Section 185 - An indepth analysis
With the 98 Sections of the Companies Act, 2013 becoming effective from September 12, 2013 onwards, one section which has been the hottest topic for discussion amongst Corporates and professionals is Section 185 of the Companies Act, 2013 which deals with Loans to Directors etc. The section particularly prohibits grant of any loans, giving of guarantee or providing of any security to the directors or any other person in whom the director is interested; otherwise than for given exemptions. It is interesting to note that per se the Companies Act, 2013 is said to be more of self regulatory and liberal as compared to Companies Act, 1956 however, this Section 185 is one section which seems to be more stringent that its previous counterpart. The provisions of Section 185 of the Companies Act, 2013 with corresponds to Section 295 of the Companies Act, 1956 provides that:-
- No company shall, directly or indirectly, 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.
- Exemptions under the section relate to:-
- the giving of any loan to a managing or whole-time director if it is given 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
- a company which in the ordinary course of its businessprovides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.
- Herein, the expression “to any other person in whom director is interested” means—
- any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;
- any firm in which any such director or relative is a partner;
- any private company of which any such director is a director or member;
- any body corporate at a general meeting of which not less than twenty five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or
- any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.
