Loan to Directors as per Companies Act 2013

LOAN TO DIRECTORS

SECTION 185 OF THE COMPANIES ACT 2013

Introduction: Section 185 of the Companies Act 2013 Specifically provides about the Provisions related to Loan to directors by the company. In this article we will understand about the provisions with their clear examples.

• SECTION 185(1)-No company shall directly or indirectly give loan represented by a book debt or give any guarantee or provide any security in connection with loan taken by
• Director of the company
• Director of holding company
• Partner of director
• Relative of director
• Firm in which director is partner
• Firm in which relative of director is a partner

Analysis of Section 185(1)-With a clear reading of section 185(1),we can interpret that this section puts direct prohibition for giving any loan to directors and above mention person and entity.

Here important to know the logic behind this :-

As shareholders gives money to company to run the business, so it is not convenient to provide the loan to directors for their own personal use. That’s why this section came into picture..

Key points of the section 185(1)-

1. Company cannot give loan to its directors.

Example:-Mr X. is director of company ABC Ltd., then ABC ltd. cannot give loan to Mr. X.

2. If director is having partnership firm ,then any partner of this firm cannot acquire loan from company.

Example: If Mr. X is having partnership firm names as ABC & Co. and MR.A,B,C are partners. Then XYZ ltd. Cannot give loan to Mr. A, B, C.

3. Company cannot give loan to the partnership firm in which director or his relative is a partner.

Example: XYZ Ltd. Cannot Give Loan to ABC & Co. as well.

Meaning of Relative: As per Section 2(77) of the companies Act 2013:-

1. Husband

2. Wife

3. Members of HUF

Such other person as may be prescribed: Following are prescribed:

• Father including Step father
• Mother including Step Mother
• Brother Including Step Brother
• Sister including Step Sister
• Son including step son
• Son’s Wife
• Daughter
• Daughter’s Husband.

Note:If relative of director is partner of partnership firm then other partners of this partnership firm can acquire loan from company.

If company shows the loan as book debt ,still it will be considered as loan.

SECTION 185(2):-A Company may give loan including loan represented by book debt or give guarantee or provide security in connection with loan taken by person in whom director is interested,by complying the following conditions:

• Special Resolution must be passed in the general meeting

However Explanatory statement of the notice must contain the disclosure about the full particulars of loan ,gurantee and security and the purpose of its utilisation by the recipient and any other relevant facts.

• The loan are utilized for the principal business activity by the borrowing company.

The expression “any person in whom any of the director of the company is interested” means—:

• Any private company in which such director is director or member
• Body corporate in which director is holding 25% or more voting power either singly or jointly.
• Body corporate in whose board of directors , MD or Mgr are accustomed to act as per the directions given by the director of lending company.

SECTION 185(3):Exemption to section 185(1) and 185(2)

• The loan can be given to MD and WTD if such facility is giving to other employees as well or if such scheme is approved by members in general meeting by passing Special resolution.
• When company is giving loan or give guarantee or provide security as an ordinary course of business interest rate charged should not be less than the interest rate of prevailing yield of one year, three years, five years or ten years government security closest to the tenure of the loan.
• If loan guarantee or security is provided by holding company to its wholly owned subsidiary but Wholly owned subsidiary should utilize this in its principal business activity.
• If 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, but subsidiary company should utilized this in its principal business activity.

EXEMPTIONS ARE GIVEN BY GOVERNMENT VIA NOTIFICATIONS,WHERE SECTION 185 DOES NOT APPLY:

• If Government company is giving loan
• If Nidhi company is giving loan to its directors provided they are also members
• Private company which satisfies following 3 conditions:

1. No body corporate is a shareholder of private company

2. if the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower; and

3. such a company has no default in repayment of such borrowings subsisting at the time of making transactions under this section

SECTION 185(4): Contravention of section 185

• Company-Fine of Rs 5 Lakh -25 lakh
• Officer in default- Fine of Rs 5 Lakh -25 lakh or imprisonment of 6 Months
• Director- Fine of Rs 5 Lakh -25 lakh or imprisonment of 6 Months