Article focus on the detailed analysis of Section 185 of the Companies Act, 2013. This Section deals with some prohibitions, some relaxations and some exemptions relating to lending of loan and providing guarantee and security. It also deals with the penalty for contravention of the provisions of the section.

PROVISIONS OF SECTION 185(1):

It states that, no Company shall, directly or indirectly, advance any loan (including book debt) or give any guarantee or provide any security in connection with any loan taken by:

Prohibits providing of loan or guarantee or security to the below mentioned individuals and firms-

  • Any Director of the Company or
  • Any Relative of such Director or
  • Any Partner of such Director or
  • Any Director of its Holding Company or
  • Any Relative of the Director of its Holding Company or
  • Any Partner of the Director of its Holding Company or
  • Any Firm in which any of the above mentioned Director is a Partner or
  • Any Firm in which Relative of the above mentioned Director is a Partner

POINT TO BE NOTED: So, as per Sec 185 (1), Company Can not give any loan/guarantee/security to above mentioned individuals and firms.

PROVISIONS OF SECTION 185(2):

It states that a Company can advance any loan (including book debt) or give any guarantee or provide any security in connection with any loan taken by any person in whom any of Director of the Company is interested subject to the conditions:

“Any person in whom any of Director of the Company is interested” means following list of persons:

  • any private company of which any such director is a director or member
  • 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
  • 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.

And subject to conditions are:

  • Pass Special Resolution in General Meeting and
  • Loan must be utilised by the borrowing Company for its Principal business activities

POINT TO BE NOTED: So, as per Sec 185 (2), Company Can give any loan/guarantee/security to above mentioned persons but subject to fulfillment of certain conditions.

PROVISIONS OF SECTION 185(3):

It states about exemptions from complying of sub section 1 and 2 of section 185 for following below mentioned individuals and entities subject to conditions:

  • Giving of any loan to a managing or whole-time director; or

 Conditions: Service extended by the company to all its     employees or pursuant to any scheme approved by way of special resolution.

  • Company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan; or

Conditions: Interest charged on such loan at a rate not less than the rate of prevailing yield of 1 year, 3 years, 5 years or 10 years Government security closest to the tenor of the loan.

  • 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; or

Conditions: Loan must be utilised by the subsidiary Company for its principal business activities.

  • 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

Conditions: Loan must be utilised by the subsidiary Company for its principal business activities.

POINT TO BE NOTED: So, as per Sec 185 (3), above mentioned individuals and entities are not required to comply with sub section 1 and 2 of section 185 if they are fulfilling the conditions mentioned for them.

PROVISIONS OF SECTION 185(4):

It states about the punishment and penal provisions for the contravention of any of the provisions of the section 185:

  • For Company:

         Fine: Minimum- 5 Lakhs

Maximum- 25 Lakhs

  •  For Every officer of the Company who is in default:

Imprisonment for a term which may extend to six       months or

      Fine:  Minimum- 5 Lakhs

Maximum- 25 Lakhs

  • For Borrower (Person who has taken loan):

Imprisonment for a term which may extend to six months or

       Fine:  Minimum- 5 Lakhs

Maximum- 25 Lakhs

                              Or

Both (Fine & Imprisonment)

POINT TO BE NOTED: So, as per Sec 185 (4), if any company, officer of the company and borrower contravenes the provisions of Section 185 then punishable with strict penal provisions.

 Conclusion: Thus, we can say that Section 185 framed in such a way to safeguard the interest of shareholders by imposing some prohibition in respect of loan or guarantee or security given by Company while on the other side it is also providing some relaxation and exemptions for ease of doing business.

Disclaimer: The information given in this document has been made on the basis of the provisions stated in the Companies Act, 2013. It is based on the analysis and interpretation of applicable laws as on date. The information in this document is for general informational purposes only and is not a legal advice or a legal opinion. You should seek the advice of legal counsel of your choice before acting upon any of the information in this document. Under no circumstances whatsoever, we are not responsible for any loss, claim, liability, damage(s) resulting from the use, omission or inability to use the information provided in the document.

Author Bio

Qualification: CS
Company: RLABS ENTERPRISE SERVICES LIMITED
Location: HYDERABAD, Telangana, IN
Member Since: 02 Mar 2020 | Total Posts: 2

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3 Comments

  1. PALASH says:

    Please tell, whether these resolution have to passed every year in case of private limited companies. If they have passed in the previous year, does it have to passed in the next coming year as well (amount of limit not increasing)

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