• Oct
  • 25
  • 2013

LOAN TO DIRECTORS- Section 185 – Companies Act, 2013

Posted In Company Law | | 24 Comments » Print Friendly and PDF

Akhilesh Kumar Jha

LOAN TO DIRECTORS- Under Section 185 of the Companies Act, 2013

APPLICABILITY OF SECTION

Section 185 of the Companies Act, 2013 is applicable on private company as well as public Company.

PROHIBITED TRANSACTIONS

IN CASE OF LOAN (INCLUDING BOOK DEBTS):-

  1. No Company advances any loan to its director.
  2. No Company advances any loan to director of the lending company, or of a company which is its holding company or any partner or relative of any such director.
  3. No Company advance any loan to any firm in which any such director or relative is a partner;
  4. No Company advance any loan to any private company of which any such director is a director or member;
  5. No Company advances any loan to anybody corporate at a general meeting of which not less than twenty five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or
  6. No Company advance any loan to anybody 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

GUARANTEE AND SECURITY

No company gives any guarantee or provides any security in connection with aforesaid loan.

ALLOWABLE TRANSCATIONS UNDER THIS SECTION

1-      Loan given to Managing Director or Whole Time Director as part of the conditions of services etc or pursuant to the scheme approved by the member by Special Resolution

2-       A company make loan or give guarantee or provide security in ordinary course of its business for due repayment of loan.  In this regard interest is charged at a rate not less than the bank rate declared by RBI

PENAL PORVISIONS

1-      IN CASE OF COMPANY

If default has been made by the company relating to provision of sub section (1) of the Act, the company shall be punishable with fine which shall not be less than Five Lacs Rupees but which may be extended to Twenty Five lacs

2-      IN CASE OF DIRECTOR

The director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.

BARE ACT LANGUAGE

“185. (1) Save as otherwise provided in this Act, no company shall, 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:

Provided that nothing contained in this sub-section shall apply to—

(a) the giving of any loan to a managing or whole-time director—

(i) as a part of the conditions of service extended by the company to all its employees; or

(ii) pursuant to any scheme approved by the members by a special resolution; or

(b) a company which in the ordinary course of its business provides loans or gives guarantees or securities for the ue repayment of any loan and in respect of loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.

Explanation.—For the purposes of this section, the expression “to any other person in whom director is interested” means—

(a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;

(b) any firm in which any such director or relative is a partner;

(c) any private company of which any such director is a director or member;

(d) any body corporate at a general meeting of which not less than twenty five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or

(e) 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.”


24 Responses to “LOAN TO DIRECTORS- Section 185 – Companies Act, 2013”

  1. Jitendra Kumar says:

    Dear Sir,
    Suppose Company A has shareholding to the extent of 85% of the capital in Company B and rest 15% is held by directors / promoters. X Bank extends assistance to Company B and asks for Corporate Guarantee of Company A. Can Company A give Corporate Guarantee to Bank X?

    Regards,
    Jitendra Kumar.

  2. ranjit kumar ghosh says:

    Thanks for to the point reply in brief

  3. Umang says:

    Old loan taken before 12.09.2013 should be repay.

  4. rahul says:

    What About Loans Given Before New Company Act 2013

  5. Ronak sharma says:

    is there any restriction on directors to provide loan to company???

  6. Ronak sharma says:

    is there any restriction on directors also to provide loan to company???

  7. CA Neeraj Kumar Rastogi says:

    The expression “loan including book debts” covers outstanding as debtors also?

  8. laxmi says:

    Hello Sir,

    Is section 185 restrict to the existing transactions also and applicable for transaction entered after the notification.

    or applicable to existing transactions also?

  9. deepak says:

    i also agree that now it will be difficult to do business in Pvt ltd company. No it wont be possible to use idle funds in another group company. the only possible way is through a group NBFC.
    The formation of NBFC is also difficult . RBI procedure is very long and tedious. I also wonder what is the way out. Either govt shall exempt pvt company as was the case earlier otherwise every one will have to use partnership or LLP.

  10. Varghese says:

    A proprietor has approached the Bank for term loans and working capital for a new unit
    2. The Factory is constructed in a property of which half portion owned by a Pvt Ltd Co in which he is a director and half owned by the proprietor himself.
    3. The lending Bank required mortgage of the entire property by the proprietor and Pvt Ltd Co and corporate guarantee of the Pvt Ltd Co.

    In light of Sec. 185, whether the Pvt Ltd Co can give guarantee for the facilities applied from the Bank ?

  11. Sidharth says:

    Hi,

    Kindly advice..
    When director take loan from any other bank/nbfc against property owned in individual name on income of company.
    Does same also attract sec 185

  12. Amith.N.R says:

    how to treat the loans which are there before the notification of this section

  13. Yogesh says:

    Need a clarificaion, if a X company buys a property in its name and to obtain a loan a Company Y ( sister concerns)income is considered. what is the way out?

  14. Rajesh P says:

    Does this means, if special resolution is passed then the Company can give guarantee to bank for offering loan to its co-subsidiary?

    Ex. B and C are subsidiaries of company A.
    C wants loan from Bank, Bank wants guarantee of Company B. Can company B give guarantee if members of B pass special resolution in this regard.

  15. Amit Chaturvedi says:

    Dear Sir

    Does it mean a Company Can not do business by the virtue of this New Section.

  16. ashish jain says:

    thanks for such nice platform to update ourselves.

  17. Mayur Sheth says:

    Section 185 is not applicable if loan is given or guarantee or security provide for the loan is taken before 12th September 2013. However if such loan was for a specific term and it is renewed after 12th September 2013, where the term is expired then section 185 will be applicable. In case of working loans or other loans which are repayable on demand and are subject to renewal, if is renewed after 12th September and company continues its corporate guarantee, section 185 will be applicable

  18. gulashan sharma says:

    Hi,
    What about the holding company which advances any loan to its subsidiary or provides any guarantee to its subsidiary. Because in the previous act, it was specifically mentioned that Sec 295 is not applicable in case holding company advances any loan or provides any guarantee in respect of its subsidiary.

  19. Priyanka Gandhi says:

    what about old loan to Director which were given before new companies act 2013? Pls clarify

  20. Parul Mehta says:

    hi, Please clarify for the explanation (b) included in this section : The explanation says “to any other person in whom director is interested” means— any firm in which any such director or relative is a “PARTNER”….

    Does this explanation also includes “any firm in which any such director or relative is a “PROPRIETOR”.”

  21. Prerna Jain says:

    Hello Sanjeevji,

    for your query, as the law speaks about the loan etc which is proposed to be taken/availed, we have to consider the provisions with prospective effect not with the retrospective effect.

  22. ca sanjeev jain says:

    what about old loan which were given before new companies act 2013 ?

  23. Nagraj says:

    Hi Thanks for updating such a important latest amendment. I need some clarification on my doubts please clarify
    if Managing Director borrows the loan in his personal name from 3rd party (individual) and gives such money to his own company as a loan from director for business purpose, but the 3rd party wants security from the company on companies letterhead as a securities for the due repayment of loan.
    Question: Is there any contravention of the provisions of sub section(1) of Section 185 as per New Companies Act 2013? Please answer.

  24. Arvind says:

    Hi. I appreciate the information and updates provided. It certainly enlightens us about the latest amendments in law. Thanks to the author who has taken the efforts of informing us of the latest and important developments. However the moderator/editor needs to edit articles for the grammatical mistakes before publishing, especially such as these which have legal significance .

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