CONCEPTUAL ANALYSIS SERIES – I

185. Loan to Directors, etc.

(1) 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.

(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—:

(a) a special resolution is passed by the company in general meeting:

Provided that the explanatory statement to the notice for the relevant general meeting shall disclose the full particulars of the loans given, or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security and any other relevant fact; and

(b) the loans are utilised by the borrowing company for its principal business activities.

Explanation.-For the purposes of this sub-section, the expression “any person in whom any of the director of the company is interested” means—:

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

(b) any body corporate at a general meeting of which not less than twenty-five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such Directors, together; or

(c)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.

APPLICABILITY OF SECTION 185 TO PUBLIC COMPANIES

S. No. Can a Public company directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security to Yes/No
1 Director of the Company No
2 Director of the Holding Company No
3 Partner of the Director No
4 Relative of the Director No
5 Firm in which Director is a partner No
6 Firm in which Relative of Director is a partner No
7 Public Company in which any of the director of the Lending company is also director or shareholder No
8 Private Company in which any of the director of the Lending company is also director or shareholder *Yes
9 Public/Private Company in which any director/directors of the Lending company is holding at least 25% Voting Power. *Yes
10 Public/Private Company in which Board of Directors, managing director or manager accustomed to act in accordance with the directions of director directors of the Lending company *Yes
* Substituted by the Companies (Amendment) Act, 2017.
Subject to the condition that—:

(a) a special resolution is passed by the company in general meeting:

Provided that the explanatory statement to the notice for the relevant general meeting shall disclose the full particulars of the loans given, or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security and any other relevant fact; and

(b) the loans are utilised by the borrowing company for its principal business activities.

APPLICABILITY OF SECTION 185 TO PRIVATE COMPANIES

S. No. Can a Private company directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security to Yes/No
1 Director of the Company *Yes
2 Director of the Holding Company *Yes
3 Partner of the Director *Yes
4 Relative of the Director *Yes
5 Firm in which Director is a partner *Yes
6 Firm in which Relative of Director is a partner *Yes
7 Public Company in which any of the director of the Lending company is also director or shareholder *Yes
8 Private Company in which any of the director of the Lending company is also director or shareholder *Yes
9 Public/Private Company in which any directordirectors of the Lending company is holding at least 25% Voting Power. *Yes
10 Public/Private Company in which Board of Directors,

managing director or manager accustomed to act in accordance with the directions of directordirectors of the Lending company

*Yes
*Notification dated 5th June, 2015

In case of private company – Section 185 shall not apply to a private company-

(a) in whose share capital no other body corporate has invested any money;

(b) Total Borrowing is less than twice of its paid up share capital or fifty crore rupees, whichever is lower.

(c) such a company has no default in repayment of such borrowings subsisting at the time of making transactions under this section.

(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; or

(b) 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 in respect of such loans an interest is charged at a rate not less than the rate of prevailing yield of one year, three years, five years or ten years Government security closest to the tenor of the loan; or

(c) 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; or

(d) 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 under clauses (c) and (d) are utilised by the subsidiary company for its principal business activities.]

EXEMPTION UNDER SECTION 185

S. No. Particulars
1 Loans to the Managing Director 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.

2 Loans in the Ordinary course of business, where Rate of Interest on such loans is not less than the rates as prescribed by RBI on government Securities.
3 Any loan made, guarantee given or security provided by a holding company to or in favour of its Subsidiary Company for its principal business activities.
4. Any guarantee given or security provided by a holding company in favour of its Subsidiary Company for its principal business activities.
5. After Notification dated 5th June, 2015, Section 185 shall not apply to a private company if such Company Fulfills 3 conditions as mentioned above.
6. Nidhi company – Section 185 shall not apply, provided the loan is given to a director or his relative in their capacity as members and such transaction is disclosed in the annual accounts by a note. – Notification dated 5th june, 2015.
7. Government Company if such Company obtains approval of the Ministry or Department of the Central Government.

(4) If any loan is advanced or a guarantee or security is given or provided or utilised in contravention of the provisions of this section,—:

(i) the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees;

(ii) every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees; and

(iii) 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 months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.]

PENALTY/PUNISHMENT FOR CONTRAVENTION UNDER SECTION 185

S. No. PARTICULARS PENALTY/PUNISHMENT
1. Company Not be less than five lakh rupees but which may extend to twenty-five lakh rupees;
2. Officers in Default i. imprisonment for a term which may extend to six months

ii. Not be less than five lakh rupees but which may extend to twenty-five lakh rupees;

3. Borrower i. imprisonment for a term which may extend to six months

ii. Not be less than five lakh rupees but which may extend to twenty-five lakh rupees;

Important Notes:

i. loan represented by a book debt means : Debt in the books of account of company in respect of goods sold or services provided on credit.

Source:

1. https://www.mca.gov.in/

2. https://www.mca.gov.in/content/mca/global/en/acts-rules/ebooks/acts.html?act=NTk2MQ==#Loan_to_Directors_etc

3. Companies (Amendment) Act, 2017

4. Exemptions to Private Companies U/s. 462 of CA 2013

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