Loan to Director of Company : FAQ’s

By | December 10, 2015

What is the definition of  ” Loan ” under Companies Act 2013 ?

Not defined under Companies Act 2013.

A loan is defined by the Oxford English Dictionary as ‘a thing lent; something the use of which is allowed for a time, on the understanding that it shall be returned or an equivalent given; esp., a sum of money lent on these conditions and usually with interest’. The essential requirement of a loan is the advance of money (or of some article) upon the understanding that it shall be returned, and it may or may not carry interest. HIGH COURT OF BOMBAY Dr. Fredie Ardeshir Mehta v. Union of India S.P. BHARUCHA, J. WRIT PETITION NO. 939 OF 1983 AUGUST 3, 1989

Can the Company give Loan to Director ?

As per Section 185 (1) of the Companies Act 2013 ( w.e.f  12-9-2013 ) Save as otherwise provided in this Act, 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

Provided that nothing contained in this sub-section shall apply to—

(a) the giving of any loan to a managing or whole-time director—
(i) as a part of the conditions of service extended by the company to all its employees; or
(ii) pursuant to any scheme approved by the members by a special resolution; or
(b) a company which in the ordinary course of its business provides 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; or
(c) (w.e.f. 29-5-2015 See Note 1) any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or
(d) (w.e.f. 29-5-2015 See Note 1)any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company:
Provided that the loans made under clauses (c) and (d) are utilised by the subsidiary company for its principal business activities.]

Explanation.—For the purposes of this section, the expression “to any other person in whom director is interested” means—

(a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;
(b) any firm in which any such director or relative is a partner;
(c) any private company of which any such director is a director or member;
(d) 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
(e) 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.

What is the meaning of  “Indirectly ” as appearing in Section 185 of the Companies Act 2013 ?

The word is not defined in the companies Act 2013.

 The word ‘indirectly’ cannot be read as converting what is not a loan into a loan.

There is sale of the flat by the company to the director. The company gave  time to pay a part of the purchase price. Director was thus, given financial accommodation by the company in the matter of payment of the debt. Such financial accommodation was not and did not amount to a loan.HIGH COURT OF BOMBAY Dr. Fredie Ardeshir Mehta v. Union of India S.P. BHARUCHA, J. WRIT PETITION NO. 939 OF 1983 AUGUST 3, 1989

Can the Private company give Loan to Director ?

In case of private companies section 185 shall not apply to a private company –

(a) in whose share capital no other body corporate has invested any money;
(b) if the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower; and
(c) such a company has no default in repayment of such borrowings subsisting at the time of making transactions under this section – Notification [F No. 1/1/2014 – CL.V], dated 5-6-2015.

What are the Consequences if Loan to Director in contravention of provisions of Companies act 2013 ?

As per Section 185 (2) of the Companies act 2013 If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of 185(1) the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, and the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.

Does the Section 185 applies to Government Companies ?

In case of Government Companies, section 185 shall not apply to Government company in case such company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the company, or, as the case may be, the State Government before making any loan or giving any guarantee or providing any security under the section – Notification No. [F.No. 1/2/2014-CL.V], dated 5-6-2015.

Does the Section 185 applies to Nidhi Company ?

In case of Nidhis, section 185 shall not apply, provided the loan is given to a director or his relative in their capacity as members and such transaction is disclosed in the annual accounts by a note – Notification No. [F.No. 2/11/2014-CL.V], dated 5-6-2015.

Does the Provisions of Section 185 Applies to loan made by holding company to its wholly owned subsidiary company ?

As per Rule 10 of the Companies (Meetings of Board and its Powers) Rules, 2014

Loans to Director etc. under section 185.-

(1) Any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company is exempted from the requirements under this section; and

(2) Any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company is exempted from the requirements under this section: Provided that such loans made under sub-rule(1) and (2) are utilised by the subsidiary company for its principle business activities.


Can the Company grants Loans and Advances to Employees  ?

CIRCULAR NO.4/2015 [NO.1/32/2013-CL.V], DATED 10-3-2015 issued by Ministry of Corporate Affairs 

This Ministry has received a number of references seeking clarification on the applicability of provisions of section 186 of the Companies Act, 2013 relating to grant of loans and advances by Companies to their employees.

The issue has been examined and it is hereby clarified that loans and/or advances made by the companies to their employees, other than the managing or whole time directors (which is governed by section 185) are not governed by the requirements of section 186 of the Companies Act, 2013. This clarification will, however, be applicable if such loans/advances to employees are in accordance with the conditions of service applicable to employees and are also in accordance with the remuneration policy, in cases where such policy is required to be formulated.

 


Note 1  Inserted by the Companies (Amendment) Act, 2015, w.e.f. 29-5-2015.

Leave a Reply