Restriction on Loans Provided by Private Limited Companies

Restriction on Loans Provided by Private Limited Companies

Introduction

Managing a company's funds is a critical decision that requires careful consideration from the management. It is essential for them to identify potential sources of funding and effectively allocate these resources to generate passive income for the organization.

To optimize excess funds, companies may explore various strategies, including lending to other businesses. Not only can this strengthen business relationships, but it can also result in interest income for the lending company.

In this article, we will examine the legal limitations imposed on private limited companies when providing loans to individuals and other corporate entities.

Legal Provisions

The Companies Act 2013 includes two distinct sections regarding loans: Section 186 for inter-corporate loans and investments, and Section 185 for loans to directors and related parties.

Although the term 'loan' lacks a specific definition in the statute, it typically refers to the act of advancing money with an agreement to repay it.

Companies may extend loans in three ways: directly, or indirectly via a guarantee or security, or through investments in securities of other corporate entities. However, any such action falls under the purview of Section 186 of the Companies Act 2013, and as such, the restrictions outlined in this section apply to these transactions.

It's important to note that the term 'body corporate' is defined in section 2(11) of the said Act, while 'person' is interpreted according to section 2(42) of the General Clauses Act. The latter includes any company, body corporate, association, or group of individuals, regardless of whether they're incorporated or not. However, 'person' excludes employees under the company's employment, meaning there are no restrictions on loans, guarantees, or securities provided to employees.

Restrictions

  • Unanimous Board Resolution-

Subsection 5 of section 186 requires that the company shall call a board meeting, discuss the terms of providing the loan, investment, guarantee, or security, as the case may be, and pass a unanimous board resolution i.e., the consent of all the directors present in the meeting.

The compliance officer/directors shall ensure that the resolution shall be passed at a board meeting only and it should not be a resolution by circulation.

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