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Borrowing of Private Companies under the Companies Act, 2013

Private Company

In 2013 the Indian Parliament partly substituted the 1956 Company’s Act for the Companies Act of 2013, with the goal of bringing improvements to the country’s present economic needs and compliance with international corporate practices. However, it should be noted that there are still few provisions in force from the 1956 Act. The Act governs all registered companies and focuses largely on corporate governance.

The Act creates a limited corporation with 2-200 employees and a minimum of 2 directors, owned by private individuals. After receiving a certificate of incorporation, it may begin business. Under Article 68(2), the private company shall not issue publicly shares and its shareholders shall be limited to shares being exchanged and there is no provision regarding minimum capital for the commencement of the business.

Permissible Borrowings

U / s 73, 179(3), 186 theacceptance of depositrules and the rules of procedure are regulated for a private borrowing company. A private company may not accept third party loans, such  In case a private corporation takes any third-party money, it may, however, be regarded as a loan. In such cases, all significant provisions under the Act have to be complied with obligatorily. The second amending rules, 2015 and other subsequent rules of procedure were significantly amended by the Companies allowed inter-corporate credit. (Accepting Deposits).

1. Loan and financial institutions from banking.

One of the principal sources of money collection is a bank loan. A private firm may borrow against its assets a term loan or a working capital loan. The bank loans are the most practical choice for companies, because they provide a fixed interest rate over a fixed term, to loan amounts for investment and expansion. The main advantage of getting a bank loan is that the company is still owned by the company.

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2. Director

The Director makes a statement that the amount he or she is borrowing is not borrowed under Chapter V of Rule 2(1)(vii); the same is stated in the Financial Statements and Board’s Report. Private companies also have the option of obtaining credit from their directors. The same happens if they lent capital to the business which was given by the Rules (2015) to the shareholder, director and to the family managers. This agreement is governed by subsection 179(3). A judgement is required by the Private Corporation for loan from the Director according to the Act. The resolution is approved by the Board of Members. The Director may charge the company interest or give the company a non-interest loan. It may either be protected or unsecured, since the unsecured lending is perceived to be an excluded deposit.

3. Employees

In the event that the amount taken out does not surpass the employee’s annual salary,  private companies will surprisingly borrow from their employees.

4. Members

Members of a private corporation will still lend money by making a written statement indicating that the amount lent to the company does not have to be borrowed in compliance with Chapter V of Rule 2(1)(vii). However, it is only permissible to borrow up to 100% of the cumulative payment of share capital, which are the free assets of the Company. In order to gain approval of the loan by ordinary resolution, the corporation is required to conduct Board meetings as u/s 179(3) and Shareholders’ Meetings as u/s 73(2). It shall also allow loans details and equity to be repaid, asset charges and a 12.5% or higher interest rate to be fixed. The Act also mandates that all loan records be reported with the company registrar.

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5. Inter-business loan

The second amending Rules of Practice, 2015, opened the door for businesses to borrow from another, i.e. intercorporate credit. (Acceptance of deposits). It is a loan made from a unit of a corporation to another unit of the same firm, where both the creditor and the lender are the same firms. Such lending is required to disclose the specifics of the loans in the financial statements of the corporation under the Act. 186(4) u / s. To provide or obtain intercorporate loans, the Company must seek approval from its Board of Directors u / s 186(5).

The Second Amendment Rules 2017 lays down some limitations on intercorporate loan transfers under the Business Approval of Deposits. Until the corporation makes an order to fix the issue, a company that has not paid interest duties would not be allowed to lend to intercorporate businesses. The Act forbids banking firms from lending money below the Indian banks ‘ lending rate.

Conclusion

The Business Act 2013 and the Company (Acceptance of Deposits) Regulations are annually reviewed by the Ministry of Corporate Affairs in response to changes and innovations in the corporate climate. By applying those regulatory conditions to obtain debt, the Act aims at accountability and safeguards the company’s stakeholders. The Act rules, however, have a huge effect on private corporations’ ability to borrow funds. The Economy, the National or Federal government or banking firms can take loans from private enterprises. Under this Act, the procurement of loans from the general public, Single Land, Associations and Hindu Undivided Family is strictly forbidden.

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Cite this article (The Bluebook 20th ed.)-

Kosha Doshi, Borrowing of Private Companies under the Companies Act, 2013, Ex Gratia Law Journal, (March 5, 2021), https://exgratialawjournal.in/blawg/company-law/borrowing-of-private-companies-under-the-companies-act-2013-by-kosha-doshi/.


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Author

Kosha Doshi
Student - Symbiosis Law School, Pune