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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 TRANSACTIONS 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.

Click here to Read About Loan to Directors Companies Act 2013

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One Comment

  1. Khushboo says:

    Hi.
    Can company provide guarantee to MD/WTD for loan taken by them in their name?
    As per sec 185 of the act it has just refereed about the loan to MD/WTD which are exempted.

    Thank you.

  2. 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.

  3. 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?

  4. 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.

  5. 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 ?

  6. 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

  7. 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?

  8. 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.

  9. 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

  10. 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.

  11. 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”.”

  12. 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.

  13. 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.

  14. 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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