Loans to Directors:
When the Companies Act, 1956 was in force, the purpose of this act was to permit grant loans guarantees and securities to the Companies Directors. However, Public Companies have to obtain prior permission from the Central Government to grant loans. Back in days, companies used to exercise a practice of borrowing funds and passing them to subsidiaries and other companies through their inter-corporate loans.
However, most of the holding companies used to take a step back when it came to compliance with the terms of a loan agreement. Moreover, they are leaving the subsidiaries in the stagger. Hence Section 185 of the companies Act 2013 came into force to stop the exploitation of subsidiaries. So under this Section, loan to directors can be provided with specific restriction.in other words, the company cannot directly or indirectly give loan include any loan represented by books of debt
To any of its Directors
Any person in whom the Director has interested
Provide security of Director who is going to take a loan
1. Understanding of Section 185:
The aim of Section 185 of the Companies acts 2013 is to grant loans to Directors under specific restriction to monitor their working.
2. Prohibition:
The original Section 185 Prohibited Directors of the company or any other person in whom the Director. Director is interested from advancing any loan or any security to take a loan. The companies were allowed penalties or any recipient to whom such as loan if found guilty of non-compliance.
3 After the Amendment:
After the amendment in section 185 of the companies acts 2013, The Directors of the company or its holding company or partner of such Director prohibited limitation from advancing loans.
This amendment allows companies to loans or security to any person in whom any of the Directors are interested
According to Section 185 as amended by the companies the utilization of loans by borrowing company shall be solely
After amended Section 185 they provide a penalty of provision to the companies as well. Also, The company extends an officer which includes Director or Manager with those directions BODs are accustomed to act
4. Exemptions of Loans:
Section 185 of Companies Act 2013, exempts the below persons and entity with certain conditions
Loans to Director or Whole Time Director subject to as a part of the following condition
Special Resolution approved by the members
Grant loans to employees according to the policy of service of the company
Loans to Subsidiary Company
The holding company grants loans or security in respect of any loan made to its wholly-owned subsidiary company. The purpose of this loan is to use only in business activity.
Loans given by Banks
Under Section 185 Bank also grant loans to the companies to grow their business. These loans are permitted based on where the company provide security or guarantee by the bank to the subsidiary company
5. Punishment:
Under section 185, these are the following punishment Company could have to face :
According to Section 185, the company will be punishable with slight, not less than Rs.5 lakh and which can be extended to Rs.25 lakh.
If it gives guarantee security or Loan to Directors will be punishable with imprisonment of 6 months with a fine.
Conclusion:
The purpose of Section 185 is to prohibit Loan to Directors of Companies completely, but later on, it was felt that the Section needs to be more flexible and transparent in the affairs of the company. To provide ease of doing business, the Section was changed. Now Section 185 of Companies Act 2013 allows Loan to Directors with adequate security.
Drafted By:
CS.A.Maniraj.,B.Com.,ACS.,CA(Fin), Independent Director
Certified CSR Professional., Certified GST Professional.
