{"id":6466,"date":"2020-12-04T16:15:43","date_gmt":"2020-12-04T16:15:43","guid":{"rendered":"https:\/\/lexforti.com\/legal-news\/?p=6466"},"modified":"2021-01-17T05:00:48","modified_gmt":"2021-01-17T05:00:48","slug":"section-185-companies-act-2013","status":"publish","type":"post","link":"https:\/\/lexforti.com\/legal-news\/section-185-companies-act-2013\/","title":{"rendered":"Explained: Section 185 of Companies Act, 2013"},"content":{"rendered":"\n<p class=\"has-text-align-justify\">Author in present article has explained the nuances of Section 185 of the Companies Act, 2013 in detail. This article should not be construed as a Legal advise.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_47_1 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"ez-toc-toggle-icon-1\"><label for=\"item-6a22759864ab0\" aria-label=\"Table of Content\"><span style=\"display: flex;align-items: center;width: 35px;height: 30px;justify-content: center;direction:ltr;\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/label><input  type=\"checkbox\" id=\"item-6a22759864ab0\"><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/lexforti.com\/legal-news\/section-185-companies-act-2013\/#What_is_Section_185_of_Companies_Act_2013\" title=\"What is Section 185 of Companies Act, 2013?\">What is Section 185 of Companies Act, 2013?<\/a><ul class='ez-toc-list-level-3'><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/lexforti.com\/legal-news\/section-185-companies-act-2013\/#Explanation_of_Section_185_of_Companies_Act_2013\" title=\"Explanation of Section 185 of Companies Act, 2013\">Explanation of Section 185 of Companies Act, 2013<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/lexforti.com\/legal-news\/section-185-companies-act-2013\/#Purpose_of_Section_185\" title=\"Purpose of Section 185\">Purpose of Section 185<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/lexforti.com\/legal-news\/section-185-companies-act-2013\/#Section_185_after_Companies_Amendment_Act_2017\" title=\"Section 185 after, Companies (Amendment) Act, 2017\">Section 185 after, Companies (Amendment) Act, 2017<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/lexforti.com\/legal-news\/section-185-companies-act-2013\/#Penalty_Provisions\" title=\"Penalty Provisions\">Penalty Provisions<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/lexforti.com\/legal-news\/section-185-companies-act-2013\/#Exemption\" title=\"Exemption\">Exemption<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/lexforti.com\/legal-news\/section-185-companies-act-2013\/#Loans_in_Foreign_Currency\" title=\"Loans in Foreign Currency?\">Loans in Foreign Currency?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/lexforti.com\/legal-news\/section-185-companies-act-2013\/#Note\" title=\"Note\">Note<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/lexforti.com\/legal-news\/section-185-companies-act-2013\/#Person_in_whom_the_director_is_interested\" title=\"Person in whom the director is interested\">Person in whom the director is interested<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/lexforti.com\/legal-news\/section-185-companies-act-2013\/#FAQs\" title=\"FAQs\">FAQs<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_Section_185_of_Companies_Act_2013\"><\/span>What is Section 185 of Companies Act, 2013?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ol start=\"185\"><li><strong>Loan to directors, etc.\u2014<\/strong> (1) Save as otherwise provided in this Act, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person:<br>Provided that nothing contained in this sub-section shall apply to\u2014<br>(a) the giving of any loan to a managing or whole-time director\u2014<br>(i) as a part of the conditions of <a href=\"https:\/\/lexforti.com\/legal-news\/government-employees-who-resigned-from-the-service-are-not-entitled-for-pension\/\" target=\"_blank\" rel=\"noreferrer noopener\">service extended by the company to all its employees; <\/a>or<br>(ii) pursuant to any scheme approved by the members by a special resolution; or<br>(b) a company which in the ordinary course of its business <a href=\"https:\/\/lexforti.com\/legal-news\/employees-compensation-act-a-social-security-legislation-providing-for-speedy-payment-of-compensation-so-as-to-render-industrial-life-more-secure\/\" target=\"_blank\" rel=\"noreferrer noopener\">provides loans or gives guarantees or securities<\/a> for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India;<br>[(c) any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or<br>(d) any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company:<br>Provided that the loans made under clauses (c) and (d) are utilised by the subsidiary company for its principal business activities.]<\/li><\/ol>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Explanation_of_Section_185_of_Companies_Act_2013\"><\/span>Explanation of Section 185 of Companies Act, 2013<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p class=\"has-text-align-justify\">For the purposes of this section, the expression \u2015to any other person in whom director is interested\u2016 means\u2014<br>(a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;<br>(b) any firm in which any such director or relative is a partner;<br>(c) any private company of which any such director is a director or member;<br>(d) 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<br>(e) 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.<br>(2) If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (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;<\/p>\n\n\n\n<p class=\"has-text-align-justify\"> and 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<br>taken by him or the other person, shall be punishable with <a rel=\"noreferrer noopener\" href=\"https:\/\/lexforti.com\/legal-news\/when-there-is-composite-sentence-of-imprisonment-and-fine-appeal-is-not-abated-on-death-of-accused\/\" target=\"_blank\">imprisonment which may extend to six months<\/a> or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Purpose_of_Section_185\"><\/span>Purpose of Section 185<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"has-text-align-justify\">Before the Companies Act, 2013; <a href=\"https:\/\/www.mca.gov.in\/Ministry\/pdf\/Companies_Act_1956_13jun2011.pdf\" target=\"_blank\" rel=\"noreferrer noopener\">Companies Act 1956<\/a> was in force. Due to the previous Act, public companies on prior permission of the Central Government could grant loans, guarantees and securities. <\/p>\n\n\n\n<p class=\"has-text-align-justify\">As a result of it, Companies used to borrow funds and pass them to their subsidiaries. When compliances issues used to raise, subsidiaries were left on their own to tackle it.<\/p>\n\n\n\n<p class=\"has-text-align-justify\">To put a stop to this practice, Section 185 of the Companies Act, 2013 came into the force.<\/p>\n\n\n\n<p class=\"has-text-align-justify\">Section 185 of the Companies Act, put certain restrictions for granting loans to the Directors.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Section_185_after_Companies_Amendment_Act_2017\"><\/span>Section 185 after, Companies (Amendment) Act, 2017<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul><li>It limits the restriction on the loans to the Directors.<\/li><li>Allows company to provide loan\/guarantee\/security to any person or entity in whom any of the Directors are interested, subject to:-<ul><li>Special resolution shall be passed in the Company in the general meeting. (75% approval)<\/li><li>Utilization of loans by the borrowing company shall be solely for its principal business activities.<\/li><\/ul><\/li><li>Penalty provision&#8217;s ambit has been increased. It now extends to an officer in default of company (inclusive of Director, Manager, etc).<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Penalty_Provisions\"><\/span>Penalty Provisions<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul><li>Fine not less than Rs. 5 Lakh extended up to Rs. 25 Lakh could be imposed upon the lending company<\/li><li>Imprisonment for the officer in default, extendable up to 6 months along with fine not less than Rs. 5 Lakh and up to Rs. 25 Lakh.<\/li><li>The recipient of the loan will be punishable with imprisonment which may extend to 6 months or with fine which shall not be less than Rs.5 lakhs but which may extend to Rs.25 lakhs or with both.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Exemption\"><\/span>Exemption<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>As per <a href=\"https:\/\/ca2013.com\/rule-10-companies-meetings-of-board-and-its-powers-rules2014\/\" target=\"_blank\" rel=\"noreferrer noopener\">Rule 10 of&nbsp;<strong>Companies<\/strong>&nbsp;(Meetings of Board and its Powers) Rules, 2014<\/a>, s. 185 of the 2013&nbsp;<strong>Act<\/strong>&nbsp;would not apply to<\/p>\n\n\n\n<ul><li>A loan made by a holding&nbsp;<strong>company<\/strong>&nbsp;to its wholly owned subsidiary&nbsp;<strong>company<\/strong>;<\/li><li>Guarantee given or security provided by a holding&nbsp;<strong>company<\/strong>;&nbsp;in respect of any loan given to its wholly owned subsidiary&nbsp;<strong>company<\/strong>;<\/li><li>Guarantee given or security provided by a holding&nbsp;<strong>company<\/strong>;&nbsp;in respect of any loan given to its subsidiary&nbsp;<strong>company<\/strong>&nbsp;by any bank or financial institution.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Loans_in_Foreign_Currency\"><\/span>Loans in Foreign Currency?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"has-text-align-justify\">Indian&nbsp;<strong>companies<\/strong>&nbsp;in India may grant loans in foreign currency to the employees of their branches outside India; for personal purposes. Provided that the loan shall be granted for personal purposes in accordance with the; lender\u2019s staff welfare scheme\/loan rules and other terms and conditions as applicable to its staff resident in India and abroad.<\/p>\n\n\n\n<p class=\"has-text-align-right\">[<em><a href=\"https:\/\/rbidocs.rbi.org.in\/rdocs\/notification\/PDFs\/13253.pdf\" target=\"_blank\" rel=\"noreferrer noopener\">Regn. 5(7) of FEM (Borrowing or Lending in Foreign Exchange) Regulation, 2000 inserted vide Notfn. GSR 531(E), dt. 08-01-2003<\/a><\/em>].<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Note\"><\/span>Note<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"has-text-align-justify\"><strong>Section 185<\/strong>&nbsp;of the 2013&nbsp;<strong>Act<\/strong>&nbsp;places a complete prohibition on loans to directors and any person in whom; the director is interested except the two exceptions provided in (a) and (b) of the proviso to s. 185(1) of the 2013&nbsp;<strong>Act<\/strong>. There is no Central Government approval to such loans as they are prohibited. Punishment is given in s. 185(2) of the 2013&nbsp;<strong>Act<\/strong>;&nbsp;which provides for imprisonment upto 6 months and fine of an amount up to rupee twenty five lakhs.<\/p>\n\n\n\n<p class=\"has-text-align-justify\"><a href=\"https:\/\/indiankanoon.org\/doc\/521938\/\" target=\"_blank\" rel=\"noreferrer noopener\">Section 20(1) of the Banking Regulation&nbsp;<strong>Act<\/strong>, 1949<\/a>;&nbsp;also lays down the restrictions on loans and advances to the directors and the firms in which they hold substantial interest.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Person_in_whom_the_director_is_interested\"><\/span><strong>Person in whom the director is interested<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"has-text-align-justify\"><strong>Section 185<\/strong>&nbsp;of the 2013&nbsp;<strong>Act<\/strong>;&nbsp;provides an exhaustive list of who or what would be considered as a \u201cperson in whom the director is interested\u201d. The list reads as follows:<\/p>\n\n\n\n<ul><li>Any director of the lending\u00a0<strong>company<\/strong>\u00a0or of its<a href=\"https:\/\/lexforti.com\/legal-news\/if-the-third-person-was-aware-of-the-retirement-of-such-partner-who-has-retired-then-the-principle-of-holding-out-will-not-apply\/\" target=\"_blank\" rel=\"noreferrer noopener\"> holding\u00a0<strong>company<\/strong>\u00a0or any relative or partner of such director<\/a>;<\/li><li>Any firm in which the director or his relative is a partner;<\/li><li>Any private\u00a0<strong>company<\/strong>\u00a0in which the director is a director or member;<\/li><li>Any body corporate in which the director either singly or along with other directors, at any general meeting of the body corporate, exercises or controls not less than twenty five percent of the total voting power;<\/li><li>Any body corporate, whose Board of directors, Managing Director or manager is accustomed to\u00a0<strong>act<\/strong>\u00a0in accordance with the directions or instructions of the Board, director or directors of the lending\u00a0<strong>company<\/strong><\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"FAQs\"><\/span>FAQs<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<div class=\"schema-faq wp-block-yoast-faq-block\"><div class=\"schema-faq-section\" id=\"faq-question-1607098381756\"><strong class=\"schema-faq-question\">What is Section 185 of Companies Act 2013?<\/strong> <p class=\"schema-faq-answer\"><strong>Section 185<\/strong>\u00a0of the\u00a0<strong>2013 Act<\/strong>, prohibited\u00a0<strong>companies<\/strong>\u00a0from advancing any loan (including loan represented by a book debt) or giving any guarantee or any security in connection with a loan taken by the directors of such\u00a0<strong>company<\/strong>\u00a0or any other person in whom the directors are interested.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1607098398738\"><strong class=\"schema-faq-question\">Does section 185 apply to private companies?<\/strong> <p class=\"schema-faq-answer\">As per Exemption notification issued by MCA on 05<sup>th<\/sup>\u00a0June, 2015,\u00a0<strong>Section 185<\/strong>\u00a0shall not\u00a0<strong>applicable<\/strong>\u00a0on\u00a0<strong>Private<\/strong>\u00a0Limited\u00a0<strong>Companies<\/strong>, if It fulfil the conditions mentioned therein. Note: &#8230; They\u00a0<strong>can<\/strong>\u00a0freely give Loan\/ Guarantee\/ Security by complying with provisions of\u00a0<strong>Section<\/strong>\u00a0186 and any other provisions of\u00a0<strong>Companies<\/strong>\u00a0Act, 2013.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1607098430066\"><strong class=\"schema-faq-question\">Is section 185 applicable to NBFC?<\/strong> <p class=\"schema-faq-answer\">Loans and Advances given by\u00a0<strong>NBFC<\/strong>\u00a0are exempt under 186 of ICA, 2013 but guarantee\/security given by\u00a0<strong>NBFC<\/strong>\u00a0company has not been covered.<\/p> <\/div> <\/div>\n","protected":false},"excerpt":{"rendered":"<p>Author in present article has explained the nuances of Section 185 of the Companies Act, 2013 in detail. This article should not be construed as a Legal advise. What is Section 185 of Companies Act, 2013? Loan to directors, etc.\u2014 (1) Save as otherwise provided in this Act, no company shall, directly or indirectly, advance [&hellip;]<\/p>\n","protected":false},"author":167,"featured_media":1630,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[111],"tags":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v21.8.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Explained: Section 185 of Companies Act, 2013 - LexForti Legal Journal<\/title>\n<meta name=\"description\" content=\"Author in present article has explained the nuances of Section 185 of the Companies Act, 2013 in detail. 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