When the Companies Act, of 1956 was in effect, public companies may offer loans, guarantees, and securities if they acquired prior authorization from the Central Government. The companies used to borrow cash and pass them on to subsidiaries and other related companies via inter-corporate loans. When it came to complying with the terms of the loan arrangement, however, the holding companies used to back down, leaving the subsidiaries in the lurch. Section 185 of the Companies Act, 2013 went into effect to prevent the exploitation of subsidiaries.
The Companies Act, 2013(Act) makes provisions relating to the granting of loans to company directors. Section 185 of the Act sets out the conditions and restrictions on the provision of loans to directors. Each company must comply with the conditions outlined in this section before making a loan or providing a guarantee or security in connection with any loan. This section also provides for the penalty of the company, the defaulting manager, and the directors who grant loans in contravention of the conditions set out in this section.
Understanding Section 185
Section 185 of the Companies Act, 2013 imposes specific limitations on the issuing of loans to Directors in order to monitor their performance.
Prior to the Amendment
The old Section 185 banned firms from extending any loan and/or providing any security or guarantee in regard to a loan taken out by the company’s directors or any other person in whom the director had an interest. Penalties were only authorized if a company or any beneficiary of such a loan, security, or guarantee was found to be in violation.
After the Amendment
Section 185 of the Companies Act (as amended by the Companies (Amendment) Act, 2017):
- Limits the restriction on loans, advances, and the like to Directors of the company or its holding company, or any partner of such Director, or any firm in which such Director or relative is a partner.
- Allows the company to make a loan, guarantee a loan, or provide security in connection with a loan to any person or entity in which any of the Directors is interested, subject to the following conditions: – The Company passing a Special Resolution in a General Meeting (approval of at least 75% of the members is required). – Loans must be used strictly for the borrowing company’s primary business activity.
- The penalty requirements of Section 185 (4) of the Act now extend to an officer in default of the company, in addition to the Company (which includes any Director, Manager or KMP or any person in accordance with whose directions BODs are accustomed to act).
- To avoid confusion as to whether the provision of section 186, which begins with the words “without prejudice to other provisions”, can exclude section 185, the new section omits the words “unless otherwise provided by law”.
- This new section allows companies to issue loans, guarantees, and securities to organizations in which directors are involved in certain situations, subject to the prior approval of shareholders by special resolution and on the condition that the loans are used by the borrower for the main business of the company.
- The interest rate referred to in section 185(3) clause (b) is under the rate established in Section 186, Paragraph 7 of the Act. Before the amendment, it was “interest at a rate not lower than the bank rate declared by the Reserve Bank of India”.
- The scope of penalties has been widened and as a result, the duties of each company’s “director” (as set out in Section 2(59) of the Act) have been increased to ensure that all loans, protection, and guarantees compliance with the provisions of the Act in which a company defaulter liable for criminal acts and may also be liable for criminal liability. A special wrong of violation of regulations when using a loan was also added to the list of crimes under this section.
Loan for Directors
Loans can be granted to the directors subject to certain situations. According to Section 185 of the Companies Act, 2013, a company may not provide loans directly or indirectly, including any loans represented by credit cards.
- To any of its directors
- Any person in whom the director of the lending company is interested, or
- To provide any security in respect of loans taken by a director or any such person
Section 185 of the Companies Act, 2013 read with Act 10 of the Companies (Board Meetings and Powers) Act 2014 provides that a company may not guarantee or lend to directors or any other person related to a director of the company. The rules and the above provisions clearly state that a director must not engage in any activity that is personally beneficial to him.
Loan to any interested person of the director
The company may make loans including any loan represented by book debt or give guarantee or provide a guarantee in respect of any loan made to any person in which the company’s director is interested. Section 185(2) allows the company under certain conditions to provide loans to any person in whom one of the executives is interested.
The conditions that must be met for the provision of loans or the provision of guarantees or security to a person in whom the director is interested are the adoption of a special resolution of the general meeting and the fact that the credit company uses the loans provided for its main business activity. The explanatory memorandum to the notification of the general meeting at which such a resolution to grant a loan is passed should contain full details of the loans or guarantees granted or the security provided and the purpose for which the loan or guarantee or security is proposed used by the person receiving the loan.
The statute establishes a list of persons who are considered to be persons in whom any of the company’s executives have an interest. The Company may grant loans or provide a guarantee or security only to such persons. They are-
- Any private company to which the lending company’s director is a member or director.
- Any corporate in whose general meeting not less than twenty-five percent of the total voting power may be exercised or controlled by any director of the Lending Company or by two or more such directors together.
- Any corporate, executive director, board, or manager who is accustomed to acting under the direction or instructions of the board or any director or directors of the Lending Company.
Exemption provisions
Section 185(3) of the Act provides for exceptions to the restriction of the company providing loans. The company may provide loans or provide a guarantee or collateral
- A full-time executive or director under the terms of service extended by the company to all its employees or under any plan approved by the members of the company by special resolution.
- A company that, in the ordinary course of business, makes loans or gives guarantees or guarantees for the proper repayment of any loan. Interest on such loans made shall be charged at a rate not less than the prevailing rate of return for one year, three years, five years, or ten years of the government security closest to the maturity of the loan.
- Any loan made by the holding company to its wholly-owned subsidiary or any guarantee given or guaranteed by the holding company in connection with any loan made to its wholly-owned subsidiary. The subsidiary must use the loans granted in this way for its main business activity.
- Any guarantee is given or provided by the holding company in connection with a loan made by any bank or financial institution of its subsidiary. The subsidiary must use the loans granted in this way for its main business activity.
Penalty
Section 185(4) of the Act provides for a sanction in case of violation of the above-mentioned provisions on the provision of loans. If a company extends credit in contravention of section 185, it shall be punishable with a fine which shall not be less than five lakh rupees but may extend to twenty-five lakh rupees. Any officer of the company who is in default shall be punished with imprisonment for a term which may extend to six months or with a fine which shall not be less than five lakhs of rupees but which may extend to twenty-five lakhs of rupees.
A director or any other person related to a director to whom any loan or security or guarantee is given shall be punished with imprisonment for a term which may extend to six months or with a fine which shall not be less than five lakhs of rupees but which may extend to twenty-five thousand rupees or with both.
FAQs
What is the purpose of Section 185 of the Companies Act, 2013?
When the Companies Act 1956 was in force, the public companies would grant loans, securities and guarantees upon prior permission of the Central Government. The companies used to borrow funds and transfer them to the subsidiaries. However, in case of any issue, the subsidiaries were left to tackle it on their own. That’s why Section 185 of the Companies Act, 2013 was introduced containing certain restrictions for granting loans.
Can a company grant loans to directors?
A company can grant loans to directors subject to certain conditions. Under Section 185 of the Companies Act, 2013, the company cannot provide loans directly or indirectly, including any loans represented by credit cards:
- To any of its directors
- To any partner or relative of the director
- Provide security in respect of loans taken by the director or any such person
Does an LLP need to follow the provision of Section 185 of the Companies Act 2013?
No, LLP is not covered under the Companies Act, 2013. An LLP needs to follow the provisions of the Limited Liability Partnership Act, 2008 and not the Companies Act, 2013. Thus, they do not have to follow the provisions laid down under Section 185 of the Companies Act, 2013 while granting loans to its partners.
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Income Tax Return Filing | Income Tax Appeal | Income Tax Notice | GST Registration | GST Return Filing | FSSAI Registration | Company Registration | Company Audit | Company Annual Compliance | Income Tax Audit | Nidhi Company Registration| LLP Registration | Accounting in India | NGO Registration | NGO Audit | ESG | BRSR | Private Security Agency | Udyam Registration | Trademark Registration | Copyright Registration | Patent Registration | Import Export Code | Forensic Accounting and Fraud Detection | Section 8 Company | Foreign Company | 80G and 12A Certificate | FCRA Registration |DGGI Cases | Scrutiny Cases | Income Escapement Cases | Search & Seizure | CIT Appeal | ITAT Appeal | Auditors | Internal Audit | Financial Audit | Process Audit | IEC Code | CA Certification | Income Tax Penalty Notice u/s 271(1)(c) | Income Tax Notice u/s 142(1) | Income Tax Notice u/s 144 |Income Tax Notice u/s 148 | Income Tax Demand Notice | Psara License | FCRA Online
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Company Registration in Jaipur | Company Registration in Delhi | Company Registration in Pune | Company Registration in Hyderabad | Company Registration in Bangalore | Company Registration in Chennai | Company Registration in Kolkata | Company Registration in Mumbai | Company Registration in India | Company Registration in Gurgaon | Company Registration in Noida | Company Registration in lucknow
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tnreginet |rajssp | jharsewa | picme | pmkisan | webland | bonafide certificate | rent agreement format | tax audit applicability | 7/12 online maharasthra | kerala psc registration | antyodaya saral portal | appointment letter format | 115bac | section 41 of income tax act | GST Search Taxpayer | 194h | section 185 of companies act 2013 | caro 2020 | Challan 280 | itr intimation password | internal audit applicability | preliminiary expenses | mAadhar | e shram card | 194r | ec tamilnadu | 194a of income tax act | 80ddb | aaple sarkar portal | epf activation | scrap business | brsr | section 135 of companies act 2013 | depreciation on computer | section 186 of companies act 2013 | 80ttb | section 115bab | section 115ba | section 148 of income tax act | 80dd | 44ae of Income tax act | west bengal land registration | 194o of income tax act | 270a of income tax act | 80ccc | traces portal | 92e of income tax act | 142(1) of Income Tax Act | 80c of Income Tax Act | Directorate general of GST Intelligence | form 16 | section 164 of companies act | section 194a | section 138 of companies act 2013 | section 133 of companies act 2013