Introduction
An Act of the Parliament of India - The Companies Act 2013 Law regulates various stages of formation of a company from incorporation to dissolution. It also regulates the day - to - day functioning of a company. Via this article, we will help you get acquainted with the Section 185 of Companies Act 2013.
Section 185 of Companies Act 2013
Section 185 of Companies Act 2013 deals with prohibitions, relaxations and exemptions on the part of companies towards lending of loans, providing security & guarantee to the directors of such a company or any other person in whom directors are interested. It also deals with the penalty in case of contravention of the provisions of the section takes place.
Purpose of section 185 of companies act 2013
When Companies Act 1956 was in force, public companies used to grant loans, guarantees and securities on a prior permission of Central Government. Companies were used to borrow funds and pass them to the subsidiaries. However, in case of any issue, subsidiaries were left on their own to tackle it.
That’s when Section 185 of the Companies Act was formed putting certain restrictions for granting loans.
- It explains the provisions under company law related to direct or indirect loans or advances to the directors by the company.
- Section 185 of Companies Act 2013 also explains the penalty for contravention of Provisions of Section 185 of Companies Act, 2013.
Loans to Directors:
Section 185 (1) of the Companies Act 2013 states that a company cannot:
- Advance loan directly or indirectly,
- Advance loan that includes a loan represented by a book debt,
- Gives security or provide a loan with connection to any loan taken
to a director, director of its holding company, relative, partner of any director or any firm in which a director is a partner or any other person in whom director is interested. Hence, this section prohibits granting loans to the relatives or directors or partners of the directors of the company.
Loans to any interested person of a director:(Section 185) (2)
Section 185 (2) allows a company to give loans to any person in whom any of the directors are interested in subject to certain conditions. The company can advance the loans or give security or guarantee only to these persons:
- Any private company of which any director of the lending company is a director or member.
- Any body corporate of which not less than twenty-five per cent of the total voting power exercised or controlled by any director of the lending company, or by two or more such directors together.
- Any managing director, body corporate, the board of directors, or manager, which is accustomed to act in accordance with the instructions or directions of the board, or of any director or directors of the lending company.
Exemption provisions (Section 185) (3):
This section provides exceptions to the restriction on the company for granting loans. A company can give a guarantee or advance loans or security to:
- The whole - time director or managing director as a part of the conditions of service extended by the company to all of its employees or pursuant to any scheme approved by the members of the company by a special resolution.
- A loan given by a holding company to its wholly owned subsidiary company or any guarantee provided by a holding company in respect of any loan made to its wholly owned subsidiary company.
- A company that provides loans or gives securities or guarantees for the repayment of any loan in the ordinary course of its business. The interest on such loans advanced is charged at a rate for not less than the rate of prevailing yield of one year, three years, five years or ten years closest to the tenor of the loan.
- Any security or a guarantee is given by a holding company in respect of a loan made by any financial institution or bank to its subsidiary company. The subsidiary company must utilize these loans for principal business activities.
Penalty provisons (Section 185) (4):
- The lending company will be punished with the fine of less than Rs. 5 Lakhs; this may extend to Rs. 25 Lakhs.
- Every officer who would be in default shall be liable to be punished with imprisonment which may extend to six months or with fine which shall not be less than Rs. 5 Lakhs, but may also extend to Rs. 25 Lakhs.
- A person or any person related to the director to whom any loan is advanced or any security is given will be liable to be punished with the imprisonment for six months or with fine which shall not be less than Rs. 5 Lakhs, but may also extend to Rs. 25 Lakhs or with both.
Checklist (Section 185):
The points to be remembered under Section 185 of the Companies Act while advancing loans or providing security/guarantee with connection to any loan:
- A company cannot advance loans to directors, relatives or partners. Any security or guarantee with connection to loan can also not be provided to them.
- A company cannot advance loans to a firm in which a director is a relative or a partner. Any guarantee or security with connection to any loan can also not be provided to them.
- Loans, guarantee or security can be given to the person in whom the director of the company is interested after passing a resolution in the general meeting.
- Only the persons and entities mentioned in Section 185 (2) are considered as persons in whom the director of the company is interested. Hence, the company is required to check if the persons to whom they want to grant loan comes under the list of persons mentioned in section 185 (3) of the Act.
Loans in Foreign Currency:
Indian companies in India can grant loans in foreign currency to the employees of their branches outside India for personal purposes. The loan can be granted in accordance with the lender’s staff scheme, loan rules and other terms & conditions as applicable to the staff resident in India and abroad.
Conclusion:
Hence, we can say that Section 185 of Companies Act 2013 is framed in such a way that safeguards the interest of shareholders by prohibiting loan or guarantee or security given by the company. It also provides exemptions and relaxations for ease of doing business.
FAQs:
Q1. Is LLP considered in Section 185 of Companies Act 2013?
Ans. No, LLP is not considered in Section 185 of Companies Act 2013.
Q2. What is the limit of giving a loan to a director as per Companies Act 2013?
Ans. No company shall directly or indirectly give any loan to any other person or body corporate exceeding 60% of its paid up share capital, free reserves and share premium.
Q3. Can a Private Limited Company give loan to a director?
Ans. Yes, a Private Limited Company can give 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 a company to all its employees
Q4. What is the penalty under Section 185 of Companies Act 2013?
Ans. Fine of Rs. 5 Lakhs that can be extended to Rs. 25 Lakhs, a person can also be imprisoned for 6 months.
Q5. Is Section 185 of Companies Act 2013 applicable to a private company?
Ans. Yes, Section 185 of Companies Act 2013 is applicable to a private company.
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