LOAN TO DIRECTORS

SECTION 185: LOAN TO DIRECTORS

Section 185 of the Act contains provisions which impose restrictions on the loans, etc. being given to directors, etc. These provisions are stated below:

(i) Imposition of restrictions [Section 185 (1)]: A company (subject to exemptions stated in the Box given later) is not permitted, directly or indirectly, to advance any loan, including any loan represented by a book debt to, or to give any guarantee or provide any security in connection with any loan taken by,—

(a) any director of company, or of a company which is its holding company or any partner or relative of any such director; or

(b) any firm in which any such director or relative is a partner.

(ii) Relaxation from restrictions [Section 185 (2)]: Subject to the specified conditions, a company is permitted to:

. advance any loan including any loan represented by a book debt, or

. give any guarantee or provide any security in connection with any loan taken, by any person in whom any of the director of the company is interested.

The specified conditions to be followed are:

(a) a Special resolution is passed by the company in general meeting.

However, the explanatory statement to the notice for the relevant general meeting shall disclose;

> the full particulars of the loans given or guarantee given or security provided; and

> the purpose for which the loan or guarantee or security is proposed to be utilized by the recipient of the loan or guarantee or security and any other relevant fact;
 

(b) the loans are utilized by the borrowing company for its principal business activities.

Explanation: The expression "any person in whom any of the director of the company is interested" means—

(a) any private company of which any such director is a director or member;

(b) any body corporate at a general meeting of which not less than twenty-five per cent of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or

(c) any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.
 

(iii) Non-applicability of restrictions [Section 185 (3)]: In the following cases, restrictions stated in Section 185 (1) or specified conditions for relaxation of restrictions stated in Section 185 (2) shall not apply:

(a) where any loan is given to a managing or whole-time director—

(i) as a part of the conditions of service extended by the company to all its employees; or

(ii) pursuant to any such scheme which is approved by the members by a special resolution.

(b) where a company in the ordinary course of its business:

> provides loans or gives guarantees or securities for the due repayment of any loan; and

> in respect of such loans an interest is charged at a rate not less than the rate of prevailing yield of one year, three years, five years or ten years Government security closest to the tenor of the loan.

(c) (i) where any loan is made by a holding company to its wholly owned subsidiary company; or

(ii) where any guarantee is given or security is provided by a holding company in
respect of any loan made to its wholly owned subsidiary company.

(d) where any guarantee is given or security is provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company.

As a pre-condition, it must be ensured that the loans made under clauses (c) and (d) are utilized by the subsidiary company for its principal business activities.

(iv) Penalty for contravention: Penalty for contravention of the provisions of Section 185 (i.e. if any loan is advanced or a guarantee or security is given or utilized contravening the provisions of Section 185) shall be as under:

(a) Company: punishable with minimum fine of Rs. 5,00,000 and maximum fine of Rs. 25,00,000.

(b) Every defaulting officer: punishable with imprisonment up to six months or with minimum fine of Rs. 5,00,000 and maximum fine of Rs. 25,00,000.

(c) the director or the other person to whom any loan is advanced or guarantee or security is given in connection with any loan taken by him or the other person: punishable with imprisonment up to six months or with minimum fine of Rs. 5,00,000 and maximum fine of Rs. 25,00,000, or with both.

Exemptions
1. Section 185 shall not apply to Government company in case such company obtains approval of the Ministry or Department of the 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.

Note: The above exemption is applicable to a Government company if it has not committed a default in filing its financial statements under Section 137 or Annual Return under Section 92 with the Registrar. [Notification No. G.S.R. 463(E), dated 5” June 2015 as amended by Notification No. G.S.R. 582 (E), dated 13 June 2017.]

2. Section 185 shall not apply to a private company-
(a) In whose share capital no other body corporate has invested any money;
(b) 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
(c) Such company has no default in repayment of such borrowings subsisting at the time of making transactions under this section.

Note: The above exemption is applicable to a private company if it has not committed a default in filing its financial statements under Section 137 or Annual Return under Section 92 with the Registrar.

[Notification No. G.S.R 464(E), dated 5 June 2015 as amended by Notification No. G.S.R 583(E), dated 13 June 2017.]

3. Section 185 shall not apply to the Nidhis, provided the loan is given to a director or his relative in their capacity as members and such transaction is disclosed in the annual accounts by a note.
However, while complying with such exception, the Nidhis shall ensure that the interests of their shareholders are protected.

[Notification no. G.S.R. 465(E), dated 5" June 2015.]