Imagine you have a lemonade stand and you have some friends helping you run it. Section 185 of the Companies Act is like a rule book that tells grown-ups who run big lemonade stands (called companies) what they need to do if they want to lend money or give money to help another company. This helps to make sure that everyone is playing fair and being safe with their money.
Section 185 of the Companies Act, 2013: A Detailed Overview – Explained Like never before
The Companies Act 2013 is a comprehensive piece of legislation that governs the incorporation, management, and winding up of companies in India. One of the key provisions of this act is Section 185, which deals with the lending of money by companies.
The purpose of Section 185 is to prevent companies from engaging in practices that could potentially harm the interests of the company or its shareholders. The provision restricts a company from lending money to its directors or to any other company or firm in which any of its directors are interested, unless certain conditions are met.
Conditions for Lending Money under Section 185
Under Section 185, a company can only lend money to its directors or other companies if the loan is approved by a resolution passed by its board of directors and by a special resolution of its shareholders. The resolution must specify the purpose of the loan, the amount, the terms and conditions of repayment, and the security, if any, for the loan.
Additionally, Section 185 sets limits on the amount of money that a company can lend or advance. The maximum amount that a company can lend is 60% of its paid-up share capital, free reserves, and securities premium account.
Penalties for Violating Section 185
Any loan or advance made in violation of the provisions of Section 185 is deemed to be void and the company and every person who is a party to the loan or advance will be liable to repay the amount with interest. 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.
In the event of a default, 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
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.
Case Study of Kingfisher:
The Kingfisher case is significant in relation to the Companies Act 2013 because it highlights the importance of responsible borrowing and loan repayment by companies. Section 185 of the Companies Act 2013 lays down rules for companies in relation to loans, guarantees, and investments made by companies to its directors, their relatives, and other specified persons.
The Kingfisher case is a reminder that companies must follow the provisions of the Companies Act 2013, including Section 185, to ensure that their borrowing and loan repayment activities are in compliance with the law. Failure to do so can lead to legal consequences and damage to the reputation of the company and its directors.
In summary, the Kingfisher case is significant in the context of the Companies Act 2013 because it highlights the need for companies to follow the provisions of the act and ensure responsible borrowing and loan repayment practices.
Conclusion
In conclusion, Section 185 of the Companies Act 2013 is an important provision that aims to ensure that companies act in a responsible and transparent manner when it comes to transactions involving loans and advances. The provision helps to prevent potential abuses of power by directors and protects the interests of the company and its shareholders. Companies must ensure that they comply with the provisions of Section 185 and follow the necessary procedures before lending money to its directors or other companies.
Author Bio
Sir kindly clear that if company r give loan to any business entity and where director himself, or his relative, or his partner does not have any substantially interest
Whether it i valid transaction?
Yes Sir.
A company can give loans, guarantee and acquire securities of up to 60% of its paid-up share capital, securities premium account and free reserves or 100% its securities premium account and free reserves, whichever is more. The provisions regarding the same are governed under Section 186 of Companies Act, 2013. The transactions are called as Inter Corporate Loans.
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