Companies Act, 2013 restrictions a company in India from providing to loan to a director or to a person connected with a director. Section 185(1) of the Companies Act, 2013 deals and in this article we review the section in detail including its applicability to private limited companies.
Section 185 of Companies Act
Section 185(1) of the Companies Act, 2013 provides that no company directly or indirectly provide any Director of the company or such other person in whom the Director is interested the the following:
– Advance any loan; or
– Any loan represented by a book debt; or
– Give any guarantee; or
– Provide any security in connection with any loan taken;
This restriction is applicable to both public limited company and public limited company.
Acceptable Loans Given to Director of a Company
The following loans given by a company are acceptable under the Companies Act, 2013;
– Loan given to a Managing Director or Whole-Time Director which as a part of the conditions of employment are extended by the company to all its employees;
– Loan 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.
Exemption for House Building Loan to Director
Through a Press Note No. 4/93. dated 20/8/1993, the Central Government of India has permitted private limited companies and limited companies to grant loans to its Managing Director of Whole-Time Director for house building purposes. Further, the earlier exemption of Rs.5 lakhs home loan with a rate of interest of 10% per annum has now be changed and the following is allowed:
– Companies are allowed to make house building loans to their Managing Director or Whole-Time Director without obtaining prior approval of the Central Government if the terms and conditions are also applicable to the employees and officers of the company. It has also been clarified that the Central Government approval would still be required for loans to Directors for house building, if the company does not have have specific terms and conditions for similar schemes to employees and officers.
Penalty for Providing Loan to Director
In case a company provides loan to its Director in contravention to the Companies Act, 2013, then the company will be punishable with a fine of not less than Rs.5 lakhs to Rs.25 lakhs. Further, the Director to whom the loan was provided would also be punishable with imprisonment which may extend to 6 months or with fine which shall be not less than Rs.5 lakhs to Rs.25 lakhs, or both.