Loan to Managing Director/Whole–time Director by the Company (Public and Private Company) Under Companies Act, 2013.
Background:
Section 185(1) of the Companies Act,2013
No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by,—
(a) any director of company, or of a company which is its holding company or any partner or relative of any such director; or
(b) any firm in which any such director or relative is a partner.
Exemption under Section 185(3):
Nothing contained in sub-sections (1) and (2) 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.
With the clarification above, we can say that a company (Whether Public / Private Company) can give loan to its Managing Director/ Whole –time Director on the Conditions mentioned u/s 185(3)(a)(i)(ii)
Section 185(3)(a)(i): As a part of the conditions of service extended by the company to all its employees:
Clarification on consideration of MD/WTD as employee of the Company:
Sec 2(94): Meaning of the term ‘whole-time director’ “Whole-time Director” has been defined to include a director in the whole-time employment of the company. The definition of ‘whole-time director’ is an inclusive definition. A whole-time director refers to a director who has been in employment of the company on a fulltime basis and is also entitled to receive remuneration.
Section 2(54): MD means individual entrusted with the power of Administrative acts of routine nature.
From above mentioned definition one can opine that MD/WTD is the employees of the company.
As per Section 185(3)(a)(i): it should be mentioned in Service agreement of MD/WTD,in absence of such clause in the service agreement then company can amend the Service agreement by passing of Board Resolution.
Section 185(3)(a)(ii): Pursuant to any scheme approved by the members by a special resolution:
As per the above provision, if a member of the Company has approved any scheme to give loan to MD/WTD by passing the Special resolution, then Company can give loan to MD/WTD.
Conclusion:
Therefore as per Section 185(3) of Companies Act,2013, A Company (Public/ Private can give loan to Managing Director/ Whole Time Director by following condition mentioned in Section 185(3)(a)(i)&(ii).
Notes:
- Companies can give a loan to their MD/WTD without any restriction under Section 185.
- Charge interest on such loan is not mandatory(as per the Companies (Amendment)Act,2017 w.e.f. May 07,2017,Explanation in Section 186 i.e for the purpose of this sub-section , the word “person” does not include any include any individual who is in the employment of the Company).
- Neither there is any limit on the amount of loan a company can give to its Managing Director or Whole –Time Director for such loan purpose.
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Author- CS Aakansha Negi and can be contacted at csaakanshanegi@gmail.com
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