Section 185 of ca 2013
This query is : Resolved
13 January 2014
Dear All,
One of the group pvt Ltd company has lent sum to another group Pvt Ltd means defaulting section 185 of Companies Act 2013. I know i am free now to take the shadow under section 372a of Companies Act 1956 but assuming that 2013 act is fully applicable and 1956 has been repealed compltetely.
Can you pls suggest how to comply with section 185 now?
One of the group pvt Ltd company has lent sum to another group Pvt Ltd means defaulting section 185 of Companies Act 2013. I know i am free now to take the shadow under section 372a of Companies Act 1956 but assuming that 2013 act is fully applicable and 1956 has been repealed compltetely.
Can you pls suggest how to comply with section 185 now?
13 January 2014
Could i have other options so as to not defaulting under section 185?
13 January 2014
Could i have other options so as to not defaulting under section 185?
23 July 2025
Section 185 of the Companies Act, 2013 restricts a company from lending or providing guarantees to its directors or the directors of its holding company, subsidiary company, or any related parties. The provision aims to prevent conflicts of interest and the potential misuse of company resources. The section is applicable to both private and public companies.
However, in your case, you're specifically asking about a situation where a group private limited company has lent money to another group private limited company, which seems to be potentially violating Section 185.
Key Points of Section 185:
A company cannot give a loan to its director(s) or to any director of its holding or subsidiary company.
Loans or guarantees are allowed under certain conditions, such as in the ordinary course of business or if approved by shareholders.
Section 185 - Exceptions:
Loans/Guarantees in the Ordinary Course of Business:
If the company is in the business of lending money or providing guarantees, this section may not apply to those transactions.
Shareholder Approval:
If the loan is being given to a director or to related parties, it is permissible only if shareholder approval is obtained through a special resolution in a general meeting.
Guarantees to Wholly-Owned Subsidiaries:
Loans and guarantees to a wholly-owned subsidiary may be permissible if they are approved by the board.
Loan for Business Purpose:
Loans given in the ordinary course of business of the company are exempt from this restriction.
How to Comply with Section 185:
Shareholder Approval:
If you are lending money to a related party or a director's company, you must seek approval through a special resolution from the shareholders of the company. This can be done through a general meeting of the members, where the terms of the loan, the purpose, and other relevant details must be disclosed.
Ensure Business Purpose:
If the loan is being provided in the ordinary course of business (i.e., the lending company has the business of lending), it may not fall under the restriction. In this case, you should be able to demonstrate that lending is a part of your business activities.
Document and Record Compliance:
Maintain proper documentation and approvals for all related-party transactions. This includes:
Board resolutions for loan sanctioning
Shareholder resolutions (if required)
Proof of the business purpose of the loan (e.g., agreements, transactions)
Inter-Company Transactions:
If the loan is between group companies (e.g., holding company to subsidiary), Section 185 still applies if it is directed to the directors or related parties. If no approval was obtained previously, you may have to go back and get retrospective approval from shareholders to ensure compliance.
Alternatives to Avoid Defaulting Under Section 185:
Utilize Section 372A (of Companies Act, 1956):
If you're specifically referring to Section 372A (of the Companies Act, 1956), you can consider using this section for inter-corporate loans. Under this provision, loans between group companies are permissible if shareholder approval is obtained.
Re-structuring Loans:
If the loan was given without proper approval, you might have to restructure the loan or seek retrospective approval. This can be done by seeking approval through a special resolution.
Immediate Steps to Take:
Get Shareholder Approval: If the loan falls under Section 185 and was given without approval, you can hold an extraordinary general meeting (EGM) to get the approval.
Ensure Proper Documentation: If the loan falls under the ordinary course of business, ensure that all supporting documents are available to demonstrate this.
Board Resolution: Ensure that a board resolution has been passed before giving any loans or guarantees to related parties.
Comply with Penal Provisions: If the company has defaulted and no action has been taken, you may need to rectify the violation to avoid penalties, which can include a fine for both the company and its officers.
Conclusion:
Section 185 is strictly enforced to prevent undue influence and conflicts of interest. You can avoid defaulting by obtaining the necessary shareholder approvals through special resolutions. If you have already provided a loan or guarantee in violation of this section, retrospective approval may be necessary, and you may also need to ensure that the transaction was within the ordinary course of business.
However, in your case, you're specifically asking about a situation where a group private limited company has lent money to another group private limited company, which seems to be potentially violating Section 185.
Key Points of Section 185:
A company cannot give a loan to its director(s) or to any director of its holding or subsidiary company.
Loans or guarantees are allowed under certain conditions, such as in the ordinary course of business or if approved by shareholders.
Section 185 - Exceptions:
Loans/Guarantees in the Ordinary Course of Business:
If the company is in the business of lending money or providing guarantees, this section may not apply to those transactions.
Shareholder Approval:
If the loan is being given to a director or to related parties, it is permissible only if shareholder approval is obtained through a special resolution in a general meeting.
Guarantees to Wholly-Owned Subsidiaries:
Loans and guarantees to a wholly-owned subsidiary may be permissible if they are approved by the board.
Loan for Business Purpose:
Loans given in the ordinary course of business of the company are exempt from this restriction.
How to Comply with Section 185:
Shareholder Approval:
If you are lending money to a related party or a director's company, you must seek approval through a special resolution from the shareholders of the company. This can be done through a general meeting of the members, where the terms of the loan, the purpose, and other relevant details must be disclosed.
Ensure Business Purpose:
If the loan is being provided in the ordinary course of business (i.e., the lending company has the business of lending), it may not fall under the restriction. In this case, you should be able to demonstrate that lending is a part of your business activities.
Document and Record Compliance:
Maintain proper documentation and approvals for all related-party transactions. This includes:
Board resolutions for loan sanctioning
Shareholder resolutions (if required)
Proof of the business purpose of the loan (e.g., agreements, transactions)
Inter-Company Transactions:
If the loan is between group companies (e.g., holding company to subsidiary), Section 185 still applies if it is directed to the directors or related parties. If no approval was obtained previously, you may have to go back and get retrospective approval from shareholders to ensure compliance.
Alternatives to Avoid Defaulting Under Section 185:
Utilize Section 372A (of Companies Act, 1956):
If you're specifically referring to Section 372A (of the Companies Act, 1956), you can consider using this section for inter-corporate loans. Under this provision, loans between group companies are permissible if shareholder approval is obtained.
Re-structuring Loans:
If the loan was given without proper approval, you might have to restructure the loan or seek retrospective approval. This can be done by seeking approval through a special resolution.
Immediate Steps to Take:
Get Shareholder Approval: If the loan falls under Section 185 and was given without approval, you can hold an extraordinary general meeting (EGM) to get the approval.
Ensure Proper Documentation: If the loan falls under the ordinary course of business, ensure that all supporting documents are available to demonstrate this.
Board Resolution: Ensure that a board resolution has been passed before giving any loans or guarantees to related parties.
Comply with Penal Provisions: If the company has defaulted and no action has been taken, you may need to rectify the violation to avoid penalties, which can include a fine for both the company and its officers.
Conclusion:
Section 185 is strictly enforced to prevent undue influence and conflicts of interest. You can avoid defaulting by obtaining the necessary shareholder approvals through special resolutions. If you have already provided a loan or guarantee in violation of this section, retrospective approval may be necessary, and you may also need to ensure that the transaction was within the ordinary course of business.
You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now
Click here to login now
Similar Resolved Queries
Unanswered Queries
- Applicability of TDS on CFS, CHA fees, and shipping line charges
- Notice from IT DEPTT IF FD AMOUNT EXCEEDS 10 LACS
- Unable to generate and save json file for updated return
- Applicablity on tds
- GST payable under RCM
- PRODUCT AND SERVICE CATEGORY CODE
- Section 194I not showing in TDS RPU for Compnay Assessee for TDS on rent
- Tax audit & Switching from Presumptive taxation
- LTCG offset against property buy
- Eway bill requirement in case of retail sale of EV scooter
- Advance money given for supply of goods
- Import purchase entry
- Rule 54(1A) for Distributing ITC
- Received advance money for supply of goods but forfeited by us since full money not received
- EXCESS CREDIT REALTED GST REVERSAL
- Export invoice not reported
- CA Articleship Extension Matter
- GST OFFICER WRONG NOTICE
- "Please ensure that the Total of the Deductions u/s 54F match the same in Table D in Sch CG"
- Composition Dealer GST Annual Return Filing process
Trending Online Classes
-
LIVE Course on GSTR-9 & GSTR-9C (Technical | Practical | Concept - Based)
Sachin Jain03 November 2025
CAclubindia
