Loan to Directors u/s 185:- Old vs Substituted Section

Section 185 of the Companies Act, 2013 had been completely substituted by Companies (Amendment) Act, 2017 dated 07th May, 2018.

loan-to-directors-section-185

Substituted Section 185:

A company cannot advance any loan, including any loan represented by book debt, or give any guarantee or provide any security whether directly or indirectly to:

  1. Any director of
  • company or
  • a company which is its holding company or
  • any partner or relative of any such director
  1. Any firm in which any such director or relative is a partner.

When can company advance loan?

A company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the director of the company is interested, subject to the following  conditions –

  1. Special Resolution is passed by the company in General Meeting.
  2. The loans are utilised for its principal business activities by the borrowing company.

Exceptions to Section 185

Following lie outside the preview of the stated section:

  1. Loan given:
  • To MD or WTD
  • As a part of the conditions of service extended by the company to all its employees; or
  • Pursuant to any scheme approved by the members by a special resolution

Or

  1. Loan given in ordinary course of business: A company in ordinary course of business provides loans or gives guarantees or securities for due repayment of loan and interest is charged for such loans at a rate 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

Or

  1. Loan made by holding company to wholly owned subsidiary or guarantee or security provided by holding company in respect of any loan made to its wholly owned subsidiary.

Or

  1. 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.

Differences between old and substituted section at a glance:

S. No. Provision as per old section Provision as per aubstituted section
1 Old section started with the words “Save as otherwise provided in the Act” Substituted section omitted these words.
2 Under old section companies were not allowed, directly or indirectly to advance any loan  including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person. Under substituted 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.
3 Interest rate prescribed under old section was “interest at a rate not less than the bank rate declared by the Reserve Bank of India” The substituted section prescribed the interest rate at a rate 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
4 The old section did not contain any provision relating to obligation of “officer” of a company and also there was no provision of penalty for offence of contravention regarding “utilization of loan”. The new section widened the scope of penalty in case of offence. It included obligations of “every officer” of a company in its ambit. Also, in the list of offences under this section, specific offence of contravention in “utilization of loan” has been added.

Thus, it can be said that the new section has widened the horizon of lending to the Directors but with more specific provisions, interest rates and penalties.

Disclaimer: This content is meant for information only and should not be considered as an advice or opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.

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