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Loan to director and section 185

CS Manohar Mishra 
on 06 November 2015

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The word “Loan” is nowhere defined under the Companies Act, 2013. In common parlance it means giving certain sum of money, to a person or body corporate, for a certain period of time at a Interest rate and on upon the request of the borrower.

Section 185 of the Companies Act, 2013: Pursuant to the proviso of this section no company, whether public or private, can advance any loan, or give any guarantee or provide any security in connection with any loan taken by him or such other person to any of its directors or to any other person in whom the director is interested.

Meaning of the term “to any other person in whom the director is interested”

a. any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;

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

c. any private company of which any such director is a director or member;

d. 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

e. 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.

Exception to section 185:

Provision Before stimulation of The Companies Amendment Act, 2015 and Exemption to private companies notification dated June 05, 2015.

a. 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 all its employees; or
  2. Pursuant to any scheme approved by the members by a special resolution; or

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

After Stimulation of The Companies Amendment Act, 2015

After the clause b (mentioned above), the following two clauses has been inserted by the Ministry of Corporate affairs (MCA):

“(c) any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or

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

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

After Issuance of Exemption to private companies Notification by MCA dated 05.06.2015

Now A private Company can advance any loan, or give any guarantee or provide any security to any of its directors or to any other person in whom the director is interested if its satisfies all the conditions mentioned below:

a. All the shareholders of the Private Company should be an Individuals i.e. no other body corporate has invested any sum of money in the share capital of the granting company;

b. If the private company has borrowed any sum of money from any banks. Financial Institution or any other body corporate less than twice (200%) of its paid up share capital or Rs. 50 crore, whichever is lower, and

c. No default has been made by the Company (granting) at the time of giving loan pursuant to this section (185).

Penal Provision: On Company- Minimum Rs. 5,00,000/- and Maximum Rs. 25,00,000/-

On the director or 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- 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.


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