Section 185-Loan to Directors, etc

Section 185- Loan to Directors, etc.

Section 185 states that Company cannot give loan to directors of the company and others and also defines to whom the company can give loans.

The other than directors includes list of persons

Let’s understand the section along with the intent of the law. Here, the section is divided into three parts Prohibited, Restricted and allowed So lets’ start without further ado:

1. PROHIBITED -forbidden by law or not allowed

The section prohibits Loan to

a) Individuals who are

• Director of the Company
• Director of the Company’s Holding Company,
• partner or relative of such director

b) Firm where:

• any such director or relative** is a partner

2. RESTRICTED- means something is put under control or limits

The section provides liberty to some extent for giving Loan to “ANY PERSON IN WHOM ANY OF THE DIRECTORS  OF THE COMPANY IS INTERESTED” only if

• A special resolution is passed and an explanatory statement to the notice for the relevant general meeting shall disclose the full particulars of the loans & other relevant facts.
• the loans are utilized by the borrowing company for its principal business activities

“ANY PERSON IN WHOM ANY OF THE DIRECTORS  OF THE COMPANY IS INTERESTED” is explained under section185(2) (b).ie.

a) any private company of which any such director is a DIRECTOR or MEMBER;

(b) any body corporate at a general meeting of which not less than twenty-five percent. of the total voting power may be exercised or controlled by any such director, or by two or more such Directors, together; or

(c) 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.

3. ALLOWED:

Loan* to

• a managing or whole-time director

as a part of the conditions of service extended by the company to all its employees; any scheme approved by the members by a special resolution

• Or Company provides Loan ordinary course of its business but such loan should bear interest rate ate 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.
• Loan by holding Company to its WHOLLY-OWNED SUBSIDIARY For its principal business activities
• 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, For its principal business activities

PUNISHMENT PROVISIONS

in case of breach of any provision in this section fine or penalty imposed by the section is:

On company

• fine of Rs. 5 lac- 25 lac

On Officer in default or director

• imprisonment upto 6 months or
• with fine Rs. 5 – 25 lac