Loan to Director

The purpose behind Section 185 of the Companies Act,2013 is to ensure that directors of the company do not surpass their fiduciary duty towards the company for their benefit Section 185 deals with prohibitions, relaxations, and exemptions concerning advance loans, providing security or guarantee to the directors of a company or any other person in whom directors are interested. Section 185 of the Companies Act is divided into three clauses: PROHIBITIVE CLAUSE: [Section 185(1)] A company (subject to exemptions stated in below mention) shall not be permitted, directly or indirectly, to advance any loan, including any loan represented by a book debt or any guarantee or provide any security in respect of any loan taken by: Analysis of Section 185(1) of the Companies Act, 2013 Company: It includes every company i.e Private Company, Public Company, Section 8 Company, Nidhi Company, Government Company An indirect loan means that the corporation shall not give a loan through the mode of one or more intermediaries. Relative: As per section 2(77) of the Companies Act,2013 "relative", concerning any person, means anyone related to another (i) If they are members of a HUF (ii) If they are husband and wife (iii) one person is related to the other in the following manner Illustrations: Does Section 185 allow Loan/Guarantee/Security to Q. ABC Ltd - Subjected Company which provides Loan/Guarantee/Security XYZ Ltd -Holding Company of ABC Ltd AB & Co. [where Mr. A (Director of ABC LTD) is a partner] CD & Co. [where Mr. C (Director of XYZ LTD) is a partner] BZ & Co. [where Mr. B (partner of Mr. C) is a partner] RESTRICTIVE CLAUSE [Section 185(2)] Company is permitted Subject to the specified conditions to advance any loan including any loan represented by a book debt or give any guarantee or provide any security in respect of any loan taken by any person in whom any of the directors of the company is interested. However, the explanatory statement annexed to the notice shall disclose; utilized by the recipient (a) Any private company of which any such director is a director or member; (b) Anybody 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 collectively; or (c) Anybody corporate, the Board of directors, managing director or manager, who is accustomed to act following the directions or instructions of the Board, or any director or directors, of the lending company. Illustrations: Computation of Total voting power Q. Mr. A holds 50% of ABC Ltd. ABC Ltd holds 60% of DEF Ltd. DEF Ltd holds 20% of GHI Ltd. The total voting power of Mr. A Hence, ABC Ltd and DEF Ltd. will be the persons in whom the director of the company is interested and GHI Ltd. will not be considered as the persons in whom the director is interested UNRESTRICTIVE CLAUSE [Section 185(3)] In the following cases, prohibitions u/s 185[1] and Restrictions u/s 185[2] shall not apply [till Section 186] to [Principal Business Activities means those activities which are mentioned under the main objects of MOA of the company] Section 185 shall not apply to Government companies subject to the following conditions: [Notification No. G.S.R. 463(E), dated 5 th June 2015 as amended by Notification No. G.S.R. 582 (E), dated 13 th June 2017.] Section 185 shall not apply to Private companies subject to the following condition: [Notification No. G.S.R 464(E), dated 5th June 2015 as amended by Notification No. G.S.R 583(E), dated 13th June 2017. Section 185 shall not apply to the Nidhi company subject to the following conditions: [Notification no. G.S.R. 465(E), dated 5th June 2015] If a loan/guarantee/security is provided in contravention of the provisions of section 185 of the companies Act, 2013 The company shall be a punishable minimum fine of Rs. 5,00,000 and a maximum fine of Rs. 25,00,000 Every defaulting officer shall be punishable with imprisonment up to six months or with a minimum fine of Rs.5,00,000 and a maximum fine of Rs.25,00,000 Shall be punishable with imprisonment up to six months or with a minimum fine of Rs. 5,00,000 and a maximum fine of Rs. 25,00,000 or with both. Onlinexbrl.com provide advisory related to company law matters. Contact us now.
Exemptions from applicability section 185 of the companies Act, 2013
Penal Provision: [Section 185(4)]