Loan to Managing Director/Whole–time Director by the Company (Public and Private Company) Under Companies Act, 2013. 

Background:

Section 185(1) of the Companies Act,2013

No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by,—

(a) any director of company, or of a company which is its holding company or any partner or relative of any such director; or

(b) any firm in which any such director or relative is a partner.

Exemption under Section 185(3):

Nothing contained in sub-sections (1) and (2) shall apply to—

(a) The giving of any loan to a managing or whole-time director—

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

(ii) Pursuant to any scheme approved by the members by a special resolution.

With the clarification above, we can say that a company (Whether Public / Private Company) can give loan to its Managing Director/ Whole –time Director on the Conditions mentioned u/s 185(3)(a)(i)(ii)

Section 185(3)(a)(i): As a part of the conditions of service extended by the company to all its employees:

Clarification on consideration of MD/WTD as employee of the Company:

Sec 2(94): Meaning of the term ‘whole-time director’ “Whole-time Director” has been defined to include a director in the whole-time employment of the company. The definition of ‘whole-time director’ is an inclusive definition. A whole-time director refers to a director who has been in employment of the company on a fulltime basis and is also entitled to receive remuneration.

Section 2(54): MD means individual entrusted with the power of Administrative acts of routine nature.

From above mentioned definition one can opine that MD/WTD is the employees of the company.

As per Section 185(3)(a)(i): it should be mentioned in Service agreement of MD/WTD,in absence of such clause in the service agreement then company can amend the Service agreement by passing of Board Resolution.

Section 185(3)(a)(ii): Pursuant to any scheme approved by the members by a special resolution:

 As per the above provision, if a member of the Company has approved any scheme to give loan to MD/WTD by passing the Special resolution, then Company can give loan to MD/WTD.

Conclusion:

Therefore as per  Section 185(3) of Companies Act,2013, A Company (Public/ Private can give loan to Managing Director/ Whole Time Director by following condition mentioned in Section 185(3)(a)(i)&(ii).

Notes:

  • Companies can give a loan to their MD/WTD without any restriction under Section 185.
  • Charge interest on such loan is not mandatory(as per the Companies (Amendment)Act,2017 w.e.f. May 07,2017,Explanation in Section 186 i.e for the purpose of this sub-section , the word “person” does not include any include any individual who is in the employment of the Company).
  • Neither there is any limit on the amount of loan a company can give to its Managing Director or Whole –Time Director for such loan purpose.

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Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION.

Author- CS Aakansha Negi and can be contacted at csaakanshanegi@gmail.com

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