The author in this article has extensively explained the nuances of Section 185 of the Companies Act 2013. This article is not intended as legal advice.
What is Section 185 of the Companies Act, 2013?
- Loans to directors, etc. – (1) Unless otherwise provided in this Act, no company may, directly or indirectly, make a loan, including a loan represented by a book debt, to any of its directors or to any other person in whom the director is interested there is, given any guarantee or security in connection with a loan taken out by him or another person:
Unless otherwise specified in this subsection, the following applies to:
(a) the granting of a loan to a general manager or a full-time director –
(i) as part of the terms of service that the Company grants to all of its employees; or
(ii) according to a scheme approved by the members by special resolution; or
(b) an entity that, in the ordinary course of its business, grants a loan or provides guarantees or collateral for the proper repayment of a loan, and interest on such loans will be charged at a rate not less than the bank interest rate indicated by the Bank of India ;
[(c) any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or
(d) any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company:
Provided that the loans made under clauses (c) and (d) are utilised by the subsidiary company for its principal business activities.]
Explanation of Section 185 of the Companies Act, 2013
For the purposes of this section, the phrase “to any other person in whom the Director is interested” means:
(a) a director of the lending company or any company that is its holding company or a partner or relative of such director;
(b) any firm in which such director or related is a partner;
(c) any private company of which such a director is a director or a member;
(d) any legal person whose general meeting is at least twenty-five percent. the total voting rights; may be exercised or controlled by such a director; or by two or more such directors together; or
(e) any legal person, director, manager or manager who is accustomed to act in accordance with the instructions or directions of the board of directors or any director or directors of the lending company.
(2) If a loan is granted or a guarantee or security is given or provided in violation of the provisions of paragraph 1, the Company shall be punished with a fine not less than five lakh rupees, but which may extend to twenty-five Lakh rupees;
and the director or other person to whom a loan is made or any guarantee or security is given or provided in connection with a loan
Taken from him or the other person is punishable by imprisonment for up to six months or a fine which can be no less than five lakh rupees but up to twenty-five lakh rupees or both.
Purpose of Section 185
Before the Companies Act, 2013; The Companies Act of 1956 was in effect. Under the previous law, public corporations could provide loans, guarantees, and securities with prior approval from the central government.
As a result, companies borrowed funds and passed them on to their subsidiaries. When compliance issues were raised, the subsidiaries were left on their own to address the issue.
To put an end to this practice, Section 185 of the Companies Act 2013 came into force.
Section 185 of the Companies Act sets certain restrictions on loans to the Directors.
Section 185 under the Companies (Amendment) Act, 2017
- It limits the limit on loans to the directors.
- Allows the company to provide loans / guarantees / collateral to any person or entity that any of the directors are interested in, subject to:
- A special resolution is taken in the company at the general meeting. (75% agreement)
- The use of loans by the lending company is solely for its main business activity.
- The scope of the criminal provisions has been expanded. It now extends to an executive in default of the company (including director, manager, etc.).
- Well, no less than Rs. 5 lakh extended up to Rs. 25 lakh could be imposed on the lending company
- Imprisonment for the defaulting officer, extendable to up to 6 months, along with a fine of at least Rs. 5 lakh and up to Rs. 25 lakh.
- The recipient of the loan will be punished with a prison sentence of up to 6 months or a fine of at least Rs. 5 lakhs, which can extend to Rs. 25 lakhs or both.
According to rule 10 of Companies (Meetings of the Board of Directors and its powers) Rules, 2014, p. 185 of the 2013 plot would not apply to
- A loan from a holding company Companies to the wholly-owned subsidiary Companies;;
- Guarantee or security of a holding Companies;; in relation to loans to the wholly owned subsidiary Companies;;
- Guarantee or security of a holding Companies;; in relation to a loan to its subsidiary Companies from a bank or financial institution.
Loans in foreign currency?
Indian Companies in India, foreign currency loans may be granted to employees of their branches outside India; for personal use. Provided the loan is granted for personal use as per the; Lender Personnel / Loan Rules and Other Terms for Employees Residing in India and Abroad.
[Regn. 5(7) of FEM (Borrowing or Lending in Foreign Exchange) Regulation, 2000 inserted vide Notfn. GSR 531(E), dt. 08-01-2003].
§ 185 of 2013 plot places a total ban on loans to directors and any person in whom; The director is interested, with the exception of the two exceptions in (a) and (b) of the reservation to p. 185 (1) of 2013 plot. There is no central government approval for such loans as they are prohibited. The punishment takes place in s. 185 (2) of 2013 plot;; This provides for a prison sentence of up to 6 months and a fine of up to 25 rupees.
Section 20 (1) of the Banking Ordinance plot1949; also sets limits on loans and advances to the directors and the companies in which they have a material interest.
Person in whom the director is interested
§ 185 of 2013 plot;; provides a complete list of who or what is considered to be “the person the director is interested in”. The list is as follows:
- Any director of lending Companies or its involvement Companies or a relative or partner of such a director;
- Any company in which the director or his relative is a partner;
- Everyone private Companies in which the director is a director or member;
- Any corporation in which the director, individually or with other directors, exercises or controls at least twenty-five percent of the total voting rights at a general meeting of the corporation;
- Any corporation whose board of directors, managing directors or managing directors one is used to plot in accordance with the instructions or directions of the board of directors, director or directors of lending Companies
What is Section 185 of the Companies Act 2013?
§ 185 of Law of 2013, forbidden Companies from obtaining any loan (including any loan represented by a book debt) or from providing any guarantee or security in connection with any loan taken out by the directors of such loan Companies or someone else the directors are interested in.
Does section 185 apply to private companies?
According to the release notice issued by MCA on June 5th, 2015 § 185 should not applicable on Private Limited Companiesif it fulfills the conditions specified therein. Note: … you can Release loan / guarantee / security by following the terms of section 186 and other provisions of Companies Law, 2013.
Does Section 185 apply to NBFC?
Loans and advances from NBFC are excluded from ICA, 2013, according to 186, but guarantee / security provided by NBFC Company was not covered.