CS Lovkesh Batra

CS Lovkesh BatraNow, if we read Section 185 of the Companies Act, 2013, there are prohibitions if a Company gives loans to Directors and their relatives.

This kind of prohibition was really needs to be amended and the same has been brought by Companies Amendment Bill, 2016 by removing some prohibition clauses and introduces some of the restrictions which are subject to the shareholders approval.

Big thanks to Companies Amendment Bill, 2016!!!!

Now, let us read the various changes which have been proposed in the section 185 under the Companies Amendment Bill, 2016.

Section 185Provision under Companies Amendment Bill, 2016Prohibition/Restriction
185(1)Company Shall not directly or indirectly give loan (including any loan represented by a book debt)/guarantee/security to:Prohibitions:

1. Its own Directors

2. Directors of its Holding Company

3. Any partner of own Directors

4. Any partner of Holding Company’s Directors

5.  Any relative of own Directors

6.  Any relative of Holding Company’s Directors

7. Any Firm in which own Director is partner

8. Any Firm in which Holding Company’s Director is partner

9. Any Firm in which any relative of own Directors is partner

10. Any Firm in which any relative of Holding Company’s Directors is partner

185(2)Company may give loan (including any loan represented by a book debt)/guarantee/security to:

 

Conditions to be followed:

1. S.R. to be passed

2. The Explanatory Statement shall include:

(a) full particulars of loan/Guarantee/Security.

(b) Purpose for which such      loan/Guarantee/Security will be utilised.

(c) Any other relevant fact(if any)

 

3. The loans must be utilised by the borrowing company for its principal

Business activities.

Restrictions:

1. Any private Company in which own Director is a Director

2. Any private Company in which own Director is a Member

3. Any Body Corporate whose 25% equity shares are exercised by own director(alone or together with all Directors)

4. Any Body Corporate whose 25% equity shares are controlled by own director(alone or together with all Directors)

5. Any Body Corporate whose

(a) Board of Directors or

(b) Managing Director or

(c) Manager

is accustomed to act in accordance with the directions or instructions of

(a) Board of own Company or

(b) Any Director or Directors of the own Company

185(3)BIG EXCEPTION OF 185(1) & (2)

Means Section 185 (1) and (2) will not be applicable if :

1. If the loan has been given to :

(a) MD/Manager

(either as conditions of service extended by the company to all its employees OR pursuant to any scheme approved by the members by a special resolution)

2.  If loan/Guarantee/Security has been provided ordinary course of its business subject to interest is at a rate of minimum prevailing yield of one year, three year, five year or ten year Government security closest to the tenor of the loan.

3. Any loan/Guarantee/Security by a holding Company to its wholly owned subsidiary Company and the loans are utilised by the subsidiary company for its principal business activities.(ANY LOAN).

4. Any Guarantee/Security by a holding Company in respect of loan given by any Bank/Financial Institution to its subsidiary Company and the loans are utilised by the subsidiary company for its principal business activities. (ONLY BANK/FI  LOAN)

185(4)Punishment Clause:

 

If any loan is given in the contravention:

1. Penalty on Company === Fine Min. 5 Lac/Max. 25 Lac

2. Penalty on the directors or the other person to whom any loan is advanced or guarantee or security is given ==== Imprisonment Max. 6 months OR Fine Min. 5 Lac/Max. 25 Lac OR BOTH

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. The observations of the author are personal views and the author does not take responsibility of the same and this cannot used to be quoted before any authority.

Posted Under

Category : Company Law (2996)
Type : Articles (10773)
Tags : Companies Act (1523) Companies Act 2013 (1277)
  • Rahul Jain

    after 5th June, 2015 “EXEMPTION” has been provided to Private Limited

    Companies. After all that exemptions status of Private Limited Companies under

    Companies Act, 2013 more or less is equal to Status in Companies Act, 1956.

    LOAN TO DIRECTOR [Section185)

    Section not applicable on Private Limited company not applicable on Private Limited company (if its satisfies the below given 3

    conditions)

    From 05.06.2015 “Exemption Notification on Private Limited Companies” Private Limited

    Company can give loan, to the directors and person interested in directors as per section 185.

    If it satisfies the ALL THE 3 (THREE) CONDITIONS mentioned below:

    a) In whose share capital no other body corporate has invested any money;

    b) If the borrowings of such a company from banks or financial institutions or any body

    corporate is less than [lower of (i) Two times of paid up share capital or (ii) Rs. 50

    Crore]; and

    c) Such a company has no default in repaymnt of such borrowings subsisting at the time

    of making transactions under this section.