Section 185 of Companies Act

ANALYSIS OF SECTION 185 OF THE COMPANIES ACT, 2013

Section 185, Loans to Directors, etc. deals with some prohibitions, some relaxations and some exemptions relating to lending of loan and providing guarantee and security. It also deals with the penalty for contravention of the provisions of the section. The rationale behind this section, is to prevent:

1. Siphoning off of Public funds lent by Financial Institutions and Banks.

2. Public issue proceeds

3. Misuse by transferring funds to private businesses owned by the Director

4. Providing corporate guarantees and securities to financial institutions to secure personal gains for the Director

According to Section 185 of the Companies Act, 2013 read with the Companies (Amendment) Act,2017, Effective from 7th May 2018, a company shall not provide any loan, guarantee, or security-related to any loan taken by—

1. any director of the company, or

2. any director of a company which is its holding company or

3. any partner or relative of any such director mentioned above or

4. any firm in which any such director or relative is a partner

However, a company can give any loan, guarantee, or security-related to any loan taken to any person in whom any director of the company is interested, only after complying with the two conditions mentioned below:

• Passed a special resolution in a general meeting of the company, and
• The loans so taken must be utilized by the borrowing company for its principal business activities.

All the provisions mentioned above shall not apply to:

• giving of any loan to a managing or whole-time director—
• as a part of the conditions of service extended by the company to all its employees, or
• as per any scheme approved by passing a special resolution

Penal Provisions:

1. the company 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.]

Under the amended provisions, the ambit of the penalties has been largely widened and as a result, the obligations of every ‘officer’ of a company has been increased to ensure that all loans, securities and guarantees are in compliance with the provisions of the 2017 Act. This step creates a balance between the liberalisation of the regime under Section 185 and corporate governance as it imposes onerous responsibility on the management of the company to clearly distinguish the transactions entered into with persons in whom its directors are interested.