This section was commenced on 12 September 2013. It is form the old Section 295 of the Companies Act 1956
185. (1) Save as otherwise provided in this Act, 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 such other person:
Provided that nothing contained in this sub-section shall apply to—
(a) The giving of any loan 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 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.
Explanation.—for the purposes of this section, the expression “to any other person in whom director is interested” means—
(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.
(2) If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1), the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, and 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.
Section 185 of the Companies Act 2013 corresponds to the Section 295 of the old Companies Act 1956. In the old Companies Act however the Section 295 was a positive Section which though had a restriction it was allowed to give loan to director or any party in whom he was interested or give guarantee or security in case of any such loan subject to the permission of Central Government.
However the new Company law 2013 states that no company shall, directly or indirectly forward any loan to its directors or to any such person in whom the director is interested. It also bars the company to give any guarantee or security regarding any loan taken by the director or any person in whom he is interested except as per the provision of this act. The difference between the two sections of 1956 and 2013 is that 295 provides for permission of the Central Government, and 185 bars the company from making any such loan ipso facto.
Ambit of Section 185: Except according to the provisions of this Act no company shall
Advance any loan: The term “advancement of” stands ‘proceed of’ for giving in any “loan” which means the act of lending. Thus advance any loan can be understood to be any act or proceeds of lending something.
To any of its directors or to any other person in whom the director is interested: It is not advisable for any director to get involve in any transaction which would put him in fiduciary position. If the director has good security for his debts he must get the loan from other sources but not from the company in which he is a director. This section also extends it ambit to person in whom the director is interested or any one related to him.
The ‘person in whom the director is interested’ is explained in the section as
(i) Any director of the company offering loan or of any company which is its holding company
(ii) any partner or relative of any such director
(iii) to any firm in which any such director or relative is a partner
(iv) to any private company in which any of such director is a director or member
(v) to 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 of such director, or by two or more such directors, together
(vi) where any body corporate whose Board of directors, managing director or manager, is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company. Here the term ‘relative’ is explained in the section 2(77) ‘‘relative’’, with reference to any person, means any one who is related to another, if—
(i) They are members of a Hindu Undivided Family;
(ii) They are husband and wife; or
(iii) One person is related to the other in such manner as may be prescribed;
Here it is prescribed in Rule 1.4; for the purposes of sub-clause (iii) of sub-section (77) of section 2, a person shall be deemed to be the relative of another, if he or she is related to another in the following manner:
(1) Spouse
(2) Father (including step-father)
(3) Father’s father
(4) Father’s mother
(5) Mother (including step-mother)
(6) Mother’s mother
(7) Mother’s father
(8) Son (including step-son)
(9) Son’s wife
(10) Son’s son
(11) Son’s daughter
(12) Daughter (including step-daughter)
(13) Daughter’s husband
(14) Brother (including step-brother)
(15) Sister (including step-sister)
Give any guarantee or provide any security: Taxman Dictionary for professional’s state that the word Guarantee stands for ‘A kind of agreement to be answerable for the debt, Default or miscarriage of another, a contract of guarantee itself is accompanied by a memorandum in writing. In a loan transaction that is accompanied by a guarantee, there are three parties (i) the guarantor (ii) principle Debtor and (iii) and the creditor.’ Where as security stands for, a valuable item such as a house that you agree to give, if you are unable to pay back the money that you have borrowed form them as per the Oxford Dictionary. As far as Section 185 is considered no company shall stay responsible for any transaction between its director and the creditor offering loan to them (not for debts of company itself.) and any property tangible or intangible should not be extended as property for security where the loan is delivered to any of the director or any person in whom he is interested.
The proviso to this section states that if there is any condition of employment in which all the employee may get loan then such an arrangement does not render the company incapable of giving loan to its director. The loan can also be extended to a director as proceeds of any scheme which is sanctioned by the members in a general meeting.
Section 185(1) (b), Put a bar to the ambit of section 185(1) (a) in certain cases like for company whose main or incidental business is giving loan, giving Security or being guarantor for any loan such companies do not come in the purview of this section. Companies like NBFCs, Banking industries, etc are to be considered for the sub-section (b). However if such company makes any loan then it shall not be less than the bank rate declared by the Reserve Bank of India.
Accustomed to act in accordance with: This term is not mentioned in the new Companies Act 2013 however this can be explained in the terms explained in the old Companies Act 1956 in Section 7 which states that ‘Except where this Act expressly provides otherwise, a person shall not be deemed to be, within the meaning of any provision in this Act, a person in accordance with whose directions or instructions the Board of directors of a company is accustomed to act, by reason only that the Board acts on advice given by him in a professional capacity’. According to which any person who while discharging his duties advises the company or its board for performance of their functions and duties shall not be considered where as this is for the ‘shadow director’ or ‘deemed director ‘. This concept shall be analyzed as ‘any member or shareholder who elect the directors and then prevent them from performing their duties’ and ‘accustomed to act’ stands for being in a habit of performing in accordance with. From here we can see that this term since not explained in the Companies Act 2013 there has to be an evidence of board acting in accordance with instructions of a member or members i.e. there has to be a contract or an agreement between such member and directors of the company. This might even extend to the directors of the holding company if the subsidiary is accustomed to act in accordance with their instructions.
Conclusion: The Section 185 states that there can be no loan given by the company to any of its directors or Key managerial persons and the people in whom the director is interested. It also cannot give guarantee or security in case of any such person. It can only give loan in pursuance of any scheme sanctioned by member in general meeting or as a part of service contract extended for all its employees.
(2) If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1), the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, and 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.
Section 185(2): This is a penalty Section for which states that if the company contravenes with the provision of this section by advancing any loan or giving of guarantee or by providing security to any person from the above list then the company has to pay the fine of at least rupees five lakhs but which can be extended up to twenty five lakhs. The person or the director who has acted contradictory to this section shall be punishable with imprisonment which may extend up to six months or with a fine which shall be at least rupees five lakhs but less then twenty five lakhs or such person may be punished with both.
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