Section 185 of the Companies Act, 2013 prohibits a company from giving loans, guarantees or security to its directors or to persons in whom the directors are interested. The prohibition is designed to prevent the diversion of company funds.
The prohibition
A company cannot:
- Give a loan to a director
- Give a loan to a person in whom a director is interested
- Give a guarantee or security in connection with a loan to a director
- Give a guarantee or security in connection with a loan to a person in whom a director is interested
The exemptions
The prohibition does not apply to:
- A loan to a managing or whole-time director as part of the conditions of service
- A loan to a company whose director is a director of the lending company, if the loan is approved by a special resolution
- A loan to a subsidiary company, if the subsidiary uses the loan for its principal business
- A loan to an employee, other than a director, under a scheme approved by the company
The practical points
The company should check whether the proposed loan falls within the prohibition. If it does, the company should obtain the special resolution and the approval. The company should document the loan agreement and the board resolution. The company should not use the exemption to give a loan to a director under the guise of a business loan.
Call to Action: We advise companies on loans to directors, Section 185 exemptions and compliance. For a Section 185 review, contact office@anujdesaiassociates.com, Ph No. 9619456656, Website https://anujdesaiassociates.com, LinkedIn linkedin.com/in/ca-anuj-desai-122547230.