Section 185 of the Companies Act, 2013

Applicability: Section 185 applies to both Public and Private Companies

The Section prohibits directly or indirectly advances of Loans to directors or to any other person in whom director is interested by a Company.

185 (1) Save as otherwise provided in this Act, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its director or to any other person in whom director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person;

Exceptions: Provided that nothing contained in this sub section apply to

   (a) Loan to a managing director or a whole-time director,

   (i) as a part of conditions of services applicable to all employees; or

 (ii) pursuant to any scheme approved by the members by a special resolution.

 Status of past contracts: It may be noted that the restriction apply only at the time of entering into the transaction, for example, if a person is only an employees of the Company and later he becomes director of the company, section 185 would not apply. In the same way, if a private limited company has given loan/guarantee or security which was earlier exempted under section 295 of the Companies, shall continue to be exempted under section 185. However it cannot give further loans without complying with the provision of section 185 of the Act.

      (b) Loan, guarantee or security for the repayment of the loan in the ordinary course of business and charging interest at the prevailing bank rate, declared by the Reserve Bank of India.

   (c) any loan made by a holding company to its wholly owned subsidiary company  (100% 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 utilized by the subsidiary company for its principal business activities.

Explanation: For the purpose of this section, the expression “to any other person in whom director is interested” means

(a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director ;

(b) any firm in which any such director or relative is a partner ; 

(c) any private company of which any such director is a director or member ;

(d) any body corporate at a general meeting of which not less than twenty-five percent of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or

(e) any body corporate, the Board of directors, managing director or manager whereof is accustomed to act in accordance with the direction or instructions of the board, or of any director or directors, of the lending company.    

Exemption to a private company: Section 185 shall not apply to a private company –

(a) in whose share capital no other body corporate has invested any money;

    (b) if the borrowing of such a company from banks or financial institutions or body corporate is less than twice its paid-up capital or fifty crore rupees, whichever is lower; and

   (c) such a company is not in default in repayment of such borrowing subsisting at the of making transactions under this section. [Notification dated 5^th June, 2015]

  Offence & Penalty

   If any loan is advanced or a guarantee or security is given or provided in contravention of the provision of sub section (1), the company shall be punishable with fine and 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 or with fine or with both. [section 185 (2)] 

     Reference: Companies Act, 2013

Contact

CS Simpal Singh

Email Id: cssimpalsingh@gmail.com