FAQ’S ON SECTION 185- LOAN TO DIRECTORS
1.ABC Limited Company wants to give loan to Mr. A who is brother of Mr. M, director in the said company.
Can company grant loan to Mr. A?
Ans. Pursuant to Section 185(1)(a), a Company is prohibited to grant loan to relative of director and “Brother”
falls under the definition of Relative pursuant to Rule 4 of The Companies (Specification of Definitions
Details) Rules, 2014. So ABC Limited Company can’t give loan to Mr. M.
2.XYZ Limited is working in retail sector from last 2 years and is a wholly owned subsidiary of ABC Ltd. It
requires loan of Rs. 5 lakh to start its new retail business unit in another state. Can ABC Ltd. grant such
amount of loan to XYZ Limited?
Ans. According to Section 185(3), prohibitions and restrictions provided in Section 185(1) and 185(2) are not
applicable while granting loans to its wholly owned subsidiary company provided that the said loans are
utilized for their principal business activities.
Hence, ABC Ltd. is allowed to grant loan to XYZ Ltd.
3. Are Private Companies allowed or exempted to grant loan to its directors?
Ans. Pursuant to Notification dated 5th June, 2015, Private Company has been exempted to adhere to
provisions of Section 185 if:
i. Its capital structure doesn’t have investment of any Body corporate;
ii. Borrowings of such private 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
iii. such a private company has not defaulted in repayment of such borrowings subsisting at the time of
making transactions under this section.
4.ABC Ltd. who is working in construction business from last 5 years wishes to take loan of Rs. 10 lakh from a
private bank for fulfilling its capital requirements. The bank wants a guarantor as per the loan sanctioning
requirements for the said loan transaction? Can a XYZ Ltd. who is the subsidiary of ABC Ltd. provide
guarantee for such transaction?
Ans. Pursuant to Section 185, a subsidiary company is prohibited to give guarantee for loan taken by its
Holding company. So XYZ Ltd. can’t become guarantor in the mentioned loan transaction.
5.A Government company which is governed by a The Ministry of State Government desires to give loan to
one of its directors for which it has taken approval from the said ministry? Can the Government Company
grant loan in this case as per Section 185?
Ans. Pursuant to Notification dated 5th June, 2015, if a Govt. Company takes state ministry approval under
which it is governed, then Section 185 shall not be applicable. So the Government company can grant loan to
its director.
6. ABC Company Limited as a part of service conditions mentioned in the appointment letter extends Rs. 1
lakh loan to Mr. A who is Non- executive director of the company. Is this transaction permissible under
Section 185 of the Companies Act, 2013?
Ans. Though Section 185(3) of the Companies act, 2013 granting loan is permissible as part of the service
conditions but only to a Managing director or a Whole time Director. So the above mentioned transaction is
not allowed under Section 185 of the Companies act, 2013.
7. XYZ Nidhi Limited wishes to grant loan to Mr. B, relative of director of the company. Can Nidhi Company
do so?
Ans. Pursuant to Notification dated 5th June, 2015, A Nidhi Company is exempted to follow provisions of
Section 185 if loan is granted to relative of director who is also a member of the Nidhi company and the
transaction is properly disclosed in the annual accounts by a note. Hence the company is allowed to grant
loan to Mr. B.
8. ABC Private Limited has taken loan of Rs. 5 lakhs from a financial institution. As part of loan sanctioning
process, they requires a guarantor for the said transaction. XYZ Limited has agreed to become the guarantor
for the said loan transaction. Suggest if the company can provide guarantee for the loan provided to ABC
Private Limited if Mr. A is the member of ABC Pvt. Ltd.?
Ans. Pursuant to Explanation provided in Section 185(2), a company can provide guarantee to a private
company even if its director is a director or a member in the private company. Hence XYZ Limited can
become a guarantor for the loan provided to ABC Private Limited Company.
9. ABC limited is a holding company of XYZ Limited. Now XYZ limited is granting loan to a firm in which
director of ABC Limited is a partner. Can XYZ Limited execute such loan transaction?
Ans. Section 185(1)(b) only restricts granting of loan to firm in director of the company giving the loan is a
partner. So there is no restriction of giving loan to a firm if director of its holding company is a partner in such
a firm. Hence the loan transaction can be executed by XYZ Limited.
10.What is the meaning of the term “any person in whom any of the director of the company is interested”?
Ans. According to Explanation provided in Section 185(2), “Any person in whom any of the director of the
company is interested” means:-
(a) any private company of which any such director is a director or member;
(b) 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
(c) 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.
11.ABC Limited proposing to grant a loan of Rs. 50 Lakh to a Body corporate. In the said body corporate, Mr.
D, Director of the company has 10% of the total voting power. Can ABC Limited is permissible to grant loan
to such body corporate according to Section 185?
Ans. According to Section 185 of the Companies act, 2013, a company is allowed to give loan to a body
corporate in which individual director or 2 or more directors jointly exercise not less than 25% of the total
voting power. So in this case. ABC Limited is not permitted to grant loan to such body corporate.
12. XYZ Limited is engaged in principal activities of granting loans. It is proposing to grant loan of Rs. 2 lakh
to its director. Is this permitted under Section 185? If yes, what is the maximum rate of interest which can be
charged by the company for the respective loan?
Ans. Section 185 is not applicable for granting loans, guarantees or providing securities for loans taken by the
company whose ordinary course of business is providing loans, guarantees or providing securities for loans
taken. So XYZ Limited can grant loan to its director.
The maximum rate of interest has not been prescribed in the section but it has been mentioned that it should
not be less than prevailing yield of 1/3/5/10 years Government security closest to the tenor of the loan.
13.XYZ Limited,a Public company proposing to provide security for the loan taken by ABC Limited, another
public company. ABC Limited has shareholding of 15% of Mr. A, director of XYZ Limited. Can this
transaction be executed as per the provisions of Section 185?
Ans. According to Section 185(2), A company is only allowed to provide security to a Private company in
which director of the company has shareholding. So above transaction can’t be executed pursuant to
provisions of Section 185.
14. What is the penalty prescribed for non compliance of provisions of Section 185 of the Companies act, 2013?
Ans. The penalty provisions under Section 185 are applicable both on company and director or other person
to whom loan, guarantee or security is provided:
1. Company-
Fine-Minimum- 5 lakh rupees, Maximum- 25 lakh rupees
2.Every officer of the company in default-
Fine-Minimum- 5 lakh rupees, Maximum- 25 lakh rupees
OR
Imprisonment- Maximum 6 months
3. Director or other person to whom loan, guarantee or security is provided
Fine-Minimum- 5 lakh rupees, Maximum- 25 lakh rupees
OR
Imprisonment- Maximum 6 months
OR BOTH
15.Clarify the two situations prescribed in which the company can give loan, guarantee or provide security to
a body corporate under Section 185 in which director is interested?
Ans. Pursuant to Explanation provided in Section 185(2), a company can give loan, guarantee or provide
security to a Body corporate:
In which individual director or 2 or more directors jointly exercises not less than 25% of the total voting
power at its General meeting OR
Whose Board of directors, managing director or manager, whereof is accustomed to act in accordance with
directions or instructions of the Board, or any director or directors of the lending company.
Prepared by CS PRIYANKA SHARMA
ACS- 65673
E-mail- psharma2895@gmail.com
Contact No.:- 9711497840
