Section 185 of the Companies Act, 2013 which has been notified on 12th September 2013 has replaced the old section 295 of the Companies Act, 1956 which provides for loans to directors.
Section 185 now applies to all companies including private companies. Earlier private companies were exempted from the provisions of the old section 295 of the Companies Act, 1956. As per Section 185, no company can give any loan to its directors or to persons in whom the directors are interested.
Rule 10 of Companies (Meetings of Board and its Powers) Rules, 2014.
A Company shall not directly or indirectly advance any loan or give any guarantee or provide security to any of its directors or to any other person in whom the directors are interested.
The provisions of this section does not apply in the following cases:
- loan given to a managing director/whole-time director, as a part of the conditions of service extended by the Company to all its employees.
- loan given to a managing director/whole-time director in pursuant to any scheme approved by the members by a special resolution.
- a Company which in the ordinary course of its business provides loans or gives guarantees or securities.
- loan made by a holding company to its wholly owned subsidiary company or guarantee given/security provided by a holding company in respect of any loan made to its wholly owned subsidiary company.
- guarantee given/security provided by a holding company in respect of loan made by any bank /financial institution to its subsidiary company.
The loans made under (d) & (e) above shall be utilized by the subsidiary company for its principle business activities.
(A) “to any other person in whom director is interested” includes the following:
- any director of the lending Company, or of a Company which is its holding Company or any partner or relative of any such director;
- any firm in which any such director or relative is a partner;
- any private Company of which any such director is a director or member;
- 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
- 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.
(B) “Book debt” means a trade debt in some way connected with trade of a businessman, which arises in the ordinary course of business, whether it is entered in any books of the business or not. [held in Independent Automatic Sales Ltd. V. Knowles & Foster].
(C) “Accustomed to” means customary, usual, habitual, habituated, acclimated, be used to, being in the habit or custom.
Penalty for contravention of provisions of Section 185:
For contravention of provisions of Section 185, the loan giver and loan receiver, both are punishable as follows:
- Company - Minimum of Rs. 5.00 lac which may extent to Rs. 25.00 lac.
- Director/any other person to whom any loan is advanced/guarantee is given/security is provided:
Fine - Minimum of Rs. 5.00 lac which may extent to Rs. 25.00 lac
Imprisonment - Maximum of 6 (six) months [or] with both
Key changes in Companies Act, 2013:
- Previously the provisions of Section 295 were restricted and allowed only with the Central Government’s approval, but now the provisions are amended. Making application to Central Government for sanctioning the loan to directors is not into force now and has been dispensed with.
- Now a Company cannot advance any kind of loan / guarantee / security to any director, director of holding company, his partner, his relative, Firm in which he or his relative is partner, private company in which he is director or member or anybody corporate whose 25% or more of total voting power or board of directors are controlled by him.
- Provisions of Section 185 applies to all companies. The exemption given to subsidiary companies and private companies under Companies Act, 1956 has been dispensed with.
- Now the concerned company shall also be punishable in addition to the persons who knowingly violate the provisions of this Section.
Disclaimer: The entire contents of this document have been developed on the basis of relevant information and are purely the views of the authors. Though the authors have made utmost efforts to provide authentic information however, the authors and the company expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document.