The companies Act, 2013 has a special provision for Loans to director covered under section 185 which seems to be a small section but there is more to the story. First of all, this section applies to Public as well as private companies regardless of their paid up capital. There are major amendment under The Companies (Amendment) Act, 2017 effective from 7th May, 2018, which I would be discuss wherever it is relevant.

Loan to Director

Section 185(1) states that company cannot give directly or indirectly, any loan which is to be recorded as book debt in the Books of accounts of company or any guarantee or providing any security in connection to any loan taken by any director of the company, any director of holding company or any partner or relative of director or any firm in which director or any of his relative is partner.

(Here any director covers additional, alternative, executive or non executive or any kind of director.)

Before the amendment, the section gives power to give loan to director/(s) if it is given under any other provision or section of Companies Act, 2013, but after amendment sub section(1) of section 185 prevails over any other provision of Companies Act, 2013.

Section 185(2) a company may give any loan which is to be recorded as book debt in the Books of accounts of company or any guarantee or providing any security in connection to any loan given to:

  • Any Private company in which any of lending company’s director, is 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;
  • 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.

Calculator with the word loan written in wooden block letters

After passing special resolution in the general meeting and loan to be utilised only for principal business activities of borrowing body corporate/ company.

Section 185(3) reads that if a company may give loan:-

(a) to its managing director or whole time director:-

  • if loan is 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

(b) a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the rate of prevailing yield of one year, three years, five years or ten years Government security closest to the tenor of the loan

(c)  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

(d) 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

Penal Provision:- Any loan, any security or any guarantee is given or provided or utilised in contravention of this section in that case the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees and the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.

Disclaimer: The above article is extract of provision of Loan to director under The Companies Act, 2013 and the interpretation is purely based on the existing information, any further amendments in provision may lead to change in its interpretation accordingly.

(The Author is Corporate Consultant and provides varied array of services including secretarial, financial, Intellectual property, start-ups, taxation, Audit, GST, Book keeping and other ancillary advisory service and can be contacted through email id:- triptishakyacs2017@gmail.com)

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One Comment

  1. IDL EXPLOSIVES LIMITED says:

    Understand from the article that pursuant to the amendment in Sec. 185 the exemption provided to PVT. Companies are done away with, which is quite understandable, can you please elaborate were it is mentioned or is it just an opinion.

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