Section 185 of companies outline the company law requirements concerning direct or indirect borrowing or company directors’ advances. Loans or advances include loans represented by the book debt or those to which the director is or may offer any assurances in connection with or assurance of any loan taken by him or that other person. Loans shall include any loans or advances. The provisions of Article 185 of the Act on Companies of 2013 clarify also the filing condition for loan or advance to directors and the penalty of the violation.
Contents
The original Section 185 of the Companies Act of 2013 (the “Amendment Act”) concerning Loan to Directors and so forth has fully replaced the new provisions (see e. g. 7 May 2018), by the Company Act of 2017 (“Amendment Act”).
Section 185 replacing this section discusses the limits on companies’ advance or guarantee or guarantee of any loan and on those who are permitted to offer such loans or guarantees or securities subject to compliance under the Act. Furthermore, this section provides relief for individuals and entities under certain circumstances from the provisions of Sec. 185 and punishment for persons who contravene it.
The goal of this article is to provide a clear view of the newly replaced provisions of Section 185 and the practical questions that prevail thereon.
Loans to directors may be granted subject to certain conditions. Under section 185 of the Companies Act, 2013, the Company may not provide loans directly or indirectly, including any loans represented by credit cards.
For purposes of Section 185 of the Companies Act, 2013, the expression “any other person to whom a director of interest” means :
Section 185 of the Companies Act, 2013, read with Act 10 of the Companies Act (Board Meeting and its Powers), 2014 provides that a Company may not guarantee or lend to directors or any other person related to a Company Director. The rules and the above provisions make it clear that the Director must not be involved in any activity that benefits him or her personally.
A business can advance loans, including any loan represented by a book debt, or provide a guarantee or protection for any loan taken to a person in whom any of the corporate administrators are involved. Section 185(2) allows a corporation to offer loans to any person/entity in whom any of the administrators have an interest the subject to certain conditions.
The conditions which are to be fulfilled for advancing loans or providing guarantee or security to the person in whom the director is interested is that a special resolution generally meeting is to be passed which the borrowing company utilizes the loans granted for its principal business activities. The explanatory statement to the notice of the overall meeting during which such a resolution for granting the loan is passed should disclose the complete particulars of the loans or guarantee given or security provided and therefore the purpose that the loan or guarantee or security is proposed to be utilized by the person receiving the loan.
The Act provides the list of the persons who are considered as persons in whom any of the administrators of the corporate is interested. the corporate can advance the loans or give the guarantee, or security only to those persons. They are-
In the Companies (Amendment) Act, 2015, the exemption is given to the company that provides a loan, guarantee, or securities to the wholly-owned subsidiary. The subsidiary uses the loans which are given for its principal commercial activity.
In the ordinary course of business, a Company provides loans, guarantees, or provide security as long as the speed of interest is charged at a rate not but rate prevailing declared by the Federal Reserve Bank of India (RBI).
The Companies (Amendment) Act, 2017, the exemption is given to the company which provides security and guarantee in respect of a loan made by any bank or financial organization to its subsidiary. The subsidiary should use the Loans which are given for its principle commercial activity.
The Companies (Amendment) Act, 2017, a personal Company can provide for a Loan including a Loan represented by book debts, or give a guarantee or security in connection to the loan taken by a person in whom the Director of the Company is interested. The loan is often given only a special resolution is passed within the general meeting. The statement of the resolution should disclose:
Upon the adoption of the Special Resolution by the representatives of the Board, the Company shall, within 30 days of the adoption of the Special Resolution, file form MGT-14 with the same ROC concerned.
Cases in which the Organization does not need a Special Resolution, even though the above limitations are exceeded:
Section 185(3) of the Act provides exceptions to the restrictions on the corporate to grant loans. the corporate can advance loans or provides a guarantee, or security to-
Section 185(4) of the Act lays down a penalty if the provisions mentioned above concerning providing loans are contravened. If the corporate advances loan in contravention to Section 185, the corporate shall be punishable with a fine which shall not be but five lakh rupees but which can reach twenty-five lakh rupees. Every officer of the corporate who is in default shall be susceptible to be punished with imprisonment for a term which can reach six months or with a fine which shall not be but five lakh rupees but which can reach twenty-five lakh rupees.
The director or the other person associated with the director, to whom any loan is advanced or guarantee or security is given shall be susceptible to be punished with imprisonment which can reach six months or with a fine which shall not be but five lakh rupees but which can reach twenty-five lakh rupees or with both.
The points to be recognized under Section 185 of the Act while encouraging loans or giving guarantee or security with link to any loan are-
The implementation of Section 185 gives rise to a total ban on the granting of loans to directors and other individuals and organizations affiliated with directors. Later on, it was considered that improvements in the Section for greater accountability and governance of the Company’s affairs should be made. The adjustments were made to keep an eye on the Directors of the Company’s fiduciary character. The section was updated to provide ease of doing business. Section 185 of the Companies Act, 2013, now permits the company and its officers to loan directors with sufficient protections and additional liability.
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