Section 185 — Prohibition on Loans to Directors Under Companies Act 2013

Section 185 of the Companies Act 2013 prohibits companies from directly or indirectly making loans to, providing guarantees for, or providing security in connection with a loan to, any of its directors or any person in whom the director is interested. This is a fundamental corporate governance provision to prevent self-dealing by directors. Here is the complete guide.

Who Is Covered Under Section 185?

A company cannot give loans/guarantees/securities to:

• Any director of the company
• Any director of the holding company
• Any partner or relative of a director
• Any firm in which a director or his relative is a partner
• Any private company of which the director is a director or member
• Any body corporate where directors of the lending company collectively hold more than 25% of total voting power
• Any body corporate whose Board/MD is accustomed to acting as per the instructions of the lending company's directors

Important Exceptions

• Loans to Managing Director or Whole-Time Director: Allowed if the loan is given as part of the conditions of service extended by the company to all employees — or as per any scheme approved by members by a special resolution
• Ordinary course of banking business: If the company is in the business of lending money (banking/NBFC)
• Loans to wholly-owned subsidiaries: A holding company can give loans to its wholly-owned subsidiary (different from Section 185 — covered by Section 186)

Deemed Loans — What Section 185 Catches

• Loans given indirectly — e.g., director's family company takes a loan from Company A, and Company A's director is also a director of the family company
• Book debts (unpaid salary, expense reimbursements) can be deemed loans if they are outstanding for an unusually long period without commercial justification
• Inter-company loans where the ultimate beneficiary is the director

Penalties

• Company: Fine of ₹5 lakh to ₹25 lakh
• Director/officer in default: Imprisonment up to 6 months OR fine of ₹5 lakh to ₹25 lakh, OR both
• The loan recipient is jointly and severally liable to repay the loan

Conclusion

Section 185 is a strict corporate governance provision — any loan or guarantee to a director or their associates is a potential criminal offence for the company's directors. SPOTON provides secretarial compliance advisory and annual secretarial audit services for companies across Kerala. Contact us for expert company compliance services.