Loan To Directors (Section 185 of Companies Act, 2013)

LOAN TO DIRECTORS (SECTION 185 OF COMPANIES ACT, 2013)
INCLUSIONS
  1. Section 185 of Companies Act, 2013
  2. Imposition of Restrictions
  3. Relaxation from Restrictions
  4. Definition of Relative (Section 2(77) of the Companies Act, 2013)
  5. Penalty for Contravention
  6. Crux of this Section

A very simple analysis of this section is as below:-

1) Section 185 of Companies Act, 2013 

Section 185 of the Companies Act, 2013 contains provisions that impose restrictions on loans being given to directors, etc.

2) Imposition of Restrictions

No company can give loan to:-

1) Director

2) Relative of a director (Define Under Section 2(77) of Companies Act, 2013)

3) Partner of director

4) Firm in which either director or relative is a partner

5) Private Company in which the director is either director or a member

6) A Body Corporate in which at least 25% shares or voting power held by the director of the lending company

7) Body Corporate whose directors are accustomed to act according to the direction of the lending company

3) Relaxation form Restriction

1. Where the holding company grants the loan, guarantee, or security to its wholly-owned subsidiary company, which uses the same for its principal activity of business only (i.e. Money Lending Business).

Provided interest rate should not below the interest rate specified by RBI.

2. Company may give a loan to the Managing director (MD) or Whole Time Director  (WTD) only if the following conditions are met with:-

a). This facility of loan is given to all of the employees of the company.

b). If the loan facility is not available to all of the employees, then with the approval of shareholders in General Meeting (GM) loan may be given to Managing Director (MD) or Whole Time Director (WTD) (i.e. special resolution in GM).

c). Holding Company can give a loan, guarantee, security to a wholly-owned subsidiary company (i.e. 100% holding).

d). Holding Company can give a guarantee, security to the subsidiary company.

3. Section 185 not apply to Private Company is 3 conditions are satisfied:-

a). No body corporate should be a shareholder in a private company.

b). Borrowing of such company from banks or financial institutions or any body corporate is less than twice of its paid-up share capital or 50 Crore rupee, whichever is lower

c) Company has no default in repayment of such borrowing subsisting at the time of making transactions under this section.

4. Section 185 not applicable to Government companies.

4) Definition of Relative (Section 2(77) of the Companies Act, 2013)

a) Husband and wife

b) Members of HUF as per Registered under the Income Tax Act, 1961

c) Father and Mother

d) Brother and Sister

e) Son and Son’s wife

f) Daughter and Daughter’s husband

5) Penalty for Contravention

In any case where Section 185 is not complied with:-

a) Company: punishable with a fine not less than Rs. 5 lakh which can be extended to Rs 25 lakh (maximum).

b) Every defaulting officer:  punishable with imprisonment for a term which may extend to 6 months or a fine which shall not be less than Rs.5 lakh but which may extend to Rs.25 lakhs (Maximum).

c) The recipient of the loan will be punishable with imprisonment which may extend to 6 months or with a fine which shall not be less than Rs.5 lakhs but which may extend to Rs.25 lakhs or with both.

6) Crux of this Section

No Company can grant a loan, give a guarantee, provide security to any person who directly or indirectly controls the same.

Note:-  Provision of Section 185 is also applicable in relation to giving guarantee and providing security Mutatis mutandis.

 

Thanks & Regards

Deepesh Goyal

Contact No. 8168782293

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