Know everything about section 185(Loan to Directors) of Companies Act, 2013

After providing the important amendments related to Direct Tax, we are now posting the sections of Companies Act, 2013. In the first series of Companies Act, 2013, we are providing all the information regarding section 185.

 

 Section 185 of Companies Act, 2013: Loan to Directors

According to section 185, company can’t give, directly or indirectly, any loan to or give any guarantee or provide any security for any loan taken or given by:

·         * Any director of the lending company, or of a company which is its holding company,

·         * Any partner or relative of director of a company or its holding company.

·         * Any firm in which any such director or relative is a partner.

·         * Any private company of which any such director is a director or member.

·         * Any body corporate at a general meeting of which 25% or more voting power is controlled by one or more directors collectively.

·          * Any body corporate where BOD, MD or manager whereof is accustomed to act in according to directions of directors of lending company.

Example:

ABC Ltd. has two Directors Mr. X and Mr. Y. Both holds 50% shares each of Company. ABC Ltd. wish to give loan to following and have asked for your views on same.

I.                    Loan to director X.

II.                  Loan to a relative of Director Y.

III.                Director of company D which is the holding company of ABC Ltd.

IV.                A partner of Director of Holding Company.

V.                  A partner of Director of ABC Ltd.

VI.                To a firm in which Mr. X is a partner.

VII.              To a firm in which relative of Mr. Y is a partner.

S No.	Situation	Whether company can grant loan?	Reason
I	Loan to Director X.	No	By virtue of section 185
II	Loan to relative of Director Y.	No	By virtue of section 185
III	Director of company D which is the holding company of ABC Ltd.	No	By virtue of section 185
IV	A partner of Director of Holding Company	No	By virtue of section 185
V	A partner of Director of ABC Ltd.	No	By virtue of section 185
VI	To a firm in which Mr. X is a partner.	No	By virtue of section 185
VII	To a firm in which relative of Mr. Y is a partner.	No	By virtue of section 185

Example: Mr. A, B & C are directors and shareholders of Ram Pvt. Ltd. They are holding 60%, 20% & 15% shares of paid-up share capital of Ram Ltd respectively. Mr. A, B & C respectively holds 10%, 10% and 5% shares of paid up capital of Sita Ltd. In this situation, Ram Pvt. Ltd can’t give loan to Sita Ltd as director of Ram Pvt. Ltd is also members in Sita Ltd.

·         * Section 185 is applicable to both public and private companies.

·          * At the same time, if one company has lend money to another company. Section 185 is required to be followed by lending company as well as borrowing company.

·         * Section 185 is applicable to a loan represented by a book debt.

Important Note: Relative [section 2(77)]

1.       Members of HUF

2.       Spouse

3.       Father, mother, son, son’s wife, daughter, daughter’s husband, brother & sister.

·        *  Section 185 is not applicable to any loan made, guarantee given or security provided by:

-> A banking company during its ordinary course of business (if interest is charged at rate not less than bank rate declared by RBI)

-> A holding company to its wholly owned subsidiary company. Provided that such loan made to subsidiary company should be used for its principal business activities.

·         * Section 185 is not applicable when the advance salary is given as per the policy of company to wife of managing director who is employee of company.

·         * Section 185 is not applicable for giving any loan to MD or WTD.

-> As part of the conditions of service extended by company to all its employees.

-> Pursuant to any scheme approved by the members by SR. Such scheme may include housing loan scheme, education loan scheme, ESOP etc.

 Penalty

·        *  For contravention of section 185

-> Company – Minimum fine: Rs. 5 lakhs, Maximum fine: Rs. 25 lakhs.

-> Director and every person who was party to loan or guarantee

-          Maximum imprisonment: 6 months or

-          Minimum fine: Rs. 5 lakhs, Maximum fine: Rs. 25 lakhs or

-          Both

·        *  Both lender of loan and receiver are liable for punishment for contravening the provisions of section 185..