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SHORT SUMMARY

In this editorial author shall discuss about Loan to Director. It is restricted under the Companies Act, 2013 to provide a loan to Director or entities in which director is interested. Main focus of this editorial is "Whether Public/ Private Companies can give loan to their Managing Directors/ Whole Time Director."

Section 185 completely modified by the Companies (Amendment) Act, 2017 w.e.f. May 07, 2018.

Whether a company can give loan to director or whole time director

Extract of Law

As per Section 185 of Companies Act, 2013 (1) No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by,

(a) any director of a 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.

Section 185(1) restrict Loan/ guarantee to Directors. As per the above-mentioned provisions, Companies can’t provide loan to Directors. However, there are some exemptions of Section 185(1) i.e. Section 185(3).

Extract of Section 185(3)

(3) Nothing contained in sub-section (1) and (2) 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

 

Section 185(3) states - Nothing contained in sub-section (1) and (2) shall apply on the followings sub-clause i.e. giving any loan to a Managing or Whole-time director subject to conditions mentioned u/s 185(3)(a)(i)(ii).

Therefore, as per section 185(3), A Company (Public/ Private) can give loan to Managing Director/ Whole Time Director on the following conditions:

a) as a part of the conditions of service extended by the Company to all its employees:

As per this provision, if there is a condition mentioned in the employment/ service agreement of employees, that they are eligible to obtain a loan from a Company. However, for Managing Director/ Whole Time Director two questions arise:

i. Whether MD/ WTD considered as an employee of the Company?
ii. Whether it is mandatory to mention in service agreement regarding a loan to them?

Point I: Whether MD/ WTD considered as employees of the Company?

(94) "Whole-Time director" includes a director in the whole-time employment of the Company

(54) MD means individual entrusted with the power of administrative acts of a routine nature.

Therefore, from the above definition, anyone can opine that MD/ WTD are the employees of the Company.

Point II: Whether it is mandatory to mention in Service agreement regarding loan?

As per 185(3)(a) it should be mentioned in Service agreement of MD/ WTD. If such clause is not mentioned in Service agreement then Company can amend the Service agreement by passing of Board Resolution.

Therefore, one can opine that as per Section 185(3)(a), a Company (Public/ Private) can give loan to MD/ WTD as per condition mentioned in the Service agreement.

 

b) pursuant to any scheme approved by the members by a special resolution

As per this provision, if members of the Company has approved any scheme to give loan to MD/ WTD by passing of the special resolution, then the Company is allowed to give loan to MD/WTD.

Therefore, as per section 185(3) Company (Public/ Private) can give loan to Managing Director/ Whole Time Director by following condition mentioned in (a) or (b)

QUICK QUESTION

a) Whether it is mandatory to charge interest on loan given to MD/WTD u/s 186?

As per 186, if the Company give loan to any entity/ person, the company shall charge interest to them as per 186(7).

However, as per The Companies (Amendment) Act, 2017 w.e.f. May 07, 2017, MCA has added one explanation in section 186 i.e. "Explanation. - For the purposes of this sub-section, the word "person" does not include any individual who is in the employment of the company"

As per 186, if the Company give loan to any entity/ person, the Company shall charge interest to them as per 186(7).

CONCLUSION

As per the above-mentioned provisions:

  • It is clear that Companies can give a loan to their Managing Director/ WTD without any restriction under Section 185.
  • However, as per Section 186, it is not mandatory to charge interest on such a loan.
  • There is neither any limit on the amount of loan a Company can give to its Managing Director or Whole Time Director nor any restriction as to the purpose for which a loan may be given.
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