Note on Loans/Advances to Directors of a Company or to entities in which such directors are interested covered under section 185 of the  Companies Act 2013 with effect from 12/09/2013

1.      With effect from 12/09/2013, no Company (including a Private 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. The provisions are also applicable for any guarantee or provide any security in connection with any loan taken by the Director or such other person;

2.      However a Company can give loan  to a managing or whole-time director if it given  as a part of the conditions of service extended by the company to all its employees; or pursuant to any scheme approved by the members by a special resolution;  

3.      Loan or guarantee can also be provided in the following two cases:

(i)                 Any Company whose business in ordinary course is to provide loan or guarantee or securities for due repayment of such loan, can provide loan or guarantee or security to its Director provided interest on loan is not less than bank rate declared by Reserve Bank of India;

(ii)               The loan/advance made to any body corporate at a general meeting of which of the total voting power exercised or controlled by any such director, or by two or more such directors, together is less than twenty-five per cent.

4.       If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of section 185 (1), the company shall be punishable (i) with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees,

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 taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.

5.      So in view of the harsh provisions applicable w.e.f 12/09/2103 as mentioned above, any advance or loan to Director or a group should be avoided at all. It can be advanced if comes within the exceptions mentioned in para 2 & 3 above; 

6.      Existing Advances or guarantees given  as on 12/09/2013 should not be renewed rather efforts should be made to paid back the same immediately or within a reasonable period;  

7.      Please note that the provisions are applicable to all the Companies whether it is Public or Private or one person Company or a small Company;  

8.      In case of contravention of provisions related to loan to Directors, only the Company and Director or person to whom the loan is given or guarantee or security provided shall be liable for punishment and not all other person, who are knowingly party to the default;

9.      The provisions are wide enough to cover advance or loan made to any firm or company in which Directors are interested as a Shareholder, Director or a partner without any limit to the extent of interest of the Director to whom the loan is advanced or guarantee given because for the purposes of this section, the expression “to any other person in whom director is interested” means—(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;(b) any firm in which any such director or relative is a partner;(c) any private company of which any such director is a director or member;(d) any body corporate at a general meeting of which not less than twentyfive 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(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.