Loan to directors under section 185 of the companies act 2013
This section of the article gives a brief insight on the applicability and prohibition, while providing loan to the director. It also includes the exemptions and penalties laid down before granting loans or giving security or guarantee in connection with any loan.
What does loan for a Director mean?
- Advance any loan; or
- Any loan represented by a book debt; or
- Give any guarantee; or
- Provide any security in connection with any loan taken.
Section 185 (1) of the Companies Act, 2013 provides that:
No company shall, directly or indirectly, advance any loan to any director of company, or of a company which is its holding company or any partner or relative of any such director; or any firm in which any such director or relative is a partner.
- In whose share capital no other body corporate has invested any money;
- If the borrowings of such a company from banks or financial institutions or anybody corporate is less than twice of its paid-up share capital or fifty crore rupees, whichever is lower; and
- Such a company has no default in repayment of such borrowings subsisting at the time of making transactions under this section.
- For a lending company the punishable fine is applicable which shall not be less than 5 lakhs but further can be extend up to 25 lakhs.
- For officer in default the punishment applies with imprisonment which may be extended up to 6 months or with fine which shall be less than 5 lakhs but further can be extend to 25 lakhs.
- For recipient director in default the punishment applies with imprisonment which may extend to 6 months or with fine which shall be less than 5 lakhs but further can be extend to 25 lakhs, or with both.
The gist of Section 185 of the Companies Act 2013:
Sec 185(1)–Prohibits providing loan/guarantee/security to certain individuals (Director of lending & holding company) and firms in which such Director/relative is Partner.
Sec 185(2) – Companies are allowed to provide loan/guarantee/security in connection with any loan taken by any person in whom any of the Directors of the company is interested subject to conditions i.e approval by passing special resolution and utilization of borrowed amount.
Sec 185(3) – Entities and individuals which are exempted from section 185(1) and section 185(2) such as holding and subsidiary companies, banking companies, etc.
Sec 185 (4) – Punishment for contravention of provisions of section 185.
Execution of Section 185 establishes a total ban on granting of loans to directors and other organizations and individuals affiliated with the Directors. These adjustments were introduced to keep an eye on the Directors of the Company’s depository character. This Section was updated in the Act to provide ease of doing business. Now Section 185 of the company’s act, 2013 permits the company and its officers to provide loan to Directors with liability and sufficient protections.