Sec. 185 of Companies Act, 2013 – Loan to Directors etc

Sec. 185 of Companies Act, 2013, r. w. Companies Amendment Act, 2017 – Loan to Directors etc

4 parts under Section –

• Strict Prohibition
• Relaxation
• Exemption
• Penalties

Sec. 185(1) – Strict Prohibition/Restriction

Company cannot

a) Advance loan directly or indirectly

b) Advance any loan represented by book debt

c) Give guarantee or provide security in connection to any loan taken

To –

a) Director

b) Director of Holding Co.

c) Partner or Relative of any Director

d) Firm in which Director/Relative is Partner

Sec. 185(2) – Relaxation

Loan to any interested person of a Director –

Company may advance any loan including any loan represented by Book debt or give guarantee or provide any security to any persons in whom director is interested, subject to following –

a) SR,

b) Funds are utilized for its Principal Business Activities

List of persons in whom director is interested –

a) Any Private Company of which any Director of lending Company is director/member

b) Any Body Corporate at whose GM minimum 25% of total voting power may be exercised/controlled by any Director of Holding Company

c) Any Body Corporate/ MD/Board/Manager is accustom to act in accordance with directions/ instructions of the Board/Director of lending Company

Sec. 185(3) – Exemption/Exceptions to Restrictions

Company can advance L/G/S to –

a) MD/WTD as a part of the conditions of service extended to all the employees of the Company as well as approved by way of SR,

b) Company provide Loan/Guarantee/Security in connection to loan in Ordinary Course of Business,

c) Any loan/ guarantee/ security in connection to loan is given by Holding Co. to WOS and same is utilized for Business Activity

d) Guarantee or security in connection to loan provided by Holding Company to Subsidiary Company and subsidiary must utilize for Business Activity

Sec. 185(4) – Penal Provisions

a) Company –
Fine – Min. ₹ 500000 – Max. ₹ 2500000

b) Officer in Default –
Fine ‐ Min. ₹ 500000 – Max. ₹ 2500000 or
Imprisonment – Min. 6 months

c) Director or any other person related to the director, to whom any loan is advanced or
guarantee or security ‐
Fine ‐ Min. ₹ 500000 – Max. ₹ 2500000 or
Imprisonment – Min. 6 months or
Both