{"id":5002,"date":"2020-03-17T18:35:38","date_gmt":"2020-03-17T13:05:38","guid":{"rendered":"https:\/\/corpbiz.io\/learning\/?p=5002"},"modified":"2022-11-16T14:22:52","modified_gmt":"2022-11-16T08:52:52","slug":"loan-to-directors","status":"publish","type":"post","link":"https:\/\/corpbiz.io\/learning\/loan-to-directors\/","title":{"rendered":"Loan to Directors: A Complete Checklist"},"content":{"rendered":"\n<p class=\"has-drop-cap\"><strong><em>Section 185 of Companies Act, 2013 is one of the essential Section of the Act.<\/em><\/strong> This Section puts restrictions on inter-corporate loans in the corporate world. Earlier Companies were in a habit to borrow funds and pass them to subsidiaries and other associate Companies through inter-corporate loans. The holding companies never thought to comply with the terms of loan agreement when it concerned with exploitation of borrowed funds. The bank also never monitored such exploitation. <strong><em>To avoid such mishap Section 185 was introduced in the Companies Act, 2013. <\/em><\/strong><\/p>\n\n\n\n<p>Section 185 of<strong> Companies Act, 2013<\/strong><sup><a class=\"text-primary\" href=\"https:\/\/www.mca.gov.in\/content\/mca\/global\/en\/acts-rules\/companies-act\/companies-act-2013.html\"><strong>[1]<\/strong><\/a><\/sup> puts some restrictions on Company in giving Loan to Directors to monitor the working of Directors in the Company<strong><em>.<\/em><\/strong>\u00a0In this article, we will discuss the requisites for Loan to Directors under Section 185 of Companies Act, 2013.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title ez-toc-toggle\" style=\"cursor:pointer\">Page Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 eztoc-toggle-hide-by-default' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/corpbiz.io\/learning\/loan-to-directors\/#What_is_Loan_to_Directors\" >What is Loan to Directors?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/corpbiz.io\/learning\/loan-to-directors\/#What_are_the_Exemptions_provided_while_Loan_to_Directors_is_given\" >What\nare the Exemptions provided while Loan to Directors is given?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/corpbiz.io\/learning\/loan-to-directors\/#What_are_the_Penal_Provisions_under_Section_185_of_Companies_Act_2013\" >What are the Penal Provisions under Section 185 of Companies Act, 2013?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/corpbiz.io\/learning\/loan-to-directors\/#Conclusion\" >Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_Loan_to_Directors\"><\/span>What is Loan to Directors?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Loan to Directors can be provided with subject\nto certain restrictions<strong><em>. Under section 185 of Companies Act, 2013,<\/em><\/strong><strong><em> the Company cannot\ndirectly or indirectly give loan, includes any loan represented by books of\ndebt;&nbsp; <\/em><\/strong><\/p>\n\n\n\n<ul><li>To any of its Directors<\/li><li>To any another person in whom the Director is interested, or<\/li><li>Provide any security in connection with loan taken by Director or such other person<\/li><\/ul>\n\n\n\n<p><strong><em>For the purpose of\nSection 185 of Companies Act, 2013, the phrase &#8220;any other person in whom\ndirector is interested&#8221; means<\/em><\/strong><\/p>\n\n\n\n<ul><li>Any Company in which he\/his relative is Partner<\/li><li>Any Company in which he\/his relative is Director<\/li><li>Any <a href=\"https:\/\/corpbiz.io\/company-registration\"><strong>Private Limited Company<\/strong><\/a> in which he\/his relative is Director<\/li><li>Any Body Corporate in which he holds or controls 25% or more of voting powers<\/li><li>Any Body Corporate who\u2019s Managing Director\/Manager\/Board of Directors acts on his directions.<\/li><\/ul>\n\n\n\n<p><strong><em>Section 185 of the\nCompanies Act, 2013, read with the Rule 10 of Companies Rules (Meeting of Board\nand its Powers), 2014<\/em><\/strong> provides that Company cannot give guarantee or Loan to Directors\nor any other person related to the Director of Company. The above rules and\nprovisions are clearly stating that the Director should not engage in any\nactivity which personally benefits him\/her.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_are_the_Exemptions_provided_while_Loan_to_Directors_is_given\"><\/span>What\nare the Exemptions provided while Loan to Directors is given?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong><em>The exemptions to the rules followed while giving Loan to Directors under Section 185 are as follows:<\/em><\/strong><\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter\"><img decoding=\"async\" width=\"524\" height=\"339\" src=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2020\/03\/image-33-e1584448696403.png\" alt=\"Exemptions provided while Loan to Directors\" class=\"wp-image-5003\" srcset=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2020\/03\/image-33-e1584448696403.png 524w, https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2020\/03\/image-33-e1584448696403-300x194.png 300w\" sizes=\"(max-width: 524px) 100vw, 524px\" \/><\/figure><\/div>\n\n\n\n<h3 class=\"wp-block-heading\">Loan\nto Managing Director or Whole Time Director<\/h3>\n\n\n\n<p>The\nproviso for <strong><em>Section 185(1)<\/em><\/strong> states that the loan can be provided to Managing\nDirectors or Whole Time Directors with respect to some restrictions<strong><em>.<\/em><\/strong>\nThe loan can be given to Managing Directors or Whole Time Director on certain\nconditions:<\/p>\n\n\n\n<ol><li>As a part of\ntheir Policy of Service Loan to Managing Director or Whole Time Director can be\ngiven. The policy should be available to all the employees of the Company.&nbsp;&nbsp; <\/li><li>Pursuant to any\nScheme in the Company Loan to Managing Director or Whole Time Director can be\ngiven. The shareholders should pass the scheme through a special resolution in\nCompany.&nbsp; <\/li><\/ol>\n\n\n\n<h3 class=\"wp-block-heading\">Loan\nto Subsidiary Company by Holding Company<\/h3>\n\n\n\n<p><strong><em>The\nCompanies (Amendment) Act, 2015,<\/em><\/strong>\nthe exemption is given to the Holding Company who provide loan, guarantee, or\nsecurities to the wholly-owned subsidiary company. The Subsidiary Company uses\nthe loans which are given for its principal business activity. &nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Loan\nby Companies in Ordinary Business<\/h3>\n\n\n\n<p><strong><em>In\nordinary course of business, <\/em><\/strong>Company\nwhich provides loan, guarantees or provide security provided that the rate of\ninterest is charged at a rate not less than rate prevailing declared by the\nReserve Bank of India (RBI). <\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Loan\nby Bank and Financial Institutions to Subsidiary Company <\/h3>\n\n\n\n<p><strong><em>The\nCompanies (Amendment) Act, 2017, the exemption is given to Holding company\nwhich provides security and guarantee in respect of loan made by any bank or\nfinancial institution to its Subsidiary Company<\/em><\/strong>. The Subsidiary Company should use the Loans which\nare given for its principle business activity. &nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Loan\nby Private Companies<\/h3>\n\n\n\n<p><strong><em>The\nCompanies (Amendment) Act, 2017, a Private Company can provide for Loan\nincluding Loan represented by book debts or give guarantee or security in\nconnection to the loan taken by any person in whom Director of Company is\ninterested.<\/em><\/strong> The loan can be\ngiven only when a special resolution is passed in the general meeting. The\nstatement of the resolution should disclose: <\/p>\n\n\n\n<ol><li>All the\nparticulars of the loan given<\/li><li>Purpose for\nwhich the recipient proposes the loan, guarantee, or security.&nbsp; <\/li><\/ol>\n\n\n\n<p>The\nloans are utilized by borrowing company for the principle business activity of\nits Company.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_are_the_Penal_Provisions_under_Section_185_of_Companies_Act_2013\"><\/span>What are the Penal Provisions under Section 185 of Companies Act, 2013?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong><em>Under\nSection 185(2) the penal provisions for not following the rules prescribed\nunder Section 185(1) while giving Loan to Directors is as follows:<\/em><\/strong><\/p>\n\n\n\n<ul><li>The Company will\nbe punishable with fine which should not be less than 5 lakhs Rupees and which\ncan be extended to 25 lakhs of Rupees if it gives a guarantee, security or Loan\nto Directors or any another person or entity associated with him\/her.<\/li><li>If any\nguarantee, security or Loan to Directors or any other person or entity\nassociated with him is given; will be punishable for imprisonment which can be\nextended to 6 months or with fine which shall be less than 5 lakhs Rupees and\nwhich can be extended to 25 lakhs of Rupees, or with both. <\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The introduction of Section 185 leads to a complete ban to give Loan to Directors and other persons and entities related to Director. Later on, it was felt that changes should be made in the Section for better transparency and governance in the affairs of the Company. The changes were made to keep an eye on the fiduciary character of the Directors of the Company. To provide ease in doing business, the Section was changed. Section 185 of Companies Act, 2013, now allows Loan to Directors with adequate safeguards and additional responsibility on the part of Company and its officers.  <\/p>\n\n\n\n<p class=\"text-left\"><b>Read our article<\/b>:<mark style=\"background: #fffd03 !important\"><a href=\"https:\/\/corpbiz.io\/learning\/procedure-for-appointment-and-resignation-of-the-directors\/\">Companies Act 2013 Provides a Procedure for Appointment and Resignation of the Directors <\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Section 185 of Companies Act, 2013 is one of the essential Section of the Act. This Section puts restrictions on inter-corporate loans in the corporate world. Earlier Companies were in a habit to borrow funds and pass them to subsidiaries and other associate Companies through inter-corporate loans. The holding companies never thought to comply with [&hellip;]<\/p>\n","protected":false},"author":16,"featured_media":5006,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[120,340],"tags":[406],"acf":{"service_id":"321"},"authorName":"Sakshi Sharda","authorImageUrl":"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2020\/02\/sakshi-sharda.jpg","authorDescription":"Sakshi Sharda has done BBALLB(HONS) and holds a strong knowledge on the matters pertaining to finance and law. From the past one year she is working as a legal advisor and in her leisure time she works on improvising her knowledge. Sakshi is spreading her knowledge by writing for Corpbiz.","postViews":11066,"readingTime":4,"_links":{"self":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/5002"}],"collection":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/users\/16"}],"replies":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/comments?post=5002"}],"version-history":[{"count":16,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/5002\/revisions"}],"predecessor-version":[{"id":50741,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/5002\/revisions\/50741"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media\/5006"}],"wp:attachment":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media?parent=5002"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/categories?post=5002"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/tags?post=5002"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}