Section 185 of Companies Act 2013-Loan to directors, etc
Section 185(1) of Companies Act 2013
No company1 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 director2 of company, or of a company1 which is its holding company or any3 partner or relative of any such director; or
(b) any firm in which any such director2 or relative4 is a partner.
Section 185(2) of Companies Act 2013
A company1 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 director2 of the company1 is interested, subject to the condition that-:
(a) a special resolution is passed by the company1 in general meeting:
Provided that the explanatory statement to the notice for the relevant general meeting shall disclose the full particulars of the loans given, or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security and any other relevant fact; and
(b) the loans are utilised by the borrowing company1 for its principal business activities.
Explanation.-For the purposes of this sub-section, the expression “any person in whom any of the director2 of the company2 is interested” means-:
(a) any private company1 of which any such director2 is a director2 or member;
(b) any body corporate5 at a general meeting of which not less than twenty-five per cent. of the total voting power6 may be exercised or controlled by any such director, or by two or more such Directors, together; or
(c) any body corporate5, the Board of Directors7, managing director2 or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director2 or Directors, of the lending company.
Section 185(3) of Companies Act 2013
Nothing contained in sub-sections (1) and (2) shall apply to-
(a) the giving of any loan to a managing or whole-time director-
(i) as a part of the conditions of service extended by the company1 to all its employees; or
(ii) pursuant to any scheme approved by the members8 by a special resolution; or
(b) a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the rate of prevailing yield of one year, three years, five years or ten years Government security closest to the tenor of the loan; or
(c) any loan made by a holding company9 to its wholly owned subsidiary company10 or any guarantee given or security provided by a holding company9 in respect of any loan made to its wholly owned subsidiary company10; or
(d) any guarantee given or security provided by a holding company9 in respect of loan made by any bank or financial institution11 to its subsidiary company10:
Provided that the loans made under clauses (c) and (d) are utilised by the subsidiary company10 for its principal business activities.
Section 185(4) of Companies Act 2013
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 company1 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 company1 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 director2 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.
Exceptions/Modifications/ Adaptations
(1) In case of 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 borrowings of such a company from banks or 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. – Notification dated 5th june, 2015.
(2) In case of Nidhi company – Section 185 shall not apply, provided 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. – Notification dated 5th june, 2015.
(3) In case of Government company – Section 185 shall not apply to Government Companyin case such 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 under the section. – Notification dated 5th june, 2015.
(4) In case of Specified IFSC Public company – In Sub-section (1) of section 185, in the Explanation, for clause (c), the following clause shall be substituted, namely:-
“(c) any private company of which any such director is a director or member in which director of the lending company do not have direct or indirect shareholding through themselves or through their relatives and a special resolution is passed to this effect;”. -Notification Dated 4th January, 2017.
(5) In case of Specified IFSC Private company – In Sub-section (1) of section 185, in the Explanation, for clause (c), the following clause shall be substituted, namely:-
“(c) any private company of which any such director is a director or member in which director of the lending company do not have direct or indirect shareholding through themselves or through their relatives and a special resolution is passed to this effect;”. -Notification Dated 4th January, 2017.
Related Definitions
1company
‘company’ means a company incorporated under this Act or under any previous law.
2Director
‘director’ means a director appointed to the Board of a company.
3company or any
includes a director in the whole-time-employment of the company.
4Relative
‘relative’ with reference to a person, means any one who is related to another, if-
(i) they are members of Hindu Undivided Family
(ii) they are husband and wife; or
(iii) one person is related to other in such manner (as may be prescribed*)
*List of relatives in terms of clause (77) of section 2.-
A person shall be deemed to be the relative of another, if he or she is related to another in the following manner, namely:-
(1) Father:
Provided that the term “Father” includes step-father.
(2) Mother:
Provided that the term “Mother” includes the step-mother.
(3) Son:
Provided that the term “Son” includes the step-son.
(4) Son’s wife.
(5) Daughter.
(6) Daughter’s husband.
(7) Brother:
Provided that the term “Brother” includes the step-brother;
(8) Sister:
Provided that the term “Sister” includes the step-sister.
5body corporate
“body corporate” or “corporation” includes a company incorporated outside India, but does not include–
(i) a co-operative society registered under any law relating to co -operative societies; and
(ii) any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf;
6Total Voting Power
“total voting power”, in relation to any matter, means the total number of votes which may be cast in regard to that matter on a poll at a meeting of a company if all the members thereof or their proxies having a right to vote on that matter are present at the meeting and cast their votes;
7Board of Directors
“Board of Directors” or “Board”, in relation to a company, means the collective body of the directors of the company;
8Members
“member”, in relation to a company, means–
(i) the subscriber to the memorandum of the company who shall be deemed to have agreed to become member of the company, and on its registration, shall be entered as member in its register of members;
(ii) every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company;
(iii) every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository;
9Holding company
“holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies;
[Explanation.— For the purposes of this clause, the expression “company” includes any body corporate;]
10Subsidiary company
“subsidiary company” or “subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company–
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the 23[total voting power] either at its own or together with one or more of its subsidiary companies:
Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.
Explanation.–For the purposes of this clause,–
(a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;
(b) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;
(c) the expression company includes any body corporate;
(d) “layer” in relation to a holding company means its subsidiary or subsidiaries;
11Financial Institution
“financial institution” includes a scheduled bank, and any other financial institution defined or notified under the Reserve Bank of India Act, 1934 (2 of 1934);
(40) “financial statement” in relation to a company, includes–
(i) a balance sheet as at the end of the financial year;
(ii) a profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year;
(iii) cash flow statement for the financial year;
(iv) a statement of changes in equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any document referred to in sub-clause (i) to sub-clause (iv):
Provided that the financial statement, with respect to One Person company, small company and dormant company, may not include the cash flow statement;