loan to director in pvt. co.

185.Loan to directors, etc.

(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 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.


(2)A company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the director of the company is interested, subject to the
condition that—
(a) a special resolution is passed by the company in general meeting:
Provided that the explanatory statement to the notice for the relevant general meeting shall disclose the full particulars of the loans given, or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security and any other relevant fact; and
(b) the loans are utilised by the borrowing company for its principal business activities
Explanation.—For the purposes of this sub-section, the expression "any person in whom any of the director of the company is interested" means—
(a) any private company of which any such director is a director or member
(b) 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
(c) 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


Nothing contained in sub-sections (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
(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 rate of prevailing yield of one year, three year, five year or ten year Government security
closest to the tenor of the loan; or
(c) any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or
(d) any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company:
Provided that the loans made under clauses (c) and (d) are utilised by the subsidiary company for its principal business activities


If any loan is advanced or a guarantee or security is given or provided or utilised in contravention of the provisions of this section,—
(i) 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;
(ii) every officer of the company who is in default shall be punishable with iomprisonment for a term 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; and
(iii) 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

#Not applicable to private companies, if all the following conditions are fulfilled
a. in whose share capital no other body corporate has invested any money;
b. if the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower; and
c. such a company has no default in repayment of such borrowings subsisting at the time of making transactions under this section.

if private limited company has given loan to its director , and company details as under
share capital Rs 1 Lakhs
Reserves Rs 10 lakhs
loan to directors Rs. 150 lakhs
loan from company Rs 250 lakhs

what will be the consequences

since 2nd condition is not fulfilled (borrowings to be less than 2x of paidup share capital) Loan cannot be given to directors.

Reason :- Our PSC is 1,00,000. Exemption allows us to take borrowings upro 2,00,000 (twice of PSC) But we have borrowed 2.5 cr which is beyond permissible limits. Hence we cannot give loans to directors.

and if loan given , what will be consequences..
pl suggest any remedies

As per section 185..

[4] If any loan is advanced or a guarantee or security is given or provided or utilised in contravention of the provisions of this section,—

[i] 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;

[ii] every officer of the company who is in default shall be punishable with imprisonment for a term 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; and

[iii] 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.

if directors and shareholders are same.. whether penalty or fine will differ

penalty still remains same.

There are 3 individuals of same family having their own seperate workshop units in same industrial estate. And out of 3 , 2 individuals have taken loan from a bank.

Now these 3 individuals come together and formed a private limited company for the same business. Workshop units are still in the name of directors and Company giving workshop rent to directors. The same banker has given loan of Rs 5 crore to a company against director's workshop units. 

Since loan taken from bank is more than Rs. 1 crore, therefore auditor want to qualify his audit report for loan to directors u/s 185.

In this case, whether auditor is required to qualify his report. And how directors should revert to auditors qualifications .

Whether director has to take anything in writing from the banker as loan are given to company against their personal properties and nature of business is same like when business was in the name of proprietorship.

How the transaction of loan to private company will treat in income tax act.

whether directors has to pass any special resolution in shareholders general meeting . Here directors are the shareholders

pl clarify..