In the corporate world, the Companies Act, 2013 (hereinafter referred to as “Act”), plays a crucial role in regulating and governing the functioning of companies in India. One of the critical aspects addressed by this legislation is the provision of loans to directors. The Act has established stringent guidelines and regulations to ensure transparency, accountability, and fairness in dealings between a company and its directors. This article delves into the provisions and implications of Loans to Directors as per Companies Act, 2013.
However, before we move on to discuss about Loans to Directors as per Companies Act, 2013, let us first understand about the position of Director in a Company.
The appointment of Director takes place by a company’s board of directors, according the Companies Act, 2013. The board of directors is tasked with making strategic choices to ensure the company’s development and success as well as general management and administration of the business. Directors have a fiduciary duty to act in the company’s and its stakeholders’ best interests.
A Director is defined by the Act as “any person occupying the position of a director, by whatever name called.” Therefore, whoever fulfils the duties of a director is legally regarded as a director, regardless of the title given to the post. The Companies Act, 2013 recognizes a number of different director categories, including nominated directors, executive directors, non-executive directors, managing directors, and whole-time directors.
The Section 185 of the Companies Act, 2013 addresses Loan to Directors. Director Loans: A company is prohibited from making an advance loan either directly or indirectly, making an advance loan that is expressed as a book debt, or providing a guarantee or security in connection with any loaned funds, per Section 185(1) of the Act.
A company may advance loans, including any loan represented by a book debt, or offer a guarantee or security in connection with any loan made to any person in whom any of the company’s directors has an interest. Section 185(2) authorizes a corporation to make loans to any person or organization in which any of its directors has an interest, subject to specified requirements.
A special resolution in general meeting must be passed, and the borrowing company must use the loans awarded for its primary business activities, in order to advance loans or provide a guarantee or security to the person in whom the director has an interest. The full details of the loans, guarantees given, or security provided, as well as the intended use of the loan, guarantee, or security by the person receiving the loan, should be disclosed in the explanatory statement to the notice of the general meeting in which such a resolution for granting the loan is passed.
The Act lists the individuals who are deemed to be those in whom any director of a company has an interest. Only these individuals are eligible for loan advances or security provided by the company in question. It is they-
Under the Companies Act, 1956, public companies may make loans, guarantees, and securities if they first received permission from the Central Government to do so. The companies used to borrow money and lend it to their subsidiaries and other linked companies through inter-corporate loans. However, the owning companies would often renege on their obligations under the loan arrangement, leaving the subsidiary helpless. To stop the misuse of the subsidiaries, Section 185 of the Companies Act, 2013 went into effect.
The initial version of Section 185 prohibited the companies from making any loans, provide security for loans taken by the company’s directors or anybody else in whom the directors had an interest, or guaranteeing loans made by them. Only businesses or recipients of such a loan, security, or guarantee were subject to penalties if found in violation.
The following amendments to Section 185 were made by the Companies (Amendment) Act of 2017:
The following are the exemptions with regard to Loans to Directors as per companies act under Section 185:
The following factors should be kept in mind while extending loans or providing guarantees or security in connection with any Loans to Directors as per companies act under Section 185:
Section 185(4) of the Act establishes a penalty for violating the above-mentioned loan restrictions. If the company lends a loan in violation of Section 185, the company will be fined not less than five lakh rupees but not less than twenty-five lakh rupees. Every official of the company who is in default must be penalized with imprisonment for a term not less than six months or with a fine not less than five lakh rupees but not less than twenty-five lakh rupees.
The director or any other person related to the director who advances a loan or provides a guarantee or security shall be punished with imprisonment for up to six months or a fine of not less than five lakh rupees but not less than twenty-five lakh rupees, or both.
The provision related to Loans to Directors as per Companies Act, is a critical component of corporate governance that aims to ensure transparency, accountability, and fairness in the financial transactions between a company and its directors or related parties. By imposing stringent restrictions and disclosure requirements, the Act seeks to strike a balance between enabling routine business operations and preventing potential conflicts of interest or misuse of company resources. Companies are advised to thoroughly understand and adhere to these provisions to avoid legal complications and maintain the integrity of their operations.
Connect to our Experts at Legal Window in case you need any assistance in understanding any provision of Companies Act, 2013 or any Notice issued by Ministry of Corporate Affair regarding the Directors of a Company.
Neelansh Gupta is a dedicated Lawyer and professional having flair for reading & writing to keep himself updated with the latest economical developments. In a short span of 2 years as a professional he has worked on projects related to Drafting, IPR & Corporate laws which have given him diversity in work and a chance to blend his subject knowledge with its real time implementation, thus enhancing his skills.
