CS Monika Jain

New Company law puts a complete prohibition on grant of loans to Directors and persons in which such directors are interested except a few exceptions. Further the section is applicable on all types of companies, be private or public. Section 185 prohibits the granting of loan or giving of guarantee or providing any security in connection with any loan taken by the director or such other person in which such Director is interested. No special privilege is granted to the private companies in this matter. Thus, a Company cannot advance a loan to:

(a)  any of its director,

(b)  any director of  holding company

(c)  any partner or relative of any such director;

(d)  any firm in which any such director or relative is a partner;

(e)  any private company of which any such director is a director or member;

(f)   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

(g)  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.

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Exemptions

The above restrictions are not applicable to giving any loan to the Managing or Whole-time Director:–

(i) as a part of the conditions of service extended by the company to all its employees;

(ii) pursuant to any scheme approved by members vide special resolution.

Further, the Companies which provides loans in the ordinary course of its business and interest in respect of such loans is charged at a rate not less than Bank rate declared by RBI are also exempt from the provisions of section 185.

PENALTIES

On Lending Company

In case of contravention of this section, the Lending Company shall be punishable with a minimum fine of Rs.5 lacs but which may extend to Rs.25 lacs;

On Recipient Director/ Entity

In case of contravention of this section, the recipient Director or other entity shall be punishable with imprisonment which may extend to six months or with a minimum fine of Rs.5 lacs but which may extend to Rs.25 lacs, or with both.

CONCLUSION

Drastic changes have been introduced by the Companies Act, 2013 with respect to Loan to Directors. A complete new regime has taken place. Earlier the prohibition was only on public companies and their subsidiaries, private companies were fully exempt but the new regime has embraced the private companies also in its ambit. The exemption is given only to the companies whose primary business is lending of money.

Further, earlier the public companies and their subsidiaries were able to grant loan to their directors with the Central Government approval. In the new Act, there is no such provision of Central Government approval. Meaning thereby all the doors have been closed by the government for grant of loans to directors and the persons in which he is interested.

The said change is introduced to discontinue the misappropriation of shareholder’s money by the Directors. The new law is anticipated to bring the better governance & transparency in the affairs of the Companies.

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Category : Company Law (3438)
Type : Articles (14591)
Tags : Companies Act (1906) Companies Act 2013 (1678)

0 responses to “Loan to Directors – Section 185”

  1. Devendra A. Mehta says:

    Dear friends,

    The provisions of any Act should not be read in isolation but should be read in totality keeping in view the scheme of the Act.The relevant provisions of the Companies Act, 2013 which are related to acceptance of loan/deposits and granting of loans/deposits in case of companies are Sec.185, 186, 73 and rules relating to acceptance of deposits.A private company does not have access to public funds and therefore, it organises funds for running its business from directors, shareholders, relatives of directors and shareholders and other group concerns. If all the provisions are read in totality, it would be quite apparent that a private company cannot accept loans from its shareholders, sister concerns etc. Similarly, it cannot give loans to its sister concerns. These provisions have put undesirable and impractical restriction on private companies in organising funds and it is impossible for private companies to do business without violating these provisions.

    One of my friend has referred to Satyam Scam. He should know that Satyam was a public company and not a private one. If its directors have swindled public money, there are laws to deal with it. For one case, the legislature cannot paint the entire corporate world as scamster. One cannot use atom bombs to kill an ant. It should be kept in mind that in case of private companies, in more than 90% of the cases, the share-holders who are owners and the directors belong to the same family. Therefore, the legislature concern that directors misappropriate shareholders funds is baseless as one cannot swindle himself.
    what is the use of corporate governance, when corporate world dies due to impractical and foolish restrictions.

    All my professional colleagues should note that the new Act was justified to the general public by the government was blowing trumpet over CSR. Surprisingly, under the Companies Act, 2013, the expenditure on CSR is not compulsory and there is no penal provisions if a company does not incur CSR expenses. It has to given only a note in diretors’s report. What more is required to open your eyes to hypocrisy and misrepresentation of the government ! This Act has delegated most of the powers to the bureaucrats and it is our day to day experience in life that how these powers are misused by them to harass and fill up their own coffers. In fact, the Companies Act, 2013 is one of the worst piece of legislation enacted in India as against a well thought and judiciously drafted Companies Act, 1956 and only the God can save the corporate world from complete chaos and collapse due to such ill conceived and draconian provisions of the new Act.

    Devendra A. Mehta

  2. Gyati Gupta says:

    To,
    Devendra A. Mehta

    I Think you have not interpreted the essence of this section correctly.
    The ban is not on accepting loans from the directors but on granting loans to directors by the company

  3. CA JAI says:

    i completely agree with the author.

    said provisions brought by the government for the better governance & transparency in the affairs of the Companies.

  4. Deepak Challam says:

    Completely agree with Mr. Mehta.

    Application of these ridiculous provisions to a small private limited company with shareholders within the family (for example in my case a father-son concern) will only make it impossible to adjust cash flows year on year. There must be some criteria of public shareholding for application of such draconian provisions.

    All in all the provision will only as Mr. Mehta puts it, “open new avenues of corruption for an already corrupt government machinery”. Couldn’t have put it better.

  5. Monika Jain says:

    Dear Mr. Devendra,

    Thanks for your comments. First of all I would like to clarify that the article is on the topic of Loan to Directors and not on Loan from Directors. Secondly how the new provisions relating to the Loan to Directors would kill the private companies and promote corruption are out of the reach of my understanding. Thirdly, you must be aware about the Satyam Scam, where the shareholders funds were misappropriated by the Directors.

  6. Devendra A. Mehta says:

    I strongly disagree with the view of the author that ‘The said change is introduced to discontinue the misappropriation of shareholder’s money by the Directors. The new law is anticipated to bring the better governance & transparency in the affairs of the Companies.’ for the following reasons:

    (a) A private company which does not have access to public funds cannot carry on its business without taking loans from share-holders, directors and their relatives,
    (b) The new provision will make it impossible for private enterprise to carry on business in India
    (c) It will open new avenues of corruption for an already corrupt government machinery
    (d) There were hardly any instances of squandering of share-holders’ funds by the companies because owners will not misappropriate their own money.
    (e) It will not bring better governance but kill the private companies in India.

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