Section 185 of the Companies Act, 2013 regulates the provisions relating to grant of loans to directors of the company. Article explains Prohibition on grant of loans to directors under section Section 185 (1), Restriction under Section 185(2) on grant of loans to directors of the company, Exemption under Section 185(3) against on grant of loans to directors of the company and Penalty under Section 185(4) on grant of loans to directors of the company.
For easy understanding, the Section can be divided into 4 parts explained below:
Section 185 of Companies Act, 2013– Prohibition, Restriction Exemption & Penalty
| Prohibition under Section 185 (1) | Restriction under Section 185(2) | Exemption under Section 185(3) | Penalty under Section 185(4) |
Prohibits the Company from providing any loan including any loan represented by a book debtor guarantee or security in connection with any loan to the below mentioned individuals and firms:
So, as per Sec 185 (1), Company cannot give any loan/guarantee/ security to above mentioned individuals and firms. |
Subject to the following conditions/ restrictions, a Company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the director of the company is interested:
(a) a special resolution is passed by the company in general meeting approving the transaction (b) the loans are utilised by the borrowing company for its principal business activities. For the purposes of this sub-section, the expression “any person in whom any of the director of the company is interested” means: (a) any private company of which any such director is a director or member; (b) 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 (c) 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. So, as per Sec 185 (2), Company Can give any loan/ guarantee/ security to above mentioned persons but subject to fulfillment of certain conditions. |
It states about the exemptions from the compliance of section 185(1) & (2) for below mentioned individuals and entities:
(a) the giving of any loan to a managing or whole-time director subject to the following conditions: (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 due repayment of any loan subject to the following conditions: Interest rate in respect of such loans is charged at a rate not less than the rate of prevailing yield of one year, three years, five years or ten years Government security closest to the tenor of the loan. (c) any loan made 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 made to its wholly owned subsidiary company subject to the condition that loan must be utilised by the subsidiary Company for its principal business activities. (d) 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 subject to the condition that loan must be utilised by the subsidiary Company for its principal business activities. So, as per Sec 185 (3), a Company can provide any loan/guarantee/ security to the above mentioned individuals and entities irrespective of the prohibitions and restrictions mentioned in sub section (1) and (2) respectively provided if the conditions mentioned for them are being followed. |
Section 185(4) of the Act lays down penalty in case of non compliance which is as follows:
For Company: Fine Minimum- 5 Lakhs Maximum- 25 Lakhs For every officer of the company who is in default: Imprisonment or Fine Imprisonment for a term which may extend to six months or Fine: Minimum- 5 Lakhs Maximum- 25 Lakhs For 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 (i.e. the borrower): Imprisonment and/or Fine Imprisonment for a term which may extend to six months or Fine: Minimum- 5 Lakhs Maximum- 25 Lakhs
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