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:
The term “any person in whom any of the director of the company is interested” means—
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.
Section 185 will be not applicable to private company after fulfilment of following conditions:
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.
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.