):“relative” means, with reference to any person, any one who is related to such person in any of the ways specified in section 6, and no others.

Section 6:A person shall be deemed to be a relative of another if, land only if, --a) They are members of a Hindu

undivided family; orb) They are husband and wife; orc) The one is related to the other

in the manner indicated in Schedule 1A.

Schedule 1A [See Section 6(c)]LIST OF RELATIVES

1. Father2. Mother (including step-mother)3. Son (including step son)4. Son’s wife5. Daughter (including step daughter)6. Father’s father7. Father’s mother8. Mother’s mother9. Mother’s father10. Son’s son11. Son’s son’s wife12. Son’s daughter13. Son’s daughter’s husband14. Daughter’s husband15. Daughter’s son16. Daughter’s sons’s wife17. Daughter’s daughter18. Daughter’s daughter’s husband19. Brother (including step-brother)20. Brother’s wife21. Sister (ioncluding step sister)22. Sister’s husband

Definition of ‘relatives’ under CA 2013

Section 2(77):

“relative” with reference to any person, means any one who is related to another, if—

a) They are members of a Hindu undivided family; or

b) They are husband and wife; orc) One person is related to the other in

such manner as may be prescribed.

Thus it will be noticed that the following are proposed to be omitted from list of relatives:

1. Son’s son’s wife2. Son’s daughter’s husband3. Daughter’s son4. Daughter’s son’s wife5. Daughter’s daughter6. Daughter’s daughter’s husband7. Brother’s wife8. Sister’s husband

Draft Rule 1.4 (yet to be notified)LIST OF RELATIVES

For the purpose of sub-clause (iii) of sub-section (77) of Section 2, a person shall be deemed to be the relative of another, if he or she is related to another in the following manner:

1. Spouse2. Father (including step father)3. Father’s father4. Father’s mother5. Mother (including step-mother)6. Mother’s mother7. Mother’s father8. Son (including step-son)9. Son’s wife10. Son’s son11. Son’s daughter12. Daughter (including step daughter)13. Daughter’s husband14. Brother (including step brother)15. Sister (including step sister)

Meaning of ‘control’ Section 2(27) of Companies Act 2013:

“control” shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreement or voting agreements or in any other manner.”

Meaning of ‘Loans’Loans vs. Deposits:

Loan is lending of money with absolute promise to repay. There is a difference between loan and deposit. However, courts have held that for the purposes of Sec.295 of CA 1956 the difference is immaterial and the Section cannot be evaded by describing monies of a company advanced to a director as deposits. Sec.372A of CA 1956 specifically provides that loan includes deposits. However, there is no such mention in CA 2013.

Loans vs. advance:

There is a difference between loan and advance also. Loan is repayable whereas advance is to be adjusted against supply of goods or services. Salary advance is an example. Advance is not covered under restrictive provisions of Companies Act.

Whether subscription of debentures is a loan?

Subscription of debentures is not a loan u/s 185 of CA 2013. However, Sec.372A of CA 1956 specifically provides that loan includes debentures.

Whether book debts could be loans?

If book debt is prolonged beyond usual credit period, it could be considered as a loan.

Bank rate declared by RBIFrom To Rate

Upto 28.02.1979

6%

1.3.1979 11.7.1981

9%

12.7.1981

3.7.1991 10%

4.7.1991 7.10.1991

11%

8.10.1991

30.12.1992

12%

1.1.1993 15.4.1997

12%

16.4.1997

25.6.1997

11%

26.6.1997

21.10.1997

10%

22.10.1997

16.1.1998

9%

17.1.1998

18.3.1998

11%

19.3.1998

2.4.1998 10.5%

3.4.1998 28.4.1998

10%

29.4.1998

28.2.1999

9%

1.3.1999 31.3.2000

8%

1.4.2000 21.7.2000

7%

From To Rate

22.7.2000

16.2.2001

8%

17.2.2001

28.2.2001

7.5%

1.3.2001 22.10.2001

7%

23.10.2001

29.10.2002

6.5%

30.10.2002

29.4.2003

6.25%

30.4.2003

13.2.2012

6%

14.2.2012

18.4.2012

9.5%

19.4.2012

19.3.2013

9%

20.3.2013

2.5.2013 8.5%

3.5.2013 14.7.2013

8.25%

15.7.2013

19.9.2013

10.25%

20.9.2013

6.10.2013

9.5%

7.10.2013

28.10.2013

9%

29.10.2013

27.1.2014

8.75%

28.1.2014

Till date 9%

Source: http://www.dicgc.org.in/English/FB_BankRate.html

Section 462 of CA 2013Power to exempt class or classes of companies from provisions of this Act.

(1) The Central Government may in the public interest, by notification direct that any of the provisions of this Act, --

(a) Shall not apply to such class or classes of companies; or(b) Shall apply to the class or classes of companies with such exceptions,

modifications and adaptations as may be specified in the notification.

(2) …..”

Note: No exemption notification has been issued by MCA so far under Section 462 of CA 2013.

Section 2(22)(e) of Income Tax Act relating to deemed dividend

Loan given to shareholder holding more than 10% of voting power could be deemed to be dividend. Section 2(22)(e) of IT Act reads as under:

2. “In this Act, unless the context otherwise requires—3. (22) ‘dividend’ includes: (e) any payment by a company, not being a company in which the public

are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits ;


but "dividend" does not include— (i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ;(ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, and before the 1st day of April, 1965 ;(ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ;(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off;[(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A5 of the Companies Act, 1956 (1 of 1956);(v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).


Explanation 1.—The expression "accumulated profits", wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956.Explanation 2.—The expression "accumulated profits" in sub-clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, 6[but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place.Explanation 3.—For the purposes of this clause,— (a) "concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company ; (b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern ;

Extracts from RBI Act relating to NBFC

Section 45-I:(c) ‘financial institution’ means any non-banking institution which carries on as its business or part of its business any of the following activities, namely ---(i) the financing, whether by way of making loans or advances or otherwise,

of any activity other than its own;(ii) the acquisition of shares, stocks, bonds, debentures or securities issued

by a Government or local authority or other marketable securities of a like nature;

(iii) …..……..but does not include any institution, which carries on as its principal business, ----……(b) Industrial activity, or……(f) ‘non-banking financial company’ means ---(iv) a financial institution which is a company; or(v) ……

Extracts from RBI Act relating to NBFC

RBI Press Release dated 8.4.1999The Reserve Bank of India on 8.4.1999 announced that in order to identify a particular company as a NBFC, it will consider both, the assets and the income pattern as evidenced by the last audited balance sheet of the company to decide its principal business. The company will be treated as NBFC if its financial assets are more than 50 percent of its total assets (netted off by intangible assets) and income from financial assets should be more than 50 percent of the gross income. Both these tests are required to be satisfied as the determinant factor for principal business of a company.Section 45-IA:(1) Notwithstanding anything contained in this Chapter or in any other law for the time being in force, no non-banking financial company shall commence or carry on any business of a non-banking financial institution without ---a) Obtaining a certificate of registration issued under this Chapter; andb) Having the net owned fund of twenty-five lakh rupees or such other

amount, not exceeding two hundred lakh rupees, as the Bank may, by notification in the official gazette, specify.

Other points relating to loans/ guarantees

Loans may or may not carry interestExcess remuneration paid could be treated as a loanSale on credit is not loan [Bombay High Court in Fredie Ardeshir

Mehta v. Union of India (1991)]

Whether letter of comfort is a guarantee?Letter of comfort may involve moral obligation but not contractual obligation and is not a guarantee and hence not covered under restrictive provisions of the Act.

Government had issued guidelines on 12.11.1976 for loans to directors for house building without approval of CG.


(Sec.372A of CA 1956)

Inter-corporate loans & investments (Sec.372A)

Applicability 1. Loan to any other body corporate2. Guarantee/security in connection with loan

made by any other person to any body corporate

3. Guarantee/security in connection with loan made to any other person by any body corporate

4. Acquisition by way of subscription, purchase or otherwise the securities of any other body corporate

Pre-condition No default u/s 58A

Ceiling applicable

Without approval of members:Upto 60% of paid-up share capital and free reserves of lending company, or 100% of free reserves, whichever is more.With approval of members:Such limit as may be specified in the special resolution.

Restriction Co. cannot give loan for purchase of its own shares [Sec.77(2)]

Inter-corporate loans & investments (Sec.372A) Contd…

Procedure a) Unanimous resolution of Board members present

b) Special resolution of shareholders (if applicable)

c) Prior approval of public financial institution u/s 4A (if term loan is subsisting and there is default in repayment of loan or payment of interest)

d) Entry in register of loans & investments within 7 days

Rate of interest

Not lower than prevailing Bank rate prescribed by RBI

Exemption 1. Banking/insurance/housing finance co. in ordinary course of business or a co. established with the object of financing industrial enterprises, or of providing infrastructural facilities

2. Co., whose principal business is acquisition of shares, stock, debentures or other securities

3. Private co., unless it is subsidiary of a public co.4. Investment made in pursuance of shares allotted

u/s 81(1)(a) Contd…

Inter-corporate loans & investments (Sec.372A) Contd…

Exemption 5. Loan by a holding co. to its wholly owned subsidiary co.

6. Guarantee/security by holding co. in respect of loan to its wholly owned subsidiary

7. Acquisition by holding co. the securities of its wholly owned subsidiary

Penal provisions

Imprisonment upto 2 years or fine upto Rs.50,000/-

(Rs.5,000 in case of default in connection with register of loans & investments + Rs.5,000 per day in case of continuing default).

MCA circular dated 19.11.2013 on Sec.372A

This Ministry has received number of representations consequent upon notifying Section 185 of the Companies Act 2013 dealing with loans to directors which is corresponding to Section 295 of the Companies Act 1956. Section 186 of the Companies Act 2013 is yet to be notified.

It is clarified that Section 372A of the Companies Act 1956 dealing with inter-corporate loans continue to remain in force till section 186 of the Companies Act 2013 is notified.

This issues with the approval of competent authority.

MCA Valentine Day circular dated 14.2.2014 on Sec.185 of CA 2013

This Ministry has received number of representations on the applicability of Section 185 of the Companies Act 2013 with reference to loans made, guarantee given or security provided under Section 372A of the Companies Act 1956. The issue has been examined with reference to applicability of Section 372A of the Companies Act 1956 vis-à-vis Section 185 of the Companies Act 2013. Section 372A of the Companies Act 1956 specifically exempts any loans made, any guarantee given or security provided or any investment made by a holding company to its wholly owned subsidiary. Whereas, Section 185 of the Companies Act 2013 prohibits guarantee given or any security provided by a holding company in respect of any loan taken by its subsidiary company except in the ordinary course of business.

2. In order to maintain harmony with regard to applicability of Section 372A of the Companies Act 1956 till the same is repealed and Section 185 of the Companies Act 2013 is notified, it is hereby clarified that any guarantee given or security provided by a holding company in respect of loans made by a bank or financial institution to its subsidiary company, exemption as provided in clause (d) of sub-section (8) of Section 372A of the Companies Act 1956 shall be applicable till Section 186 of the Companies Act 2013 is notified. This clarification will, however, be applicable to cases where loans so obtained are exclusively utilised by the subsidiary for its principal business activities.

MCA circular dated 4.6.1999 on section 372A

The provisions in the Companies Act, 1956, relating to inter-corporate investments, loans and guarantees have been recently liberalised by the Government through Companies (Amendment) Act, 1999. However, apprehensions have been expressed in some quarters with regard to possible misuse of these provisions by companies. I shall, therefore, be grateful if the chambers could draw the attention of their constituents to the following:

(i) The companies are expected to obtain the approval for making investments into securities or grant of loan to other companies of amounts which are linked with company’s available financial resources and the resolution, for investment much beyond the networth should not be passed by the companies.

(ii) The companies should specifically indicate in the explanatory statement to the resolution, the specific securities in which it is proposed to invest the amount. En bloc approval should normally be avoided (except in the case of guarantee where the resolution can indicate an amount on annual basis).2. If the above broad parameters are not complied with, the Government will be constrained to take suitable action against those who contravene these.

Circular : No. 8 of 1999, dated 4-6-1999.

Borrowing

BorrowingCeiling on borrowing

Without members approval:Aggregate of paid-up capital and free reserves (apart from temporary loans from bankers in ordinary course of business)

With members approval:As specified in members resolution[Ordinary resolution u/s 292(1)(c) of CA 1956 upto 11.9.2013 and special resolution u/s 180(1)(c) of CA 2013 w.e.f. 12.9.2013 – applicable to private co. also]

Care to be taken

1. Board resolution at Board meeting only (& not by circulation) [Sec.292(1)(c) of CA 1956]

2. Check applicability of Section 58A read with Companies (Acceptance of Deposits) Rules 1975 --

3. Co. cannot give loan for purchase of its own shares4. Check applicability of Sec.14A of IT Act –

disallowance of interest on loan5. Check Object clause of Memorandum6. Check applicability of provisions of RBI Act for

NBFC7. Check RBI regulations in case of borrowing from

foreign company 8. Check position of current ratio & net worth

CBDT circular dated 11.2.2014on disallowance u/s 14A of IT

ActSection 14A of the Income-tax Act 1961 (‘Act’) provides for disallowance of expenditure in relation to income not ‘includible’ in total income.

2. A controversy has arisen in certain cases as to whether disallowance can be made by invoking section 14A of the Act even in those cases where no income has been earned by an assessee which has been claimed as exempt during the financial year.

3. The matter has been examined in the Board. It is pertinent to mention that section 14A of the Act was introduced by the Finance Act 2001 with retrospective effect from 01.04.1962. The purpose for introduction of section 14A with retrospective effect since inception of the Act was clarified vide Circular No.14 of 2001 as under:

“Certain incomes are not includible while computing the total income, as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tas incentive given by way of exemptions to certain categories of income is being used to reduce aslo the tax payable on the non-exempt income by debiting the exepenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e. gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of such taxable income”.

Thus, legislative intent is to allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not.

4. The above position is further clarified by the usage of term ‘includible’ in the Heading to section 14A of the Act and also the Heading to Rule 8D of I.T. Rules, 1962 which indicates that it is not necessary that exempt income should necessarily be included in a particular year’s income, for disallowance to be triggered. Also, section 14A of the Act does not use the word ‘income of the year’ but ‘income under the Act’. This also indicates that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration.

5. The above position is further substantiated by the language used in Rule 8D(2)(ii) & 8D(2)(iii) of I.T. Rules which are extracted below:

“(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt an amount computed in accordance with the following formula, namely:

A*B/C

Where….B= the average of value of investment, ;income from which does not or shallnot form part of the total income as appearing the in the balance sheet of the assessee, on the first day and the last day of the previous year;……(iii) An amount equal to one-half percent of the average of the value of investment, ;income from which does not or shalll not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year.”(Emphasis added)

6. Thus in light of above, Central Board of Direct Taxes, in exercise of its powers under section 119 of the Act hereby clarifies that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income.

7. This may be brought to the notice of all concerned.

8. Hindi version to follow.

Rule 2(b)(ix) of Companies (Acceptance of Deposits) Rules 19752. “In these rules, unless the context otherwise requires, ----(a)….(b) “deposit” means any deposit of money with, and includes any amount borrowed by, a company, but does not include ----

……(ix) Any amount received from a person who, at the time of receipt of the amount, was a director of the company or any amount received from a relative of a director or its member by a private company ----

Provided that the director, relative of a director or a member, as the case may be, from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting from others;”

Practical Questions

Q.1

Can ABC Ltd accept loan from:

a) Mr A, Director of the companyb) Mr B, Shareholder of the companyc) Mr C, Director & shareholder of the companyd) Mr E, son of MD of the company

Q.2

ABC Pvt Ltd granted loan to its employee Mr A on 1.10.2013 . Subsequently, Mr A was appointed as a director of the company. Is there any contravention?

Q.3

ABC Ltd gives loan to XYX Ltd. Mr A is a director in both companies. Subsequently, XYZ Ltd is converted into private limited company. Is there any contravention of company law?

Q.4

Can ABC Ltd give corporate guarantee to bank for giving loans to its wholly owned subsidiary abroad?

Q.5

ABC Private Ltd proposes to give loan to Mr A who is sister’s husband of a director of the company. Is it permitted u/s 185 of CA 2013?

Q.6

ABC Ltd proposes to give loan to a private limited company incorporated in Germany. Mr A is a director in both companies, but no director of ABC Ltd is holding any shares of Germany company. Is it permitted u/s 185 of CA 2013?

Q.7

Mr A is a member of ABC Pvt Ltd and XYZ Pvt Ltd. XYZ Pvt Ltd gives loan to Mr X. Can ABC Pvt Ltd give guarantee for the loan?

Q.8

Mr A, who is director of ABC Ltd, is also a trustee of a public charitable trust. The Trust requests the company to give some loan. Can the company give loan to the Trust?

Q.9

Paid-up capital & free reserves of ABC Ltd are to the extent of Rs.10 crores. However, ordinary resolution u/s 293(1)(d) of CA 1956 has been passed permitting borrowing upto Rs.15 crores. Accordingly, company borrowed by way of term loan of Rs.12 crores on 1.9.2013. Repayment of term loan will start from 1.4.2014. Is there any contravention?

Q.10:

In the above case, the company took a second term loan of Rs.3 crores on 1.10.2013 by just passing Board resolution. Is there any contravention?

Q.11

Paid-up capital and free reserves of ABC Ltd as on 31.3.2013 were to the tune of Rs.10 crores. Profit after tax of the company for 9 months period ended 31.12.2013 was Rs.2 crores. Company wants to take term loan of Rs.12 crores in February 2014. Can it do so by passing Board resolution?

Q.12

In the above example, can the company take Cash Credit limit of Rs.12 crores from SBI instead of term loan of Rs.12 crores by passing Board resolution?

Q.13

Paid-up capital and free reserves of ABC Ltd as on 31.3.2013 were to the tune of Rs.10 crores. Company had taken term loan of Rs.10 crores in the year 2010 and outstanding as on 31.3.2013 was Rs.2 crores. Now the company wants to take new term loan of Rs.8 crores and cash credit limit of Rs.5 crores in February 2014. Can it do so by passing Board resolution?

Paid-up capital and free reserve of ABC Ltd is Rs.10 crores. It has invested Rs.10 crores in Reliance Mutual Fund. Is there any contravention?

Q.14:

P C [email protected]

loans under companies act 1956/2013

Documents

said act

private companies

sustainability loans

indirect loans

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