Is It Legal for a Director to Lend Money to a Company?

Under the Companies Act, 2013 in India, directors can provide loans to their companies, and such loans are considered exempted deposits under Section 73(2) and the Companies (Acceptance of Deposits) Rules, 2014. This means they are not treated as public deposits, provided certain conditions are met:

• Source of Funds: The loan must come from the director’s own funds, not borrowed funds. The director must provide a self-declaration to the company confirming this.
• Disclosure Requirements: The company must disclose details of the loan in its Board’s report and financial statements (via notes).
• No Upper Limit for Private Companies: Private companies can accept any amount as a loan from directors without a cap, unlike public companies, which face restrictions on deposits from shareholders (up to 35% of paid-up capital, free reserves, and securities premium).

In the UK, directors can also lend money to their companies, recorded in a Director’s Loan Account (DLA). The company’s Articles of Association must permit such loans, and a formal loan agreement is recommended to outline terms like interest rate and repayment schedule.

Key Compliance Requirements

To ensure compliance when a director lends money to a company, the following steps are crucial:

1. Board Approval: The company’s board must approve the loan via a board resolution, even in private companies, to document the decision formally. For public companies, Section 180 of the Companies Act, 2013, may require a special resolution if borrowings exceed the aggregate of paid-up share capital, free reserves, and securities premium.
2. Loan Agreement: A written director loan agreement should detail:
   • Loan amount
   • Interest rate (if any, can be interest-free)
   • Repayment schedule (e.g., repayable after 5 years)
   • Option to convert the loan to equity (if applicable)
3. Self-Declaration: The director must submit a declaration stating the funds are from their own resources, not borrowed.
4. Disclosure: Details of the loan must be disclosed in the company’s financial statements and Board’s report.
5. Filing Requirements: In India, companies must file Form DPT-3 annually with the Registrar of Companies (ROC) to report deposits, including exempted deposits like director loans.

For example, if a director lends ₹35 lakhs to a private company with ₹10 lakhs in paid-up capital and reserves, no upper limit applies, and the loan is permissible with proper documentation.

Tax Implications of Director Loans

Loans from directors have tax implications for both the company and the director:

• For the Company: Interest paid on the loan is tax-deductible as a business expense, reducing the company’s taxable income.
• For the Director: Interest received is treated as personal income and subject to income tax. In the UK, the company must deduct 20% income tax on interest payments and report it to HMRC quarterly via Form CT61. In India, similar tax withholding rules may apply based on the Income Tax Act.
• Interest-Free Loans: Directors can provide interest-free loans, which are legally permissible and have no tax implications for interest income. However, in the UK, if the loan is below HMRC’s official interest rate (4.5% as of March 2025), it may be treated as a “benefit in kind,” attracting additional taxes.

Can a Director’s Relative or Shareholder Lend Money?

• Director’s Relative: Loans from a director’s relative (e.g., spouse, sibling) are also considered exempted deposits in India, provided the funds are from their own resources and a declaration is submitted. The company can pay interest, subject to mutual agreement.
• Shareholder Loans: If the director is also a shareholder, the loan’s classification (director or shareholder) matters. Shareholder loans in public companies are capped at 35% of paid-up capital, free reserves, and securities premium, per the Companies (Acceptance of Deposits) Rules, 2014.

Converting Director Loans to Equity

Directors may choose to convert their loans into equity shares, especially in private companies. This requires:

• Board and Shareholder Approval: A board resolution and special resolution at an Extraordinary General Meeting (EGM).
• Filing Requirements: File Form MGT-14 (for the special resolution) and Form DPT-3 with the ROC.
• Loan Agreement Terms: The loan agreement should specify the conversion option upfront to avoid disputes.

This can be a strategic way to strengthen the company’s equity base while reducing debt.

Best Practices for Director Loans

To ensure compliance and avoid legal or tax pitfalls, follow these best practices:

1. Check Articles of Association: Confirm the company’s Articles permit director loans.
2. Formalize the Loan: Use a director loan agreement to document terms clearly.
3. Obtain Board Approval: Record the loan decision in board minutes.
4. Disclose Properly: Include loan details in financial statements and Board’s reports.
5. Consult Professionals: Seek advice from accountants or company secretaries to ensure compliance with local laws (e.g., contact experts at LegalWindow.in for India-specific guidance).

Global Perspective: Director Loans in the UK

In the UK, director loans are common but come with specific rules:

• Director’s Loan Account (DLA): Tracks all transactions between the director and company.
• Tax on Overdue Loans: If the loan isn’t repaid within nine months after the company’s tax year-end, a 32.5% corporation tax (Section 455 tax) applies on the outstanding amount.
• Interest Payments: Interest is deductible for the company but taxable for the director, reported via Form CT61.

Conclusion

Directors can legally lend money to their companies in India and jurisdictions like the UK, provided they adhere to legal and compliance requirements. In India, the Companies Act, 2013, allows such loans as exempted deposits with proper documentation and disclosures. Tax implications, especially for interest, must be carefully managed. By following best practices like formalizing agreements and obtaining board approval, directors can support their companies financially while staying compliant.

For tailored advice, consult a professional accountant or company secretary. In India, resources like LegalWindow.in can provide expert guidance. In the UK, contact HMRC or a qualified accountant for assistance with Form CT61 and tax compliance.

Disclaimer: This article is for informational purposes only and does not constitute legal or financial advice. Always consult a professional for specific guidance tailored to your situation.