Section 185 of the Companies Act, 2013 - Loans to Directors

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Can a company give loan to a person who is a director of the company?

A company shall advance loan to its director, directly or indirectly, subject to approval by a special resolution of the shareholders. The compliance restriction of shareholder’s approval shall be applicable even in case the loan is given to the director in the course of business of the company. However, Section 185 does not explicitly specify whether the special resolution should be prior to advancing the loan, although a prior approval stands as a good corporate practice.

With respect to the Special Resolution, a notice shall first be sent to the shareholders of the company calling for a general meeting for the purpose of taking shareholder’s approval on advancement of loan. Further, an explanatory statement shall be attached to the notice which shall specify in detail the following:

1. Particulars of the loan advanced or to be advanced;

2. Purpose of the taking the loan by the director.

Can a company give loan to any other person apart from the director of the company?

Per Section 185 of the Companies Act, 2013, a company can advance loan to:

1. directors of the company, or

2. directors of its holding company; or

3. any partner of a firm in which such director is a partner; or

4. relative of such director;

5. any private company of which any such director is a director or member;

6. 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;

7. any body corporate, the board of directors or managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the board of directors, or of any director or directors, of the lending company.

Note: The term such director refers to a director(s) of the company specified in point 1.

What are the circumstances where a company can give loan and not be covered under Section 185 of the Companies Act, 2013?

A. A company may give a loan to its managing director or a whole-time director pursuant to a scheme approved by shareholders of the company by a special resolution or as a part of the conditions of service extended by the company to all its employees.

B. A company whose ordinary course of business is to provide loans shall be exempted from the compliances of section 185 provided the company charges an interest on such loan and at such a rate which is 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.

C. A loan given by a holding company to its subsidiary company (provided the subsidiary utilizes the loan advanced to it for its principal business activities).

What is the purpose of Section 185 of the Companies Act, 2013?

Section 185 of the Companies Act, 2013 curbs or restricts the misuse of powers by directors. Section 185 ensures that the directors are not enriched at the expense of the funds of the company.

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