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The Companies Act, 2013 (“Act”) regulates the provisions relating to grants of loans to directors of the company. Section 185 of the Act provides the conditions and restrictions of granting loans to the directors. Every company must follow the conditions laid down in this Section before granting loans or giving guarantee or security in connection with any loan. This Section also provides a penalty to the company, officer in default and the directors who grant loans in contravention to the conditions laid down in this Section.
Section 185(1) of the Act states that a company cannot –
to a director, director of its holding company, partner or relative of any director, or any firm in which a director is a relative or a partner. Thus, this Section prohibits granting loans to the directors or relatives or partners of the directors of the company.
A company may advance loans including any loan represented by a book debt or give guarantee or provide security in connection with any loan taken to any person in whom any of the directors of the company is interested. Section 185(2) allows a company to give loans to any person/entity in whom any of the directors are interested in subject to certain conditions.
The conditions which are to be fulfilled for advancing loans or providing guarantee or security to the person in whom the director is interested is that a special resolution in general meeting is to be passed and that the borrowing company utilises the loans granted for its principal business activities. The explanatory statement to the notice of the general meeting in which such a resolution for granting the loan is passed should disclose the full particulars of the loans or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the person receiving the loan.
The Act provides the list of the persons who are considered as persons in whom any of the directors of the company is interested. The company can advance the loans or give the guarantee, or security only to these persons. They are-
Section 185(3) of the Act provides exceptions to the restrictions on the company to grant loans. The company can advance loans or give a guarantee, or security to-
Section 185(4) of the Act lays down penalty if the provisions mentioned above relating to providing loans are contravened. If the company advances loan in contravention to Section 185, 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. Every officer of the company who is in default shall be liable to be punished 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.
The director or any other person related to the director, to whom any loan is advanced or guarantee or security is given shall be liable to be punished 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.
The points to be remembered under Section 185 of the Act while advancing loans or providing guarantee or security with connection to any loan are-
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.
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:
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.
A company cannot directly or indirectly give a loan to any other person or body corporate exceeding 60% of its paid-up share capital, free reserves and share premium.
In the Companies (Amendment) Act, 2015, the exemption is given to the company that provides a loan, security or guarantee to its wholly-owned subsidiary. The subsidiary can use the loans granted for its principal commercial activities.
Yes, a Private Limited Company can grant a loan to a managing/whole-time director of the company if it is approved by a special resolution in the meeting and if this facility is given by the PLC to all its employees.
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