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Can you give loan to directors? Conditions under section 185 of Companies Act, 2013

Directors are responsible for management of the company.  Some directors even engage into day to day affairs of the company (example, managing directors).  While directorship brings in several powers under the law, it also brings many responsibilities.  One of such responsibilities is to ensure that the affairs of the company are not managed for his own good.

Section 185 of the Companies Act, 2013 read with Rule 10 of Companies Rules (Meetings of Board and its Powers), 2014 provides that a Company cannot give loan or guarantee to its Directors or any other person related to it.  This provision is in line with the legal requirement that the directors should not engage in activities which benefits them.

Certain exceptions are given as to whom the loan can be given even if such person is the director of the Company.

Section 185, strictly prohibits the Company to provide any loan or give guarantee or provide any security in connection of a loan to any of its directors or “any other person with whom the directors are interested”.

For the purpose of this section the term “any other person with whom the directors are interested” means the following:

It implies that the Company cannot give loan to directors as well as above parties.

Cases where loan/ guarantee or security against loan can be provided

Loan, guarantee or security against any loan taken by the Director can be provided to them in the following cases:

  • Managing Director/ Whole-time Director – As a part of the conditions of services extended by the Company to all its employees or pursuant to any scheme approved by members of Special Resolution.
  • Any loan made by holding Company to its wholly-owned subsidiary Company or any guarantee or security for its Principal Business Activity
  • Any guarantee given or security provided by a holding company in respect of loan made by any bank of financial institution to its subsidiary company for its Principal Business Activity
  • A Company, which provides loan in normal course of business which charge interest at a rate of not less than the Bank rate, as may be declared by RBI.

Exemption to this provision:

Private limited companies have been exempted from this section vide notification dated 5.6.2015 issued by the Ministry of Corporate Affairs, Government of India.

However, they need to fulfill the following criteria to be exempted from the section:

  • No other Body Corporate has invested money in the company’s share capital
  • The borrowings of such Company from Banks/ Financial Institution/ Body Corporate shall not exceed twice its paid-up share capital or Rs. 50 crores, whichever is low.
  • The company has made no default in repayment of such borrowings subsisting at the time of making transaction under this section.

Consequence of non-compliance

In case of non-compliance, the Company shall be fined with not less than Rs. 5 Lakh, which may extend to Rs. 25 Lakh. The Director or any other person, to whom loan has been advanced, shall be punished with imprisonment up to 6 months or fine of not less than Rs. 5 Lakh but may extend to Rs. 25 Lakh or with both.