BooksIQ§185(1) PROHIBITS a company from giving any LOAN, GUARANTEE, or SECURITY to its DIRECTORS or to any person in whom a director is interested. §185(2) PERMITS loans to entities in which a director is interested only with a SPECIAL RESOLUTION and where the loan is used for the borrower's principal business. Specific exceptions cover MD/WTD remuneration schemes and companies in the ordinary business of lending.
Key points
- §185(1) — no company shall, directly or indirectly, advance any LOAN (including a loan represented by a book debt) to, or give any GUARANTEE or provide any SECURITY in connection with a loan taken by, (a) any DIRECTOR of the company / its holding company, (b) any PARTNER or RELATIVE of such director, or (c) any FIRM in which such director or relative is a partner.
- §185(2) — a company MAY advance a loan / guarantee / security to any PERSON IN WHOM A DIRECTOR IS INTERESTED (e.g. a private company where a director is a member, or a body corporate where directors hold ≥ 25% voting, or a body corporate whose Board acts on the director's instructions) subject to BOTH (i) a SPECIAL RESOLUTION in general meeting (with full disclosure in the explanatory statement), AND (ii) the loans being utilised for the PRINCIPAL BUSINESS ACTIVITY of the borrower.
- §185(3) EXCEPTIONS (prohibition does not apply): (a) loan to a MANAGING / WHOLE-TIME DIRECTOR as part of conditions of service extended to all employees, or pursuant to a scheme approved by special resolution;
- (b) a company that in the ordinary course of business PROVIDES LOANS / GUARANTEES, charging interest not below the prevailing yield of 1/3/5/10-year government securities;
- (c) loan by a HOLDING company to its WHOLLY OWNED SUBSIDIARY, or guarantee/security for a loan to any subsidiary, utilised for the subsidiary's principal business.
- CONTRAVENTION — company fine ₹5 lakh to ₹25 lakh;
- officer in default imprisonment up to 6 months or fine ₹5 lakh to ₹25 lakh;
- the director/recipient is also punishable.
Reference: §185 Companies Act 2013 (as substituted by Amendment Act 2017)
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