December 17, 2021

There has been a time in our lives when we have sought for a loan. The directors are no different, they would have their requirements and they would look for loans. But, have you wondered how the procedure of giving a loan to director under section 185 of Companies Act 2013 work? No, don’t worry, we have written it down for you. Read on.

According to this Section.

  1. No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or the other person in whom director is interested.

The Expression “to any other person in whom director is interested” means –

  1. Any director of the Lending company, or of a company which is its holding company or any partner or relative of any such director

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

  3. Any private company of which any such director is a director or member

  4. Any body corporate at a general meeting of which not less than twenty five percent of the total voting power may be exercised or controlled by any such director, or by two or more such directors together or

  5. Any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directors or instructions of board, or of any director or directors, of the lending company

The above restriction does not apply in the following circumstances:

  1. The giving of any loan to a managing or whole time director

  1. As a part of the conditions of service extended by the company to its employees

  2. Pursuant to any scheme approved by the members by a special resolution or

  1. 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 the respect of such loans as interest is charged at the rate not less than the bank rate declared by the Reserve Bank of India.

  2. Any loan made by a holding company to its wholly owned subsidiary company or any guarantees given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company or

  3. Any guarantee given or security provided by a holding company in respect of any loan made by any bank or financial institution to its subsidiary company.

Provided that the loans made under clauses (c) and (d) are utilized by the subsidiary company for its principal business activities.

Penalty for contravention of provisions of section 185

  1. On Company   :  Minimum – 5 lakhs and  Maximum – 25 lakhs

  2. On defaulting director and 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.

Imprisonment : Maximum 6 months or

Fine : Minimum – 5 Lakhs and Maximum – 25 Lakhs or Both Imprisonment and Fine.

Vide notification G.S.R 464(E) dated 5th June 2015, section 185

  1. Shall not apply to the Nidhis, provided the loan is given to a director or his relative in their capacity as member and such transaction is disclosed in the annual accounts by a note

  2. Shall not apply to a private company

  1. In whose share capital no other body corporate has invested any money

  2. If the borrowings of such company from the banks or financial institutions or any body corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower and

  3. Such company has no default in repayment of such borrowings subsisting at the time of making transaction under this section.

  1. Shall not apply to Government company in case such company obtains approval of the Ministry or  department  of central government which is administratively In charge of the company, or, as the case may be, the state government before making any loan or giving any guarantee or providing any security under the section.

We hope this article was helpful enough for you to understand the provisions under Sec 185. Do you have more queries? Get in touch with us.

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