Amendment under Section 185 Loan to Director : A Trap OR A Trick

Introduction

Section 185, being one of the crucial section of the Companies Act, 2013. It has changed the nature of transaction between the Company and its directors and all the transaction in which director were interested. The intention of introducing this Section was to curb the unnecessary benefits taken by the Directors directly or through their related parties. However, the strictness hampered the genuine transaction resulting in huge difficulties faced by the Business. To address this difficulties, the amendment was bought in this Section, and granting loans/guarantee/security was allowed to the Directors or to person in which director are interested subject to certain  compliance to be done with the intent to  protect the interest of the stakeholders.

The result of amendment is:

1. It made the Section Independent by deleting the starting lines stated that “Save as otherwise provided in this Act.”
2. It has introduced within the Section:
   • What can be done with Permission subject to certain condition
   • What are Prohibition imposed
   • What are the Exemption allowed
3. The Section has been categorised into 4 parts:
   • Prohibition
   • Conditional Permission
   • Exemption
   • Penalty for non compliance

Provision of Section 185 of Companies Act, 2013

Prohibition : 

As per the provision of Section 185(1), No Company shall, directly or indirectly,  advance

• any loan including loan represented by book debt
• give any guarantee or
• provide any security

to the following persons;

• director of the Company
• Company which is its Holding Company
• any partner/relative of any such Director
• any firm in which such director or relative is partner

Conditional Permission : 

Subsection 2 of Section 185 states the condition under which a Company may

•  advance any loan represented by book debt,
• provide any security or give any guarantee in connection with the loan taken *by any person in whom any of the director of the Company is interested

subject to the condition that

• Special resolution has been passed and for which the explanatory statement to the notice for relevant general meeting shall disclose all the particulars related to loan, purpose of loan and any other relevant fact; and
• Such loan shall be utilised by the borrowing company (applicable for companies only)  for the purpose principal business only.

It is further explained that any person in whom any of the director of the Company is interested means and includes:

1. any private company of which any such director is a director or member (member irrespective of holding)
2. any body corporate whose more than 25% of the total voting power in a general meeting is controlled/exercised by any such director individually or with other director
3. any body corporate, the Board/ Manager/Managing Director is accustomed to actin accordance with the directions/instruction of the Board/ Director/ Directors of the lending Company

Exemptions : 

As per provision of Section 183(3), no provision of Section 185(1) and 185(2) shall apply to the following transaction:

1. giving of loan to managing/ whole time director pursuant to part of the Service extended to all its employees or  the scheme approved by special resolution by the members
2. a company which gives in the ordinary course of business and charges interest at the rate not less than the rate of prevailing yield of 1 year, 3 years, 5 years or 10 years of the Government Security closet to the tenor of the loan
3. any loan made by holding company to  its Wholly Owned Subsidiary
4. any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary or by any bank/ financial institution to its subsidiary

Provided that such loan under (c) and (d) above are used by the subsidiary company for its business activities only.

Penalty : 

Without penalty, it is very difficult to implement any provision. In case of contravention of the provision of this Section, penalty would be as follows:

Conclusion : 

Section 185 is a guarding section which governs the transaction of the Company with its directors. Though amendments has been bought to provide ease to genuine transaction. However, the law makers has also made the law stringent and penalty on each and every person involved in the transaction. So, it is advisable to enter into transactions only after thorough research and subject to the compliance of the Provision of the Act.