LOANS TO DIRECTORS

  CS C. M. Bindal     0000-00-00 00:00:00

APPLICABILITY OF SECTION 185

“LOANS TO DIRECTORS”

 

BASIC PROVISIONS

Section 185 says “No company (both public & private) shall directly/indirectly

  • Advance any loan (including loan represented by a book debt) to any of its directors or to any other person (Individual) in whom the director is interested* ; or
  • Give any guarantee; or provide any security in connection with any loan taken by him or such other person.

The director is deemed to be interested means as follows:

  • 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 25% 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 on accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.    

Relative includes:

  • Members of HUF,
  • Husband & Wife and
  • Others as may be prescribed i.e. one or more of the following:

(1) Spouse                                     (2) Father (including step-father)

(3) Father’s father                           (4) Father’s mother

(5) Mother( including step-mother)    (6) Mother’s mother

(7) Mother’s father                           (8) Son ( including step-son)

(9) Son’s wife                                 (10) Son’s son

(11) Son’s daughter                        (12) Daughter (including step-  daughter)

(13) Daughter’s husband                 (14) Brother ( including step-  brother)

(15) Sister (including step-sister)

EXEMPTION

1.Any loan given to MD/WTD

  • As a part of the conditions of service extended by the company to all its employees; or
  • Pursuant to any scheme approved by the members by a Special Resolution; or

2. A company which in ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loan an interest is charged at a rate not less than the bank rate declared by the RBI.(Normally NBFC’s)

 

EFFECT

  • Private companies also are covered in the ambit w.e.f. 12.09.2013.
  • The requirement of permission of CG for giving loan to Director as required under the Companies Act, 1956 has been dispensed with.
  • The exemption given to loan granted, guarantee or security provided by any Holding Company to its subsidiary has also been dispensed with.
  • The previous transactions of Section 295 of the Companies Act, 1956 shall cease to have effect.
  • The Company will also be punishable in case of contravention of this section.

 

PENALTIES ON CONTRAVENTION

  • Against the Company

In case of default in complying with the provisions of the new Section, the Company shall be punishable with fine of atleast Rs.5,00,000/- which may extend to Rs.25,00,000/-

  • Against the Directors 

The Director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with

  • Imprisonment which may extend to 6 months or
  • Fine which shall be of atleast Rs.5,00,000/- which may extend to Rs.25,00,000/- , or
  • Both. 

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