The Companies Act, 2013, along with its rules, governs the functioning of companies—big or small—ensuring they operate within the framework of the law. When it comes to granting loans, several legal provisions must be considered. One of the most significant among them is Section 185, titled “Loan to Directors, etc.” What makes this section noteworthy is the “etc.”—a seemingly small word that greatly widens the scope beyond just loans to directors.
Sub section 1 is a negative section, which restricts the company from advancing loan, giving any guarantee or providing any security in connection with any loan to
1.Any director of the company or of its holding company
2. Any partner or relative of such director
3. Any firm in which director or his relative is a partner
Sub section 2 allows the company to advance loan or give any guarantee or provide any security in connection with any loan to any person in whom director of the company is interested* but only if:
1.A special resolution is passed by the shareholders in a general meeting.
2. The loan is used by the borrowing company for its principal business activities.
So, who are these “persons in whom the director is interested”?
1. A private company where the director is a director or member.
2. Anybody corporate where at least 25% of the voting power is held by such director(s).
3. A body corporate whose Board of Directors, MD, or manager is accustomed to act under the instructions of the director(s) of the lending company
Lastly, the section outlines situations where the above restrictions do not apply.
1. Loans given to a Managing Director or Whole-time Director, as part of the conditions of service or as approved by shareholders.
2. Loans extended by the company in the ordinary course of business, where lending is a principal business (e.g., NBFCs).
3. Loans by a holding company to its wholly owned subsidiary.
4. Guarantees or securities provided by a holding company for loans taken by its subsidiary from banks or financial institutions.
To sum up, Section 185 of the Companies Act, 2013 goes beyond just regulating loans to directors—it encompasses a broader spectrum of transactions involving individuals and entities connected to them. The core objective of this provision is to safeguard the company’s resources from being misused for the personal gain of insiders, ensuring transparency and integrity in corporate dealings.
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Author Bio
the above write up is good enough for guidance of students as well as professionals.
query:
what will happen when advance is granted to any director against salary/expenses or any security or guarantee provided for his loan borrowed from bank.