Loan to Directors, etc. - Section 185 of Companies Act, 2013
Loan
to Directors, etc.
Section 185 of
Companies Act, 2013, explains the provisions related to loan or advances to
directors or any security provided in connection with any loan taken by him or
his relative either directly or indirectly by company and also the punishment
for contravention of the provisions of this section. The main intention behind
this section in Companies Act is to ensure that directors who are having a
fiduciary position in the Company with respect to shareholder cannot utilize
the funds of the Company for their own benefits. However, it is also known that
the Shareholders are the ultimate owner of the Company so they have full right
to approve the utilization of the funds of the Company in the specified manner
in the interest of the Company. Let’s discuss the provisions:
Section 185 (1) says that:
No Company shall directly or
indirectly:
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Ø advance any loan including any loan represented by a book debt, or
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Ø give any guarantee, or
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Ø provide any security in connection
with any loan taken by:
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A
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B
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any
director of company; or
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Any
firm in which any such director is
a partner; or
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any
director of Holding company; or
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any
partner of any such director; or
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Any
firm in which any relative of such
director is a partner.
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any
relative of any such director; or
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Section 2(77)
"relative", with
reference to any person, means anyone who is related to another, if—
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Members
of a HUF
Husband
and wife
Father
including step father
Mother
including step mother
Son
including step Son
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Son’s
wife
Daughter
Daughter
Husbands
Brother
includes step Brother
Sister
includes step sister
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Section 185(2) says that:
A company may:
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“any person in whom
any of the director of the company is interested” means—
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(a)
any private
company of which any such director is a director or
member;
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(b)
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
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(c)
any body
corporate, the Board of directors, MD 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.
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Subject to the
condition that—
(a) A special resolution is passed by the company in general meeting:
Ø The explanatory statement to the notice for the relevant general meeting shall disclose the full particulars of the loans
given, or guarantee given or security provided and
Ø The purpose for which the loan or
guarantee or security is proposed to be utilized
by the recipient of the loan or guarantee or security and any other
relevant fact;
(b) The loans are utilized by the borrowing company
for its principal
business activities.
Section 185(3): Exceptions to Sections
185(1) and 185(2): Means
said provision shall not apply:
(a)
If the giving
of any loan to a MD or whole-time director—
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(i)
as a part of
the conditions of service extended
by the company to all its employees; or
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(ii)
pursuant to any
scheme approved by the members by a special resolution; or
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(b)
If a Company in the ordinary course
of its business, provides loans or gives guarantees
or securities for the due repayment of
any loan and in respect of such loans an interest is charged at a rate
not less than the rate of prevailing yield of 1 year, 3 years, 5 years or
10 years Government security
closest to the tenor of the loan; or
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(c)
any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a
holding company in respect of any loan made to its wholly owned subsidiary
company and it is used for principal business activities by subsidiary company
; or
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(d)
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 and
it is used for principal business activities by subsidiary company:
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Section 185(4): Punishment for
Contravention under Section 185:
(i)
The Company
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(ii)
Every officer in default
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(iii)
The director or the other
person to whom any loan/guarantee/security is given or provided.
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EXEMPTIONS TO THE PRIVATE COMPANY
Section
185 of Companies Act 2013 not applicable on the private Company as per exemption notification (notification no.
G.S.R 583(E)) dated 5th
June 2015: If fulfill the following Conditions:
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a) In
whose share capital no other body
corporate has invested any money.
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b) If
the borrowings of such a company from Banks or financial institutions or any body corporate is less
than twice its paid up capital or Rs. 50 crores whichever is lower.
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c) Such
Company has no
default in repayment of such borrowings subsisting at the time of
making transactions.
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EXEMPTIONS TO THE GOVERNMENT COMPANY
Section 185 shall not
apply to the Government Company if it takes prior approval of concern ministry
or department as per Notification No. G.S.R. 463 (E) dated 05th
June, 2015.
EXEMPTIONS TO THE NIDHI COMPANY
Section 185 shall not
apply to a Nidhi Company as per Notification No. G.S.R. 465(E) dated 05th June,
2015.
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Sir in exam can we write as it is in section 185(1) ?
ReplyDeleteYou can modify according to your question, but the facts should not be changed.
DeleteYou can modify according to your question, but the facts should not be changed.
DeleteYou can modify according to your question, but the facts should not be changed.
Deletecan a company give loan to its additional director?
ReplyDelete