Section 185 of companies: Everything to about Loan to directors

Introducing of Section 185 of the Companies

What is a loan for directors?

• To any of its directors
• To any other person the Director is interested in, or
• Provide any security in respect of loans taken by the Director or any such person

• Any Company whose relative is a Partner
• Any Company whose relative is a director

• Any Private Limited Company whose relative is a Director

• Any Corporate Body where it holds or controls 25% or more of the voting power
• Any Corporate Body headed by a Director / Manager / Board of Directors acts as directed.

Loan to Any Interested Person Of A Director

• Any Private Limited Company of which any director of the lending company may be a director or member.
• Anybody is corporate at whose general meeting not but twenty-five percent of the entire voting power could also be exercised or controlled by any director of the lending company, or by two or more such directors together.
• Any body corporate, director, the board of directors, or manager, which is familiar with act following the directions or instructions of the board, or of any director or directors, of the lending company.

Loan to subsidiary by company

Loan by Companies in Ordinary Business

Loan by Bank and Financial Institutions to a subsidiary

Loan by Private Companies

1. All the particulars of the loan given
2. The purpose that the recipient proposes the loan, guarantee, or security.
3. The loans are utilized by the borrowing company for the principal commercial activity of its Company.

The requirement of Filling: 

• Managing Director or Whole Time Director's loan: 
• Under the Employee Stock Option Plan, as a condition for the services provided by the company to all its employees.
• The ordinary course of business of the Lending Company is the lending or provision of loans and the rate of interest paid should be greater than the Government Security's prevailing yield closest to the loan duration.
• The loan or guarantee was given to its wholly-owned subsidiary. 
• The guarantee is given to its subsidiary business about the loan obtained from any bank/financial institution.

Important Changes made under Section 185 by the Amendment Act

•  In order to avoid confusion as to whether the provisions of section 186, which begins with "without prejudice to the other provisions" can exclude section 185, the new section omits the words "save as otherwise provided in the Act."
•  This new section allows companies to issue loans, guarantees, and securities to organizations in which directors are involved, subject, in some situations, to the prior approval of the shareholders by special resolution and on condition that such loans are used by the borrower for the principal business of the company.
•  The interest rate set out in clause (b) of Section 185(3) is consistent with the rate set out in Section 186(7) of the Act. It was "interest at a rate not less than the bank rate declared by the Reserve Bank of India" prior to the amendment.
•  The extent of the penalties has been broadened and, as a result, the duties of each company's 'officer' (as specified in Section 2(59) of the Act) have been increased to ensure that all loans, protection, and guarantees compliance with the provisions of the Act in which the company's defaulting officer is liable for penal acts and may also be liable for criminal liability. The special offense of contravention in loan use has also been added to the list of offenses under this clause.

Exemptions

• The manager or full-time director of the terms of service extended by the company to all or any of its employees as a neighborhood or under any scheme authorized by a special resolution by the representatives of the company.
• A company that gives loans or gives guarantees or securities for the due repayment of any loan within the ordinary course of its business. The interest in respect of such loans advanced is charged at a rate not but the speed of the prevailing yield of 1 year, three years, five years, or ten years agency security closest to the tenor of the loan.
• Any loan is given by a company to its wholly-owned subsidiary or any guarantee given or security provided by a company in respect of any loan made to its wholly-owned subsidiary. The subsidiary must utilize such loans provided for its principal business activities.
• Any guarantee is given or security provided by a company in respect of a loan made by any bank or financial organization to its subsidiary. The subsidiary must utilize such loans provided for its principal business activities.

Penalty

Checklist

• A company cannot advance loans to directors, their relatives, or partners, nor any guarantee or security with connection to any loan are often provided to them.
• A company cannot advance loans to a firm during which a director may be a relative or partner nor can provide any guarantee or security with connection to any loan to them.
• Loans are often advanced, and any guarantee or security with connection to any loan is often given to the person in whom the director of the corporate is interested after passing a resolution within the general meeting and if the loan amount is utilized by the borrowing company for its principal business activities.
• Only the persons and entities mentioned in Section 185(2) are considered as persons in whom the director of the corporate is interested. Thus, the corporate must check if the persons to whom they need to grant a loan comes under the list of persons mentioned during this section as persons in whom the director is interested.
• The company can grant a loan or provide a guarantee or security with connection to any loan to the managing, or whole-time director when the corporate satisfies the condition mentioned in Section 185(3) of the Act.
• The company which provides loans or gives guarantees or securities for the due repayment of any loan in its ordinary course of business can grant a loan.
• The company can grant a loan to its subsidiary if the corporate satisfies the condition mentioned in Section 185(3) of the Act.

Conclusion

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