Loan to Directors- Section 185

New Company law puts a complete prohibition on grant of loans to Directors and persons in which such directors are interested except a few exceptions. Further the section is applicable on all types of companies, be private or public. Section 185 prohibits the granting of loan or giving of guarantee or providing any security in connection with any loan taken by the director or such other person in which such Director is interested. No special privilege is granted to the private companies in this matter. Thus, a Company cannot advance a loan to:

i. any of its director,

ii. any director of  holding company

iii. any partner or relative of any such director;

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

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

vi. any body corporate at a general meeting of which not less than 25% of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or

vii. 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.

Exemptions

The above restrictions are not applicable to giving any loan to the Managing or Whole-time Director:–

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

(ii) pursuant to any scheme approved by members vide special resolution.

Further, the Companies which provides loans in the ordinary course of its business and interest in respect of such loans is charged at a rate not less than Bank rate declared by RBI are also exempt from the provisions of section 185.

PENALTIES

On Lending Company

In case of contravention of this section, the Lending Company shall be punishable with a minimum fine of Rs.5 lacs but which may extend to Rs.25 lacs;

On Recipient Director/ Entity

In case of contravention of this section, the recipient Director or other entity shall be punishable with imprisonment which may extend to six months or with a minimum fine of Rs.5 lacs but which may extend to Rs.25 lacs, or with both.

CONCLUSION

Drastic changes have been introduced by the Companies Act, 2013 with respect to Loan to Directors. A complete new regime has taken place. Earlier the prohibition was only on public companies and their subsidiaries, private companies were fully exempt but the new regime has embraced the private companies also in its ambit. The exemption is given only to the companies whose primary business is lending of money.

Further, earlier the public companies and their subsidiaries were able to grant loan to their directors with the Central Government approval. In the new Act, there is no such provision of Central Government approval. Meaning thereby all the doors have been closed by the government for grant of loans to directors and the persons in which he is interested.

The said change is introduced to discontinue the misappropriation of shareholder’s money by the Directors. The new law is anticipated to bring the better governance & transparency in the affairs of the Companies.