Can a Private Company Take a Loan from Another Private Company Under the Companies Act 2013?

Under the Companies Act 2013, a private company is allowed to take a loan from another private company. This flexibility provides an avenue for companies to access financing and manage their capital more efficiently. However, certain provisions and conditions must be met to ensure compliance with legal and regulatory standards.

Inter-Corporate Loans

Section 185 of the Companies Act 2013 grants permission for loans between private companies. The lending company cannot be a subsidiary of the borrowing company under this section.

Approval Requirements

If the loan amount exceeds certain prescribed limits, the borrowing company may need the approval of its Board of Directors or shareholders based on the nature and size of the transaction. These limits are set to ensure that significant financial decisions are made with careful consideration.

Repayment Terms and Conditions

The terms of the loan, including interest rates and repayment schedules, should be documented in a loan agreement. This agreement must outline the repayment terms clearly to avoid any future disputes.

Detailed Compliance and Requirements

In addition to the provisions mentioned above, several other requirements and conditions must also be adhered to:

Disclosure in Financial Statements: The loan transaction must be disclosed in the financial statements of the involved companies as per accounting standards. Compliance with Other Laws: Both companies must ensure compliance with other applicable laws such as the Income Tax Act. This includes ensuring that interest payments are deductible under tax regulations. Company Articles of Association: The Articles of Association of both companies must permit such transactions and have a Board resolution authorizing the directors/employees to raise loans.

Specifically, the Act includes provisions that must be observed when the lending company is not a subsidiary:

No companies holding shares in the lending company should be involved. The borrowings of the lending company should not exceed twice its paid-up capital and reserves or Rs. 50 Crores, whichever is lower. The lending company must have no defaults in repayment of such borrowings.

Conclusion

Private companies can take loans from other private companies, but it is crucial to ensure compliance with all relevant provisions and regulations. Companies must consult with legal and financial advisors to ensure they are fully aware of the requirements and can make informed decisions.