Section 185 Of Companies Act, 2013: A Detailed Overview
Updated: Dec 17, 2024
The laws regarding granting of loans to directors of the firm are governed by the Companies Act, of 2013. The Act's Section 185 outlines the requirements and limitations for lending money to directors. All companies must adhere to the terms and conditions outlined in this section before making a loan or providing a guarantee or security in conjunction with one. Additionally, this section imposes penalties on the corporation, defaulting officers, and directors who make loans that violate the terms outlined above. In this article, we will share a detailed overview of Section 185 of the Companies Act.
Table of content
What is Section 185 of the Companies Act
Under the original Section 185, the companies were barred from lending money or providing security or guarantees for loans provided to the directors of the company or to anybody else in which the directors had an interest. Penalties were only applied to companies or recipients who happened to have violated the terms of the loan, security, or guarantee.
Section 185 was changed according the Companies (Amendment) Act of 2017 in the following ways:
The only people covered are the company's or its holding company's directors, their business partners, and any firm in which they or a family member are members.
The guidelines that follow should be accomplished for the company to be able to lend money to anyone or any company that any of the directors are interested in: - The corporation, at a general meeting, must pass a special resolution, with the approval of at least 75% of the members. Loans may only be used by the borrowing company to support its main business functions.
The financial penalties listed in Section 185(4) of the Act apply not only to the Company but also to any officer in breach of the Company (including any Director, Manager, KMP, or other person whose instructions BODs are used to follow).
Loan to Directors
According to the Act's Section 185(1), a business cannot
Directly or indirectly advance loan.
A loan represented by a book debt can be included in an advance loan.
Assure or secure any debt taken out by a director, a director of the holding company, a director's partner or relative, or any business in which a director is a partner or linked.
Therefore, this section restricts lending money to the company's directors, partners, or family members.
Loan To Any Interested Person Of A Director
A business can extend loans, including those reflected by book debt, or offer security or guarantees in connection with any loan made to a person in which any of the company's directors has an interest. A firm may lend money to any person or association in which any director has an interest, subject to specific boundaries, under Section 185(2).
The requirements that must be met to grant loans or offer security or assurance to the individual in whom the director has an interest are:
A special resolution has to be passed at a general meeting.
The loan must be utilised for the primary business operations of the borrowing company.
The details that follow should be included in the justification of the notice of the general meeting where the resolution enabling the loan is passed:
Complete details of the loans, guarantees, or security provided, and
The planned use of the loan, guarantee, or security by the borrower.
The list of individuals that are recognised to be of interest to any of the company's directors is provided by the Act. Only these individuals are authorised to receive loan advances, guarantees, or security from the company. They are
Any private business in which the director of a lending company serves as a director or member.
Any organisation whose general meeting enables any director of the lending firm, or two or more of them, to exercise or control at least 25% of the voting power.
Any business corporation that is used to following the directives or orders of the board or any director or directors of the lending company, comprising the managing director, the board of directors, or the manager.
Exemptions to the Loans Given to Directors
The Act's Section 185(3) allows for exceptions to constraints on the company's ability to offer money to directors. The business might make loan advances or provide security or a guarantee to
The managing or full-time director as part of the terms of service that the firm offers to all of its workers, or by any plan accepted by the company's members through a special resolution.
A business that, in the usual course of its operations, makes loans or offers guarantees or securities for the timely reimbursement of any loans. The interest rate levied on these advanced loans is at least as high as the current yield on government securities that are one, three, five, or ten years old and closest to the loan's term.
A holding company's guarantee or security for any loan made to its wholly-owned subsidiary firm, or any loan made to its wholly-owned subsidiary company. For its primary business operations, the subsidiary company must make the loans.
A holding company's guarantee or security for a loan issued to a subsidiary company by a bank or other financial institution. These loans must be used by the subsidiary company for its primary business operations.
Penalty for Non-Compliance to Section 185
If the aforementioned rules relating to loan provisions are broken, there is a penalty stated in Section 185(4) of the Act. A punishment of at least Rs. 5 lakh, but up to Rs. 25 lakh, will be imposed on the corporation if it makes loan advances in violation of Section 185. The director or any other director-related individual to whom a loan, guarantee, or security is provided faces a maximum penalty of six months in prison, a fine of at least Rs. 5 lakh (but not exceeding Rs. 25 lakh), or both.
Checklist for Section 185 of the Companies Act
When making loan advances or offering guarantees or security related to any loan, the following points should be kept in mind by Section 185 of the Act:
Directors, their family members, or partners cannot get loans from a firm, nor can they acquire any security or guarantee related to a loan.
A company is not permitted to make loans to a business where a director is a partner or relative, nor can it issue any security or guarantee in connection with a loan to them.
If a resolution is passed at the general meeting of a company and the loan amount is utilised by the borrowing organisation for its primary business activities, the director of the company can advance the loan and provide any security or guarantee linked to the loan to the person to whom the director is interested.
Only the people and groups listed in Section 185(2) can be considered to have an interest in the company's director. The business must verify that the individuals it wishes to lend money to are on the list of the people identified by this section as those the director is interested in.
When the business fulfils the requirements outlined in Section 185(3) of the Act, it can offer a loan to the managing or full-time director, or it furnish a guarantee or security related to any loan.
A loan can be granted by any corporation that presents guarantees or security for the timely repayment of any debt in the regular course of business.
If the subsidiary firm satisfies the requirements outlined in Section 185(3) of the Act, the controlling company may lend money to it.
Conclusion
The Companies Act of 2013's Section 185 offers protection against any conflicts of interest and financial mismanagement. The Act safeguards the interests of a company's stakeholders and encourages transparency by clearly defining the restrictions and approval procedures for loans to directors and affiliated companies. Companies, directors, and other appropriate parties must comprehend these clauses to guarantee compliance with corporate governance rules.
FAQ
Q1. What is the key objective of Section 185 of the Companies Act, 2013?
Under the Firms Act of 1956, publicly traded enterprises could only offer loans, securities, and guarantees with approved Central Government consent. In the past, the businesses would borrow money and give it to their affiliates. Nevertheless, the subsidiaries were left to handle any problems independently. For this reason, certain constraints on loan issuing were included in Section 185 of the Companies Act of 2013.
Q2. Can a company grant loans to directors?
Directors can receive loans from a firm under specific guidelines. By Section 185 of the Companies Act of 2013, the business is restricted from making direct or indirect loans, including those made using credit cards:
About any of its directors
To any partner or family member of the director
To offer security for any debts the director or such person takes out.
Q3. Is an LLP required to follow the provision of Section 185 of the Companies Act?
No, the Companies Act of 2013 is not subject to LLPs. The Limited Liability Partnership Act of 2008, not the Companies Act of 2013, determines what an LLP must do. As a result, they are exempt from the rules outlined in Section 185 of the Companies Act of 2013 when lending money to their partners.
Q4. Who has the authority to approve loans to directors under section 185?
Any corporate entity that has access to following the directives or orders of the Board or any director or directors of the lending company, that includes the Board of Directors, the managing director, or the manager.
Q5. Is section 185 applicable to private companies?
Section 185 prevents public and private corporations from lending money, making advances, or offering guarantees to any of their directors or to any other person in which the director holds an interest.
Q6. What is the latest amendment in Section 185 of the Companies Act?
Under certain restrictions, a firm may lend money to directors. The corporation is prohibited from making direct or indirect loans, including those made through credit cards, under Section 185 of the Companies Act of 2013: to any of its directors. To any of the director's partners or family.
Q7. What is the loan limit under the Companies Act, 2013?
Any company cannot lend more than 60% of its paid-up share capital, free reserves, and share premium to another person or corporate entity, directly or indirectly.
Q8. Can a company provide a loan to its subsidiary?
Companies that offer a loan, security, or guarantee to their wholly-owned subsidiary are excluded under the Companies (Amendment) Act, 2015. The loans are available for the subsidiary to use for its primary business operations.
Q9. Can a Private Limited Company (PLC) grant a loan to a director?
Indeed, a private limited company can only provide money to a managing or full-time director of the business if a special resolution is passed at the meeting and the PLC gives this service to all its employees.
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