The Prohibition That Survives the Amendment
Section 185(1) continues to prohibit a company from advancing any loan, including a book debt, to a director or to any person in whom the director is interested, and from giving any guarantee or security in connection with a loan taken by such person. The 2023 amendment did not erase this prohibition; it replaced an earlier near-total bar with a conditional gateway. The distinction matters because the default position remains “prohibited,” and the burden rests on the company to establish that a specific statutory exception applies.
The phrase “person in whom the director is interested” carries the expansive meaning retained from the pre-amendment framework: a director or relative of the lending company or its holding company, a firm in which such director or relative is a partner, a private company in which such director is a director or member, and any body corporate in which twenty-five per cent or more voting power is controlled by such director. Advising on Section 185 without mapping every limb of this definition is a common source of inadvertent non-compliance.
The Special Resolution Gateway Under Section 185(2)
The operative exception under the amended provision permits a company to advance a loan, give a guarantee, or provide security if a special resolution is passed in general meeting, and the resolution records the specific purpose for which the loan or guarantee is proposed. The resolution is not a formality. It must be tied to the use of funds, and the explanatory statement to the notice must disclose the material facts, including the identity of the beneficiary and the commercial rationale.
A second permitted route is a loan advanced pursuant to a scheme approved by members by special resolution—typically employee housing or education loan schemes extended to all employees on uniform terms. The distinction between a one-off director loan under Section 185(2) and a scheme-based loan is substantive: the latter requires a pre-existing, member-approved scheme, not an ad hoc resolution for a single director.
The “Ordinary Course” Defence and Its Limits
The amended framework does not disturb the exemption for companies whose ordinary course of business includes providing loans or guarantees for due repayment of loans. For an NBFC or a company with a genuine lending business, Section 185 may not be the governing restriction at all, provided the transaction is truly in the ordinary course and not a device to route funds to a director. The evidentiary question is whether the company maintains a documented lending policy, applies it uniformly, and can demonstrate that the director loan was processed on the same terms as third-party loans.
Documentation Conditions That Determine Validity
A defensible Section 185 file contains: a board resolution recording the unanimous consent of directors present, with interested directors disclosing their interest under Section 184 and abstaining; a special resolution with an explanatory statement that identifies the purpose and amount; Form MBP-1 disclosures from each director; and a loan agreement or guarantee instrument that reflects commercial terms. Where the loan exceeds the Section 186 limit, a separate special resolution under that section must also be obtained. A single resolution purporting to cover both sections without distinct recitals invites scrutiny.
Consequences of Non-Compliance
Contravention of Section 185 exposes the company and every officer in default to penalty, and the loan may be treated as voidable at the instance of the lender. In adjudication before the Registrar of Companies, the absence of a special resolution or the failure to record the purpose in the resolution is typically treated as a substantive violation rather than a curable procedural lapse. Where the loan is routed through an interposed entity to reach a director, the ROC may lift the corporate veil and treat the transaction as a direct advance.
Practical Compliance Architecture
Board papers should identify, for each proposed transaction, whether the beneficiary falls within any limb of “person interested,” whether a special resolution is required, and whether Section 186 approval is independently triggered. The company secretary should maintain a Section 185 register that records the resolution number, the purpose, the amount, the beneficiary’s relationship to the director, and the repayment status. This register is the first document an ROC adjudicating officer will request.
For a director loan structure that will withstand regulatory examination, obtain a legal opinion before disbursement rather than after a show-cause notice. Our corporate practice routinely reviews Section 185 and Section 186 approval chains for board-level transactions and prepares the resolution architecture before funds move.
Call to Action: For a Section 185 approval audit or resolution drafting, contact Anuj Desai & Associates at office@anujdesaiassociates.com or 9619456656. Website: https://anujdesaiassociates.com. LinkedIn: linkedin.com/in/ca-anuj-desai-122547230.