Section 185 Of Companies Act 2013

When the companies Act was in force, public companies were allowed to grant loans, guarantees, and securities as long as they got prior permission from the Government to do this.

The companies initially used to exercise a practice of borrowing funds and then passing them to the subsidiaries and other associate companies through inter-corporate loans. 

Although, when it comes to compliance with the terms of the loan agreement, the holding Company can take a step back, which leaves the subsidiaries in the lurch. In order to stop the exploitation of the subsidiaries, Section 185 of the companies act 2013 was established.

What is Section 185?

The original Section 185 forbade the firms from making any loans or providing security or guarantees for loans taken by the Company's directors or anybody else in whom the directors have an interest.

Only businesses or recipients who received such a loan, security, or guarantee were eligible for penalties if discovered in violation.

The Companies (Amendment) Act of 2017 made the following changes to Section 185:

  • Only applies to Directors of the Company or its holding Company, any partner of such a Director, any partner of such a Director, or any firm in which such Director or relative is a partner.
  • Allows the Company to lend money to anyone or any firm that any of the directors are interested in, as long as the following conditions are met: - The corporation must pass a special resolution at a general meeting (Approval of at least 75% of the members is required). – The borrowing corporation may only use loans for the purposes of its main business operations.
  • An officer in default of the Company is also subject to the penalty measures outlined in Section 185(4) of the Act - in addition to the Company (which is inclusive of any Director, Manager or KMP, or any individual in accordance with whose directions BODs are accustomed to act.)

Loan to Directors

Section 185(1) states that the Company cannot:-

  • Advance loans directly or indirectly.
  • The advanced loan includes the loan represented by the book debt.
  • Give a guarantee and provide security with the connection to any loan taken. 

Exemptions to the Loans that are given to the Directors

For the Loans Given to Managing Directors or Time Directors

The loans to MD or WTD may only be provided if the following requirements are met:  Where it is a requirement of the Company's Policy of Service that loans be provided to all employees; In accordance with any plan that is properly approved by the members by way of a Special Resolution.

The Loans that are Given by Banks and Financial Institutions

The following conditions must be met in order for a loan to be granted: The holding Company must offer security or a guarantee in connection with any loan issued to the subsidiary firm by a bank or other financial institution. The loan must be used for the primary business purpose of the subsidiary.

The Loans Given to Subsidiary Companies

When a holding company gives a totally owned subsidiary company a loan, guarantee, or security, and that subsidiary uses it exclusively for commercial purposes.

Loan to Directors by Private Company

Loans may be provided to businesses in the regular course of business if the interest rate on such loans is not less than the rate imposed at the time by the RBI.

Penalties

Infractions of the aforementioned loan provisional provisions are punishable under Section 185(4) of the Act. If the business provides a loan in violation of Section 185, the business will be fined a sum that must not be less than five lakh rupees but could reach twenty-five lakh rupees.

Each officer of the business who is in default is subject to punishment, which may include imprisonment for a time period of up to six months or a fine of at least five lakh rupees but up to twenty-five lakh rupees.

The Director or any other person connected to the Director who receives a loan, guarantee, or security may be punished with up to six months in jail, a fine that must be less than five lakh rupees but can reach twenty-five lakh rupees, or a combination of the two.

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