Section 185 of the Companies Act, 2013
Section 185 of the Companies Act, 2013 deals with "Loans to Directors, etc." – it restricts or regulates loans and similar transactions involving company directors and related entities.
📜 Section 185 – Loan to Directors, etc.
🔴 (1) Absolute Prohibition (No Loan Zone):
A company shall not directly or indirectly:
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
👉 To the following persons:
Any director of the company or its holding company
Any partner or relative of such director
Any firm in which such director or relative is a partner
✅ This clause is a blanket prohibition – no exceptions.
🟡 (2) Conditional Permission (Allowed with Special Resolution):
A company may give loans, guarantees, or securities to:
Private company in which such a director is a director or member
Any body corporate in which not less than 25% voting power is held by such director or in which they are accustomed to act on the board
👉 But only if:
A special resolution is passed by the company in general meeting, and
The loan is used for the principal business activities of the borrowing entity.
🟢 (3) Exemptions (Allowed Freely to These):
Section 185 does not apply to:
Loans to managing or whole-time directors, if:
It is part of service conditions, or
It is approved under a company’s scheme (e.g., housing loan).
Loans by a company which provides loans in the ordinary course of business, if:
An interest rate of not less than the RBI rate is charged.
⚖️ (4) Penalty for Contravention:
Company: Fine ₹5,00,000 to ₹25,00,000
Officer in default: Imprisonment up to 6 months or fine ₹5,00,000 to ₹25,00,000, or both
Recipient of the loan: Fine ₹5,00,000 or amount of loan, whichever is lower
✅ Summary Table:
| Provision | Applicability |
|---|---|
| Absolute prohibition | Directors, their relatives/partners, and firms where they are partners |
| Conditional permission | Companies where director is a member/director – with special resolution |
| Exemptions | Loans in ordinary course, loans to WTD/MD under service terms |
| Penalty | Up to ₹25 lakhs and/or 6 months imprisonment |
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