06-May-2020 Loan To Directors

Section 185 lays down provisions relating to providing loans, guarantee and security to directors and other persons in whom the director is interested. Earlier the section strictly prescribed prohibitions relating to lending of loan and providing guarantee and security to its directors and other interested persons. However, later on, few exemptions and amendments to the law were introduced by the Ministry of Corporate Affairs in order to provide relaxation and improve ease of doing business.

Presently, the Section has been entirely replaced by a new section as per the amendment made via. Companies (Amendment) Act, 2017. The new section has already become applicable w.e.f. 07th May, 2018.

The amended provisions are partly prohibitive and partly restrictive. The section continues to prohibit the granting of loan/guarantee/security to some, while restricts the others in the following way:

Prohibitive to:

·          directors of the company, or

·          directors of a company which is its holding co.; or

·          any partner of such director; or

·          relative of such director

Restrictive to:

·          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;

·          any body corporate, the BoD, MD or manager, whereof is accustomed to act in accordance with the directions or instructions of the BoD, or of any director or directors, of the lending company.

The amended provisions allow the companies to grant loans/guarantees/securities to entities in which directors are interested, in the above mentioned restrictive cases, subject to prior approval of the shareholders by a special resolution and on the condition that such loans are utilised by the borrower for its principal business activities. The said provisions have been amended to make such transactions possible for the sake of ease of doing business.

STATUS OF EXEMPTIONS PROVIDED TO THE PRIVATE COMPANIES

The amended section 185 seeks to completely replace the existing provisions of section 185 of Companies Act, 2013. However, the exemption notification dated June 5, 2015 (click on the link for the notification https://www.mca.gov.in/Ministry/pdf/Exemptions_to_private_companies_05062015.pdf) shall continue to hold good and the amended provisions of section 185 shall be not applicable to private companies subject to the conditions prescribed in the notification.

As per the exemption notification dated June 5, 2015 only those private companies which fulfil the prescribed conditions are exempted from the provisions of section 185. Hence, private companies which do not fulfil the conditions prescribed are subject to the prohibition as per the amended section 185, i.e., the private companies, which do not fulfil the conditions for availing the exemption, will be able to grant loan/guarantee/ security under the restrictive purview.

SUBSTANTIAL CHANGES MADE UNDER SECTION 185 BY THE AMENDMENT ACT

·         By this new section, Companies are allowed to grant loans, guarantees and security to entities in which directors are interested, in certain cases, subject to prior approval of the shareholders by a special resolution and on the condition that such loans are used by the borrower for its principal business activities. 

·         The ambit of the penalties has been widened and as a result, the obligations of every “officer” of a company (as defined in Section 2(59) of the Act) have been increased to ensure that all loans, security and guarantees are in compliance with the provisions of the Act failing which officer of the company who is in default shall be liable for penal actions and may also attract criminal liability. Also, in the list of offenses under this section, specific offence of contravention in utilization of loan has been added. 

EXEMPTIONS FROM SECTION 185

Exceptions have been mentioned in the third subsection, which do not attract any restrictive provision of this section: 

* Note: Provided that the loans made under clauses (c) and (d) are utilized by the subsidiary company for its principal business activities.

TABLE DEPICTING THE  CURRENT AND AMENDED PROVISIONS OF SECTION 185

CONCLUSION:

 In view of the latest updated provisions relating to loan to director etc., it can be concluded that a company is not allowed to advance any loan, give guarantee or provide any security in connection with a loan made, to any of its director, director of its holding company, relative or partner of such director or any firm in which such director or relative is a partner.

Further, a company may be allowed to give such financial assistance to any person in whom such director is interested if a special resolution has been duly passed in its general meeting and the loan has been proposed to be utilized for borrower company’s principal business activities. 

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