Loans to directors.

Section 185 of the new Companies Act, 2013

Section 295 and 296 of the Companies Act, 1956

Section 295 and 296 of the Companies Act, 1956 combined into Section 185 in the Companies Act, 2013. Section 185 is clearer and some new modifications brought in while some others dropped.

Requirement of permission of Centre Government for giving loan to a director under certain situations completely dispensed with. Old Act exempted Private companies and subsidiary companies from the purview of Sections 295 and 296. That is, there was no restriction to such companies in giving loan to Directors. All such exemptions are taken away through Section 185 of the new Act.

According to Section 185 of Companies Act, 2013, all companies, whether Private, public, Subsidiary or holding, are prevented from giving any kind of loan to its Directors, their relatives, related companies and firms. Here loan includes book debts also. Besides loans, giving guarantee or providing security for getting a loan to any of the above referred persons is also restricted. But loans given to Managing Director/Whole time Director as part of their service terms and any schemes approved by the share holders by way of special resolution are exempted. In total,  a company cannot give a loan or help in getting a loan by giving guarantee or security to its Directors or their relatives.

Penal provisions are also made more stringent. If a company contravenes this provision, company itself is liable for a punishment for an amount ranging between five lakh rupees to twenty five lakh rupees. The Director or other person who enjoys such loan/guarantee/security shall be punishable with imprisonment (max six months) or fine (an amount ranging between five lakh rupees to twenty five lakh rupees) or with both. It is interesting to see that the company and the person who receives the loan are punishable. So the duty is given to the Director to stand away from availing such facilities from the company. Here the officers of the company are exempted from the penal provisions.

Act does not insist to disclose such matters in the financial statements of the company.

Indian companies are family driven institutions. Exemptions are there. The intention of law is clear, but how much it can be tackled is a question of fact.

Section 185 of the Companies Act, 2013 came into effect from 12th September, 2013. But certain issues rose from stake holders. So the Ministry of Corporate Affairs clarified that any guarantee given or security Provided by holding company in respect of loans made by a bank or financial institution to its subsidiary company, exemptions provided in clause (d) of sub-section (8) of section 372A of the companies Act, 1956 shall be applicable till section 186 of the Companies Act, 2013 is notified.