Section 185 of Companies Act - Loan to directors

Last updated: 18 April 2022

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Quick Summary

Section 185 of the Companies Act governs loans, guarantees, or security provided to directors, their relatives, or related companies. Generally, a special resolution with full disclosure is required, unless specific exemptions apply, such as for private companies with limited borrowing or for loans given by a holding company to its wholly-owned subsidiary for business purposes. Non-compliance can result in significant fines and potential imprisonment for the company, officers, and recipients.

To Give

Loan / Guarantee/security to Director / Director of holding Co / partner or relative of Director OR
Guarantee/security in connection with loan taken by Pvt Co. in which such director is director or member and the loan is utilised for principal business activities.

Companies Act: Loans to Directors Explained

Requirement is

Should Pass special resolution (Explanatory statement shall mention full details of loan / guarantee / security, and purpose.

Exemption

Private Co. in which no body corporate is shareholder, borrowings from Banks / FI /Body corporate is less than 2 times its paid up capital or 50 crore (whichever is less). And there are no defaults in such borrowings.
NBFC can give in regular course of business without special resolution.
If given by Holding company to wholly owned subsidiary company for its principal business activities.

Fines for contravention

Co: Min 5 lacs. Max 25 lacs.
Every officer in default - imprisonment of up to 6 months or fine Min 5 lacs. Max 25 lacs or both.
Recipient - imprisonment of up to 6 months or fine Min 5 lacs. Max 25 lacs or both.

Compliance

MGT 14 has to be filed within 30 days of Special resolution

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Rish s

Proprietor of R.Sethia Associates, Chartered accountants. CA year 2000. Experience in Banking, Corporate law, Manufacturing cos systems and audit, Income Tax etc.

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