MCA vide its notification dated 7th May 2018 notified the Sections 61 of the Companies (Amendment) Act, 2017, through which Section 185 has been amended and reproduced as follows:

1. Loan to Director or firm in which he is interested-Absolutely Prohibited

Pursuant to section 185(1), no company shall advance any loan to or give any guarantee or provide any security in connection with any loan taken by,—

> Any director/its partner/its relative or director of its holding company

Any firm in which such director or director’s relative is a partner.

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2. Loan to any person in whom any of the director of the Company is interested-Allowed

Pursuant to section 185(2), A company may advance any loan 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, subject to the condition that

(a) A Special Resolution required,

Explanatory statement attach to the notice for the relevant general meeting shall disclose the full particulars of the loans/guarantee/ security provided and the purpose for which the same is proposed to be utilised by the recipient and any other relevant fact; and

(b) the loans are utilised by the borrowing company for its principal business activities.

Explanation.—for the expression “any person means-

(a) any private company of which any such director is a director or member;

(b) any body corporate in which he is holding twenty-five per cent. or more of the total voting power; or

(c) any body corporate, in which he is a shawdow director;

3. Loan to director or any person in which he is interested-special cases

Pursuant to section 185(3) and sub-section 1 & 2 not applicable,

– company can give the loan to its Managing Director/Whole-Time-Director as a part of the conditions of service extended by the company to all its employees or pursuant to any scheme approved by the members by a special resolution;

– a company providing such loans/guarantee/security in the ordinary course of its business;

– any loans/guarantee/security made by a holding company to its wholly owned subsidiary company and such loans/guarantee/security  are utilised by the subsidiary company for its principal business activities.(also special resolution is not required under section 186(3))

– any guarantee/ security made by a holding company in respect of loan made by any bank or financial institution to its subsidiary company and are utilised by the subsidiary company for its principal business activities.

4. Penalty For the Contravention of Whole Section 185

Who will be liable for contravention Fine/Imprisonment
For lending company Minimum Fine: Rs. 5 lac

Maximum Fine: Rs. 25 lac

Every officer in default Maximum imprisonment: 6 Months or

Minimum Fine: Rs. 5 Lac

Maximum Fine: Rs. 25 Lac

the director or the other person to whom any loans/guarantee/security made Maximum imprisonment: 6 Months or

Minimum Fine: Rs. 5 Lac

Maximum Fine: Rs. 25 Lac

With both

5. Compliance of Section 186 in respect of loans/guarantee/security made by company to another company

1. Pursuant to section 186(3), Special resolution required if loans/guarantee/security made by company exceeding sixty per cent. of its paid-up share capital, free reserves and securities premium account or one hundred per cent. of its free reserves and securities premium account, whichever is more.

2. No loan/guarantee/security shall given by the company unless the resolution passed at a board meeting unanimously and the prior approval of the PFI concerned where any term loan is subsisting, is obtained:

3. No loan shall be given under this section at a rate of interest lower than the prevailing yield of one year, three year, five year or ten year Government Security closest to the tenor of the loan.

4. No company which is in default in the repayment of any deposits accepted before or after the commencement of this Act or in payment of interest thereon, shall made any loan/ guarantee/security till such default is subsisting.

5. Every company which has made any loan/guarantee/security shall keep a register in MBP-2.

(Author can be reached at varsha.aggarwal0@gmail.com or at Ph: 9971647458)

Disclaimer: The entire contents of this article are solely for information purpose and have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. It doesn’t constitute professional advice or a formal recommendation. The author has undertaken utmost care to disseminate the true and correct view and doesn’t accept liability for any errors or omissions. You are kindly requested to verify & confirm the updates from the genuine sources before acting on any of the information’s provided herein above.

Author Bio

Name: CS Varsha
Qualification: CS
Company: V AGGARWAL & CO.
Location: Delhi, New Delhi, IN
Member Since: 27 Sep 2018 | Total Posts: 3

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3 responses to “Loan to Director and Other Person in Which he is Interested”

  1. kamal Mall says:

    Dear Varsha ji

    I think there are some exceptions also, like If all shareholder is non corporate then a company can give loan to interested person. Pls clear,

    • CS Varsha Aggarwal says:

      Kamal Ji,

      A Private Company can give loan to directors or entities in which director is interested, subject to following conditions:

      1) there is non corporate shareholders in such private company;
      2) the borrowings of such private company from banks/Financial Institutions/any body corporate is less than twice of its paid up share capital or 50 crore rupees whichever is lower and
      3) such company has no default in repayment of such subsisting borrowings at the time of making transactions u/s 185.

      as per the MCA notification dated 5th June 2018 i.e. exemptions given to the private companies only.

    • CS Varsha Aggarwal says:

      Kamal Ji,

      Kindly read the notification date as 5th June 2015 instead of 5th June 2018.

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