Loan To And From Directors Section 185 | Legal Provisions

Section 185 of the Companies Act, 2013 states that no company is allowed to make, advance any loan, that includes the loan to constituted by a book debt to, or provide any guarantee or give any security relatedany loan taken by,—

1. Any director of company, or of a company that is its holding company or any partner or relative of director; or

2. Any firm in which the director or relative is a partner.

A company may perform any of these transactions with any person in whom any of the director of the company is interested, but after satisfying following condition:

• A special resolution shall be passed in the general meeting, and shall also provide complete details of loan along with its use shall be specified in the explanatory statement attached with the notice and.
• Theloans shall be used by the borrowing company for its main business activities.

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

• A director or member of such private company where the person is director;
• A director in 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, or by two or more such directors; or
• Any body corporate, the Board of directors, managing director or manager, where they areaccustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the creditor company.

 EXCEPTIONS to Section 185 of Companies Act, 2013

1. If special resolution is passed by members in connection with the loan that is given to managing or whole time director as part of the conditions of service.

2. Any loan made, guarantee given or security provided by a holding company to its wholly owned subsidiary company, provided it is utilized by the subsidiary company for its main business activities.

NON APPLICATION OF SECTION 185 of Companies Act, 2013

Section 185 will be not applicable to private company after fulfilment of following conditions:

• If no body corporate has invested in share capital of those companies.
• If they have borrowings from banks or any financial institutions is less than the double of its paid up share capital or fifty crore rupees, whichever is lower and
• Such a company has not made any default in repayment of such borrowings at the time of making transactions under this section.

Section 185 does not apply to Nidhi Company if the loan is given to a director or his relative in their capacity as member and such transaction is disclosed in the annual accounts by a note.

Section 185 also does  not apply to Government Company.

PENALTY for violation of provisions of Section 185 of Companies Act, 2013

If anyone contravenes of provisions of this section will be liable for punishment with fine which shall not be less than five lakh rupees but which may increase to twenty five lakh rupees.

The directoror to whom loan or advance is given or guarantee or security is given or provided shall be imprisonment which may extend to six months or with fine mentioned above or with both.