Loan or Guarantee/Security to Directors by Private Company (Sec. 185)

September 3, 2021 By Damodhar C Off

(1) No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by,—

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

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

(2) A company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the director of the company is interested, subject to the condition that—:

(a) a special resolution is passed by the company in general meeting

(b) the loans are utilised by the borrowing company for its principal business activities.

Explanation.-For the purposes of this sub-section, the expression “any person in whom any  of the director of the company is interested” means—:

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

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

(c) any body corporate, the Board of Directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or Directors, of the lending company.

NOTE:- If company is giving loan to any person in whom any of the director of the company is interested” then  company should fulfill the criteria and limits given u/s 186 along with passing of special resolution u/s 185 of Companies Act, 2013.

APPLICABILITY OF SECTION 185:-

TYPE OF COMPANY CONDITIONS APPLICABLE
PUBLIC COMPANY YES
PRIVATE COMPANY (a) In whose share capital no other body corporate has invested any money;

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

(c) such a company has no default in repayment of such borrowings subsisting at the time of making transactions under this section.

NO
NIDHI COMPANY The loan is given to a director or his relative in their capacity as members and such transaction is disclosed in the annual accounts by a note. NO
GOVERNMENT COMPANY Company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the company, or, as the case may be, the State Government before making any loan or giving any guarantee or providing any security NO

(3) Provided that nothing contained in this sub-section shall apply to–

    (i) As a part of the conditions of service extended by the company to all its employees;

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

      PUNISHMENT FOR CONTRAVENTION OF PROVISION U/S 185:-

      If any loan is advanced or a guarantee or security is given or provided or utilised in contravention of the provisions of this section,—:

      (i) the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees;

      (ii) every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees; and

      (iii) 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 which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.