According to Section 185 (1) of the Companies Act, 2013,

No Company shall directly or indirectly

– Advance any Loan,

-Loan represented by Book debt

-Or give any guarantee,

– Or provide any security in connection with the Loan taken by

Following persons:

A.

1. Any Director of the company,

2. Any Director of the Holding Company,

3. Any partner or relative of any such above mentioned Director.

B.

any firm in which such Director or relative is a partner.

According to Section 185(2) of Companies Act, 2013

  1. A company may advance any Loan including any loan represented by book debt
  2. or give any guarantee
  3. or provide any security in connection with loan taken,

To any other person in whom Director is interested

To any other person in whom Director is interested:

(a)

Any Private company in which any such Director is a Director or member.

(b)

any body corporate at a general meeting of which not less than 25 % of the total voting power may be exercised or controlled by any such Directors or by two or more such Directors together.

(C)

Body corporate, whose the board of directors, the managing director or manager is accustomed to act in accordance with the Directions, or instructions of the board , or any director or directors of the lending company

Note: The Company may advance any loans to any other person in whom Director is interested subject to two conditions

Conditions are as follows:

1.

Special Resolution has to be passed by the Company in the general meeting of the company AND

2.

loans are utilized by the borrowing company for its principal business activities.

Further Explanatory Statement to the notice for the relevant general meeting in which special resolution shall be passed shall disclose:

  1. the full particulars of loans given, or guarantee given or security provided and
  2. the purpose for which loans given, or guarantee given or security provided

EXCEPTIONS PROVIDED IN THE PROVISIONS OF SUB SECTION (1) AND (2) OF SECTION 185 OF THE COMPANIES ACT, 2013.

1.

Company which in ordinary course of business provides loan or give guarantees/ securities in connection with the loan to its Managing Director or Whole Time Director

a) as part of the conditions of their service extended by the company.

b) Any scheme approved by the member through special resolution

2.

Company which in ordinary course of business provides loan or give guarantees/ securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.

3.

Any Loan made by holding company to its wholly owned subsidiary or

-Guarantee given or security provided by holding company in respect of loan to its wholly owned subsidiary company

4.

Any Guarantee given or security provided by a holding company in respect of loan made by any bank or financial Institution to its subsidiary company.

Note: In respect of loans made under (3) and (4) above, Loan shall be utilised by subsidiary company for its principal business activities

PUNISHMENT FOR VIOLATION

1.

the company shall be punishable with fine which shall not be less than five lakh rupeesbut which may extend to twenty-five lakh rupees.

2.

every officer of the company who is in default shall be punishable with imprisonmentfor a term 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; and

3.

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.

EXEMPTIONS TO THE PRIVATE COMPANY

As per exemption notification issued by MCA on 05th June 2015, Section 185 of Companies Act, 2013 not applicable on the private Company

1.

In whose share capital no other body corporate has invested any money.

2.

If the borrowings of such a company from Banks or financial institution or any body corporate is less than twice its paid up capital or Rs fifty crores whichever is lower.

3.

Such Company has no default in repayment of such borrowings subsisting at the time of making transactions under this section vide Notification No. 464(E) dated 05th June 2015.

EXEMPTIONS TO THE GOVERNMENT COMPANY

Section 185 shall not apply to the Government Company in case such company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the Company or the case may be, the state Government before making any loan or giving any guarantee or providing any security under the section as amended vide Notification No. G.S.R. 463 (E) dated 05th June, 2015.

EXEMPTIONS TO THE NIDHI COMPANY

Section 185 shall not apply to a Nidhi Company provided the loan is given to a Director or his relative in their capacity as members and such transaction is disclosed in the annual accounts by a note vide Notification No. G.S.R. 465(E) dated 05th June, 2015.