Loans to Directors for Cars

[livingontheedge]

Hey guys, ever come across a company that extended loans to its shareholders for repayments of their private cars and if so how did they comply with CA?

Currently CA allows for loan to purchase one property for the director but it also states that a scheme can be approved by the general meeting.

The director is employed full time by the Company.

[Strong Eagle]

If you are an exempt private limited, the limitations of loans to directors do not apply (Section 162.1). If not an EPC you cannot do it unless you can demonstrate that it is necessary in order for the director to conduct the business of the company.

However, my reading of the CA is that if you do make a loan, you must follow the rest of the rules.

a) Must be approved by shareholders at AGM/EGM
b) Must state full terms and conditions of the loan

Any loans that are forgiven must be forgiven in an AGM/EGM (directors cannot forgive), and any amounts of the loan forgive will be considering income to the director.

[livingontheedge]

Its not an EPC - so the only outlet is to substantiate on the grounds the cars were purchased for business trips? meeting clients, suppliers, etc.?

[Strong Eagle]

Well... my reading of the statutes says there is a lot of latitude. For example, item (c) of 162.1 says:

...nothing in this section shall apply...

(c) to any loan made to such a director who is engaged in the full-time employment of the company or of a corporation that is deemed to be related to that company, as the case may be, where the company has at a general meeting approved of a scheme for the making of loans to employees of the company and the loan is in accordance with that scheme; or

What do you think? Section (a) says loans are OK if they enable the director to perform duties... one would normally think of travel expenses and such, but perhaps a car falls under that purview.

Section (b) is all about a house and not applicable to this conversation.

Section (c) seems to leave the door wide open. If the shareholders, at an AGM/EGM approve a scheme for making loans to directors, then it seems that the door is wide open. At least that's the way I see it.

You just need to get a majority of shareholders to approve the loan.

[livingontheedge]

The Directors are also Shareholders - so should be easy to get the above done. I can't got by (c) since the loans are already give since the last 2 years. So its (a).