Section 185 of the Companies Act

No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by

(1) any director of the company, or of a company which is its holding company or any partner or relative of any such director; or

(2) any firm in which any such director or relative is a partner.

 

The loans are utilised by the borrowing company for its principal business activities.

A company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the directors of the company is interested.

 

The special resolution is passed by the company in general meeting: 

Provided that the explanatory statement to the notice for the relevant general meeting shall disclose the full particulars of the loans given, or guarantee is given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security and any other relevant fact.

 

Acceptable Loans Given to Director of a Company

The following loans given to a company are acceptable under the Companies Act, 2013

(1)  Loans given as a part of the conditions of employment are extended by the company to its employees;

(2) The loan is given to a Director by a company which is in the business of providing loans and provides the loan to the Director with due repayment schedule and at an interest that is not less than the Bank’s rate of Interest to customers.

 

The penalty for Providing Loan to Director

(1) The Company shall be Punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees. Every officer of the company may extend to six months or with fine shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees.

(2) The director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six or with fine which shall not less than five lakh but which may extend to twenty five lakh rupees, or both.

 

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