Legal Provision:-
Section No. 185:
1. No company shall, directly or indirectly, give advance any loan, including any loan represented by a book debts to or give any guarantee or provide any security in connection with any loan taken by-
- Any director of company or of a company which is its holding company or any partner or relative of any such director;
- Any firm in which any such director or relative is a partner.
(Explanation: A company cannot give directly or indirectly advance any loan, including any loan represented by a book debts, give any guarantee or provide any security in connection with any loan to:
1. To its director;
2. To Relative of director;
3. To the director of its holding company;
4. To the partner of firm in which director is the partner;
5. To firm in which any such director is a partner;
6. To firm in which the relative of any such director is partner;)
2. A company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the director of the company is interested, subject to the condition that:
3. A special resolution is passed by the company in general meeting (approval of at least 75% of the members is required).;
provided that the explanatory statement to the notice for the relevant general meeting shall disclose the full particular of the loans given, guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilized by the recipient of the loan or guarantee or security and any other relevant fact; and
The loans are utilized by the borrowing company solely for its principal business activities.
(Explanation: For the purposes of sub section 2, the expression any person in whom any of the director of the company is interested-
i. Any private company of which any such director is director or member;
ii. Any body corporate at a general meeting of which not less than 25% of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or
iii. any body corporate the board of directors, managing director or manager where of is accustomed to act in accordance with directions or instructions of the board, or of any director or directors, of the lending company.)
Form Filling Requirement:
The Company shall file form MGT 14 within 30 days of passing of Special Resolution to intimate the same to concerned ROC.
4. Nothing contained in sub-sections 1 and 2 apply to:
1. The giving of any loan to managing director or whole time director:
2. as a part of the conditions of service extended by the company to all its employees; or
3. pursuant to any scheme approved by the members by a special resolution
4. 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 is respect of such loans an interest is charged at a rate not less than the rate of prevailing yield of 1 year, 3 year, 5 year or 10 year government security closest to the tenor of the loan;
5. 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 which is utilized by the subsidiary company for its principal business activity; or
6. 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 provided that the loans made are utilized by the subsidiary company for its principal business activity.
(Explanation: Sub section-3 provided exemption from the Sub-section 1 and 2 , to company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security, but subject to some condition :
i. Loan to managing director or whole time director as a part of the conditions of service extended by the company to all its employees of the company.
ii. 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 is respect of such loans an interest is charged
iii. Any loan made by a holding company to its wholly owned subsidiary company which is utilized by the subsidiary company for its principal business activity.
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 which is utilized by the subsidiary company for its principal business activity.)
1. Any non-compliance of this section or any sub-section, company and every officer of the company shall be punishing:
2. The company shall be punishable with fine which shall not be less than five lakh rupees but which may extend o twenty-five lakh rupees;
3. Every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six month or with fine which shall not be less than five lakh rupees but which may extend o twenty-five lakh rupees; and
4. 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 month or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.
Applicability:
This section applicable on both public company and private limited company.
Exemption to private limited company:
Section 185 shall not be apply to a private limited company, but provided the following conditions are satisfied:
i. No other body corporate has invested any money in the share capital of that private company;
ii. The borrowing of such a company from banks or financial institutions or anybody corporate is less than twice of its paid-up capital or fifty crore rupees, whichever is lower: and
iii. Such a company has no default in repayment of such borrowing subsisting at the time of making transactions under section 185.
Disclaimer: In no event I shall be liable for any direct, indirect, incidental damages resulting from, arising out of or in connection with the use of the information.
Author Bio
