Director Loan to Private Limited Company: When It Does Not Amount to Deposit
Overview : Director loans to private limited companies represent a crucial funding mechanism that, when structured correctly, enjoys exempted deposit status under the Companies Act 2013. Such loans from the director’s own funds (and not borrowed) provide companies with flexibility while ensuring regulatory compliance. Understanding the distinction between exempted deposits and regulated deposits becomes essential for proper corporate governance and avoiding unintended legal consequences under the comprehensive deposit acceptance framework.
Legal Framework and Regulatory Structure
The legal framework governing director loans to private limited companies primarily operates through Section 73 of the Companies Act 2013, read with the Companies (Acceptance of Deposits) Rules 2014. This regulatory structure creates a careful balance between enabling legitimate corporate funding and preventing unauthorised deposit collection from the public.
Exempted Deposit Classification
Under Rule 2(1)(c)(viii) of the Companies (Acceptance of Deposits) Rules 2014, amounts received from directors are specifically excluded from the definition of "deposit" when certain conditions are fulfilled. When a director provides money to the company from owned funds rather than borrowed resources, the transaction qualifies for exempted deposit treatment.
Board Resolution and Corporate Authorisation
Section 179(3) of the Companies Act 2013 mandates that borrowing powers must be exercised through board resolution, ensuring proper corporate authorisation. The board resolution should clearly specify the loan amount and terms and acknowledge the exempted deposit status based on the director's declaration.
Disclosure and Reporting Requirements
As per Section 134(3)(d) of the Companies Act, 2013, the Board's Report must include particulars of loans given, investments made, guarantees given or securities provided. Furthermore, financial statements must give a true and fair view of the state of affairs of the company. While there is no specific rule like 16A for this disclosure, for transparency, details of loans from directors are required to be disclosed in the notes to the financial statements as related party transactions under the applicable accounting standards.
Director Status and Timing Considerations
The exemption is available for money received from a person who is a director of the company at the time of the receipt of the money. If a director resigns while the loan is outstanding, the amount will continue to be treated as an exempted deposit until it is repaid. The status of the amount does not change upon cessation of directorship, as the crucial factor is the person's status at the time the loan was given. The company is, however, expected to repay such loans as per the agreed terms.
Annual Compliance and Filing Requirements
Form DPT-3 filing requirements under Rule 16 mandate annual reporting of deposit particulars, including exempted deposits. Companies must file this return by 30th June each year, providing comprehensive details of all deposit-related transactions, even those enjoying exempted status.
Declaration Mechanism and Legal Accountability
The declaration requirement serves as a critical compliance mechanism. Directors must provide written confirmation that funds originate from owned resources rather than borrowed amounts. This declaration creates legal accountability and prevents misuse of the exemption framework.
Practical Considerations for Companies
Interest payment on director loans remains permissible, though companies often utilise interest-free arrangements to simplify accounting and tax implications. The flexibility in structuring terms allows companies to align loan conditions with cash flow requirements and business needs.
Private companies enjoy broader exemptions compared to public companies, reflecting their typically close-knit ownership structures and reduced public investor protection requirements. This regulatory differentiation acknowledges the distinct risk profiles and governance arrangements between private and public entities.
DECLARATION BY DIRECTOR
(Pursuant to Rule 2(1)(c)(viii) of the Companies (Acceptance of Deposits) Rules, 2014)
To,
The Board of Directors,
[Full Name of the Company]
[Registered Office Address of the Company]
CIN: [Company Identification Number]
Subject: Declaration regarding loan of ₹ [Amount of Loan] provided to the Company
Dear Sir/Madam,
I, _________________ [Full Name of the Director], son/daughter of ________________ [Father's Name], residing at _____________________ [Director's Residential Address], holding Director Identification Number (DIN) [Director's DIN], do hereby solemnly declare and confirm the following:
- That I am a Director on the Board of ____________________[Full Name of the Company] as of the date of this declaration.
- That I have provided an unsecured loan of ₹ ______________ [Amount in Figures]/- (Rupees _________________ [Amount in Words] only) to the company on [Date of Loan].
- I further declare that the aforementioned amount provided to the company is from my own funds and is not being given out of funds acquired by me by borrowing or accepting loans or deposits from any other person or entity.
- I request you to kindly take this declaration on record and treat the said amount as an exempted deposit in accordance with the provisions of Rule 2(1)(c)(viii) of the Companies (Acceptance of Deposits) Rules, 2014.
This declaration is true to the best of my knowledge and belief.
Thank you.
Sincerely,
(Signature of the Director)
Name: ________________[Full Name of the Director]
DIN: __________________[Director's DIN]
Date: _________ [Date of Signing]
Place: _________[City of Signing]
Conclusion
Director loans can provide flexible funding for private limited companies, provided they are structured correctly within the exempted deposit framework. It is crucial to ensure that the funds originate from the director's own resources and that proper declarations are obtained. Companies must also adhere to board resolution and disclosure requirements, meticulously document these transactions, and complete annual DPT-3 filings. This approach ensures regulatory compliance while effectively utilizing this funding mechanism for business growth and operational needs.
FAQ's
Owned funds refer to money belonging to the director personally, including savings, inherited amounts, proceeds from personal asset sales, or profits from personal business activities. Crucially, these funds must not originate from borrowings, deposits accepted from others, or any form of leveraged financing. The director must genuinely own these resources without any underlying obligation to third parties.
Yes, Section 179(3) of the Companies Act 2013 requires a board resolution for borrowing money, including director loans. The resolution should authorise loan acceptance, specify terms, and acknowledge the exempted deposit status. This ensures proper corporate governance and maintains clear documentation of the transaction for regulatory compliance and future reference.
Directors can legitimately charge interest on loans provided to companies. However, many directors opt for interest-free arrangements to simplify accounting treatment and avoid potential tax complications. When interest is charged, companies can claim it as a business expense, whilst directors must declare it as income for tax purposes.
If a director resigns while the loan is outstanding, the amount will continue to be treated as an exempted deposit until it is repaid. The status of the amount does not change upon cessation of directorship, as the crucial factor is the person's status at the time the loan was given. The company is, however, expected to repay such loans as per the agreed terms and maintain proper documentation of the transaction.
The Companies Act 2013 does not impose specific limits on director loan amounts to private companies when they qualify as exempted deposits. However, companies must ensure overall borrowing remains within authorised limits as per their Articles of Association and comply with any restrictions imposed by existing lenders or regulatory requirements.
Yes, Form DPT-3 must be filed annually by 30th June, reporting all deposit particulars including exempted deposits like director loans. Companies must provide comprehensive details of outstanding amounts, terms, and exemption basis. This requirement ensures regulatory oversight whilst maintaining transparency in deposit-related transactions.
The exemption for receiving money from relatives of directors was available to private companies but has since been omitted. Currently, any amount received from a relative of a director would be considered a deposit unless it is structured as a loan from a relative of a shareholder, subject to the condition that the funds are provided out of the relative's own funds and not from borrowings.
Author Bio
Sanjeev Kumar | in
Meet Sanjeev Kumar, a distinguished advocate before the Supreme Court of India, High Courts, and National Tribunals. Founding Partner of Juriskps Law Offices, a premier law firm, he specializes in commercial, corporate, tax, arbitration, and IPR matters. His incisive legal insights enrich Setindiabiz’s blog with expert commentary.