SECTION 185- LOAN TO DIRECTORS

Legal Advisory By - CS Shivani Vashistha

Quite common question that comes across to every business owner is “will it be a violation under Companies Act 2013 if I give loan to the director” ??

 

To clear the clouds of confusion , let us have the clear understanding of the Section 185 of The Companies Act,2013.

 

As per provisions of sub-section (1) of section 185, a Company shall not, directly, or indirectly advance any loan , including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person.

Now Let us Understand the meaning of the Term “ any other person in whom the director is interested”.

 

1. Firm in which such Director or any relative of the director is partner
2. Private Company in which such director holds the office of directorship or is a member.
3. Body Corporate at a general meeting of which not less than 25% of the total voting power is exercised or controlled by any such director, or by two or more such directors together.
4. Any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

 

Now Let us have a look on the Exemptions under which a Company may advance loan, give guarantee, or provide security in connection with a loan.

1. Private Company which satisfies all the following criteria may advance loan, give guarantee, or provide security in connection with a loan to a Director or to any other person in whom director is interested.

 

1. In whose share capital no other body corporate has invested any money.

 

1. If the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid-up share capital or fifty crore rupees, whichever is lower;

and

 

1. Such a company has no default in repayment of such borrowings subsisting at the time of making transaction under section 185 ( MCA notification dated 05^th June 2015)

 

 

2. Loan given to Managing Director and Whole Time Director-

 

1. Loan given as a part of Conditions of service extended to all the employees by the company; or
2. Loan is pursuant to any scheme approved by Special resolution at the Shareholders meeting.

 

3. A company which in the ordinary course of its business provides loans or gives guarantee or securities provided by a holding company in respect of any loan and in respect of such loans an interest is charged at a rate not less than bank rate declared by the Reserve Bank of India.

 

4. Loans given by a holding company to its wholly owned subsidiary company, or any guarantee given, or security provided by a holding company in respect of any loan to its wholly owned subsidiary company , if the loan is utilized by the subsidiary company for its principal business activities.

 

5. Any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company if the loan is utilized by the subsidiary company for its principal business activities.

 

PENALTY PROVISIONS

Where Section 185 is in Non-Compliance: – – The Lending Company will be punishable with a fine minimum of Rs. 5 lakh and maximum to Rs 25 lakh.

– Any officer in default will be punishable with imprisonment for a term which may extend to 6 months or fine which shall not be less than Rs.5 lakh but which may extend to Rs.25 lakh.

– The recipient of the loan will be punishable with imprisonment which may extend to 6 months or with fine which shall not be less than Rs.5 lakhs but which may extend to Rs.25 lakhs or with both.

 

Thus, to conclude one can say that the main objective of Section 185 is to safeguard the interest of shareholders by imposing some prohibition in respect of loan/guarantee/security given by Company simultaneously providing some relaxation and exemptions for ease of doing business.

 

Source: Companies Act,2013

 

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