The Companies Act, 2013 governs the formation, operation, and management of companies in India. Section 185 of the Act imposes restrictions on companies from providing loans, guarantees, or security to directors and related parties. In this article, we will discuss the provisions of Section 185 and their implications.
Section 185:
An Overview Section 185 prohibits companies from providing loans, guarantees, or security to their directors and related parties. The provision applies to public as well as private companies. A related party is defined as a director or a relative of the director or a firm in which the director or his relative is a partner or a private company in which the director is a director or a member.
Implications of Section 185:
The primary objective of Section 185 is to prevent instances of conflict of interest. By prohibiting companies from providing loans to directors and related parties, the Act seeks to ensure that the management of the company acts in the best interest of the company and its shareholders. The section also aims to promote corporate governance and transparency.
Exceptions to Section 185:
While Section 185 prohibits companies from providing loans, guarantees, or security to directors and related parties, it allows for certain exceptions.
The exceptions are as follows:
- Loans to managing or whole-time directors: Companies can provide loans, guarantees, or security to their managing or whole-time directors, subject to certain conditions. The loan amount should not exceed the prescribed limit, and the company must pass a board resolution approving the loan. Additionally, the loan should be utilized for the purposes specified in the resolution.
- Loans to other directors: Companies can provide loans, guarantees, or security to other directors if the loans are in the ordinary course of business, and the director is not interested in the transaction. The loan amount should not exceed the prescribed limit, and the company must pass a board resolution approving the loan.
- Loans to employees: Companies can provide loans, guarantees, or security to employees, subject to certain conditions. The loan amount should not exceed the prescribed limit, and the loan must be utilized for the purposes specified in the resolution. Additionally, the company must pass a board resolution approving the loan.
Penalties for non-compliance:
If a company violates the provisions of Section 185, it will be liable for penalties. The penalties can range from fines to imprisonment for the directors. Additionally, the company will be barred from making any further loans, guarantees, or security to directors and related parties for three years.
Conclusion:
Section 185 of the Companies Act, 2013 is a significant provision that aims to prevent instances of conflict of interest and promote transparency and good corporate governance. By prohibiting companies from providing loans to directors and related parties, the Act seeks to ensure that the management of the company acts in the best interest of the company and its shareholders.
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While there are exceptions to the provision, companies must ensure that they comply with the prescribed limits and conditions. Failure to do so can result in penalties and other legal consequences.
Frequently Asked QuestionsÂ
Q: What is section 185 of the Companies Act 2013?
A: Section 185 of the Companies Act 2013 prohibits companies from providing loans, guarantees, or securities to directors or any other person in whom a director is interested, subject to certain exceptions.
Q: Who is considered a person in whom a director is interested?
A: A person in whom a director is interested includes a director of the lending company, any partner or relative of the director, any firm in which the director or his relative is a partner, any private company in which the director is a director or member, and any body corporate whose board of directors, managing director, or manager is accustomed to act by the directions or instructions of the lending company’s board of directors or any director of the lending company.
Q: What is the purpose of section 185 of the Companies Act 2013?
A: The purpose of section 185 of the Companies Act 2013 is to prevent companies from providing loans, guarantees, or securities to directors or any other person in whom a director is interested to prevent potential conflict of interest situations.
Q: Are there any exceptions to the prohibition on providing loans to directors?
A: Yes, there are a few exceptions. The prohibition on providing loans to directors does not apply to loans given to a managing or whole-time director as a part of the conditions of service, loans given to directors or their relatives in the ordinary course of business, and loans given by holding companies to their subsidiaries or by banking companies in the ordinary course of business.
Q: What are the penalties for non-compliance with section 185 of the Companies Act 2013?
A: Any company that violates the provisions of section 185 of the Companies Act 2013 shall be punishable with a fine of not less than five lakh rupees but which may extend to twenty-five lakh rupees, and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with a fine of not less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.
Q: Is prior approval required for providing loans to directors under any circumstances?
A: Yes, prior approval of the company in a general meeting is required for providing loans to any person in whom a director is interested, including a director. However, this requirement does not apply to loans given to a managing or whole-time director as a part of the conditions of service.
