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

Can a company give loan to a director?

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

  • any firm in which any such director or relative is a partner;
  • any private company of which any such director is a director or member;
  • If the director is a director is any company and 25% of the voting power is in his hand, then company cannot give loan to such entity.
  • 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.

When can a Company give loan?

Company can give loan in the following cases:

Loan can be given to managing/whole time director of the company if

  • it is approved by a special resolution in the meeting passed AND
  • If this is a facility given by company to all its employees as well.

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.

  • If No body corporate has invested in the share capital of the company
  • Borrowings of such company from bank or financial institution or any other body corporate is less than two times it paid up capital or Rs 50 Crore whichever is less and
  • The company did not make any default in repaying the loan

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?

  • Can a company give loan through any of its intermediary?

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.

  • Can a company give loan on 25.03.2018 and pass the resolution on 30.03.2018?

Ans: Resolution is to be passed before giving the loan, not after. If the loan is given before, then it is a direct violation

  • Can a company give loan to director as per the special scheme approved mentioned above?

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.

Author Bio

Qualification: CA in Practice
Company: Makwana Sweta & Associates
Location: Mumbai, Maharashtra, IN
Member Since: 20 Aug 2017 | Total Posts: 62
A qualified Chartered Accountant with over 4 years of rich experience in Company Law, Audits, Accounts & taxation. She is a writer at her own blog https://insights.caswetamakwana.com/. She is keen in streamlining business accounts of the Company and provide Startup consultancy. View Full Profile

My Published Posts

More Under Company Law

One Comment

  1. kamal says:

    Hi Sweta

    Article is very nicely drafted. But i think Loan to Director is completely not allowed even if company fulfills all the required criteria. Pls give some more info

Leave a Comment

Your email address will not be published. Required fields are marked *