In this article we are going to discuss provisions of Section 185 of Companies Act 2013, under this article we are undertaking question when a company can give loan to its director and what are the conditions to give such loans.
This section is applicable to both Private as well as Public companies.
The section states that:
Section 185(1)
No Company SHALL directly or indirectly give any loan/loan represented by book debt/guarantee/provide any security in connection with any loan taken by following:
1. Director of company/holding company/partner or relative
2. Any firm in which any such director/relative is a partner (as per point no 1)
Section 185(2)
A company MAY give any loan/loan represented by book debt/guarantee/provide any security in connection with any loan taken *any loan taken by any person in whom any of the director of the company is interested Subject to following conditions
1. A Special Resolution is passed in general meeting
Provided
Explanatory statement shall disclose following details:
1. full particulars of loans given, or guarantee given or security provided
2. purpose of loans given, or guarantee given or security provided
3. any other relevant facts
AND
2. loans are utilised by the borrowing company for its principal business activities
* meaning of any loan taken by any person in whom any of the director of the company is interested
1. any private company-such director-director or member
2. any body corporate-of which 25% voting rights-controlled by-such director/2 or more such directors together
3. any body corporate-whose Board of Directors /Managing Director /manager-accustomed to act-directions/instructions- Board of Directors /any director of lending company
Section 185(3)
Sub section 1 and 2 not applicable (i.e. loan can be given) to following:
3. loan to MD/WTD:
Conditions
1. part of condition of service given to all employees
2. any scheme approved by special resolution
3. a company-ordinary course of business- provides loans or gives guarantees/securities
Conditions
charge interest at prevailing yield of 1/3/5/10 years of govt securities closest to tenor of loan
(a) loan given by holding co-wholly owned subsidiary company
(b) guarantee given or security provided by holding company for its wholly owned subsidiary company
(c) any guarantee given or security provided-by holding company-loan made by bank/financial institution-to subsidiary company
Section 185(4)
Contravention of the provisions of this section
1. Company-fine-Rs. 5,00,000/- to Rs. 25,00,000/-
2. Officer in default- imprisonment-6 months/fine- Rs. 5,00,000/- Rs. 25,00,000/-
3. Director or any other person- loan is advanced or guarantee or security is given or provided- imprisonment-6 months/fine- Rs. 5,00,000/- Rs. 25,00,000/- or BOTH
Conclusion:
After going through above provisions of section 185 of the act we can clearly understand that loan can be provided to a director or any person in whom any of directors is interested by following certain conditions as stated under section 185(2). As per section 185(3) it is stated that when an amount which is transferred to a director is not to be treated as Loan to director.
Author Bio
YOUR ARTICLE ON THE SUBJECT OF LOAN FROM A DIRECTOR TO THE PRIVATE LIMITED COMPANY, IN WHICH HE / SHE IS ONE OF THE DIRECTORS, WILL BE ALSO INTERESTING.