Sunday, December 1, 2013

Loan to Directors: Section 185 of Companies Act 2013

Section 185 of the Companies Act, 2013
Applicable from: 12th September, 2013
Corresponding to: Section 295 of the Companies Act, 1956
Related to: Loan to Directors
Applicability: Both public and private limited companies

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.

Therefore, no loan can be advanced by a company to the following persons:
-          Director
-          Director of Holding or Subsidiary company
-          Partner or relative of any such Director
-          Any firm in which such Director or relative is partner
-          Any other company in which such Director is a Director
-      Any company or LLP in which not less than 25% of the total voting power may be exercised individually or jointly by any such Director(s)
-     Any company or LLP, the Board of Directors of which is controlled by any of the Directors of the lending company

-          Loans to Managing Director in accordance with the terms of his appointment
-        Loans to Director as a part of loan to employees in accordance with the conditions of service applicable to all employees of the company
-          Loan pursuant to any scheme approved by the members vide special resolution
-        A company which provides loans in the ordinary course of business and interest in respect of such loans is charged at a rate not less than the bank rate declared by RBI

-        The company shall be punishable with fine which shall not be less than Rs. 5 lakh but may extend to Rs. 25 Lakhs
-     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 6 months or with fine which shall not be less than Rs. 5 Lakhs but may extend to Rs. 25 Lakhs, or with both

Note: Meaning of Relative: spouse, lateral ascendants up to two levels i.e. father (including step father) and grandfather, mother and grandmother; lateral descendants on the son’s side up to two levels i.e son and son’s children, daughter (including step daughter), her husband and siblings.