This is a question which is always in the mind of business owners. Whether there is any violation if my Company give loan to the director. Is there any penalty?
Let me give you a detailed informed to solve your problem
Company (Private & Public whether small, OPC, Start-ups etc.) shall not directly or indirectly, advance any loan (including loan represented by a Book debt (meaning of book debt is amount receivable on account of sales) OR
give any guarantee OR
provide any security in connection with any loan taken by:
a) Any director of the company; or
b) Any director of its holding company; or
c) Any partner of any such director; or
d) Relative of any such director;
e) Any firm in which any such director is a partner; or
f) Any firm in which the relative of any such director is a partner;
So as per the above provision, Sec 185 of Companies Act does not allow companies to give loan to directors or its relative. Loan cannot be given to any other person in whom the directors are interested.
Let me explain: any other person in whom the director is interested
Company can give loan in the following cases:
Loan can be given to managing/whole time director of the company if
Holding company can give loan to wholly owned subsidiary if the wholly owned subsidiary uses it for its principal business activity and not for any other purpose
Holding company can give guarantee for any loan taken by a subsidiary company only the said loan is used for principal business activity and not for any other purpose.
Note: Principal business activity is not defined as per the act, however, as per our understanding it is the main object of the company for which the company is formed)
Non applicability of Sec 185 if the following conditions are satisfied. A Company can give loan to its director if following conditions are fulfilled.
This Section shall not apply to Nidhi companies if the loan given is in the capacity of a member and not in the capacity of a director
Let’s everything with an example?
Ans: The word used is no lending is allowed directly or indirectly. Indirectly mean through an intermediary. Hence lending through an intermediary is also a violation.
Ans: Resolution is to be passed before giving the loan, not after. If the loan is given before, then it is a direct violation
Ans: No, company cannot give loan to director as the section clearly mentions that it is permitted only to whole time director and managing director. However, if the above three conditions are satisfied then the company can give loan.
Penalty if there is any violation
Lending Company: Punishable with fine which shall not be less than Rs. 5 lakhs but which may extend to Rs. 25 lakhs
Officer in default: Punishable with imprisonment for a term which may extend to 6 months or with fine which shall not be less than Rs. 5 lakhs but which may extend to Rs. 25 lakhs.
Recipient Director: Punishable with imprisonment which may extend to 6 months or with fine which shall not be less than Rs. 5 lakhs but which may extend to Rs. 25 lakhs, or with both.
Can a director give loan to the company?
Ans: A director is permitted to give loan to the company. However, he has to give an undertaking that the loan given is out of his personal funds and not from the funds of the company. Director can give loan to the company and there is no prohibition for it.
Note: Please note that Sec 185 is not applicable to a company which is in the business of giving loans
Conclusion: Now the Government has made this section little less stringent. Initially giving loans was completely prohibited. However, now a company can give loan if the conditions mentioned above are fulfilled. Kindly adhere to the norms to avoid penalty and do write back if you have any query.