Section 185 of the Companies Act, 2013

To understand this Section properly we can divide it into three parts:

• Part 1. Will describe that Loan or Advance cannot be given to individuals or Director.
• Part 2. Will talk about Loans to Private Company and Body Corporates subject to fulfilment of certain conditions.
• Part 3. Will describe about the relaxation that are given to some individual and Company subject to certain conditions.

Part 1. No company shall directly or indirectly advance

• any loan including a book debt
• give any guarantee
• provide any security in connection with any loan taken

To Whom?

• any director of company,
• any director of the holding company
• any partner of any such director
• relative of any such director
• any firm in which any such director is a partner.
• any firm in which any such relative of director is a partner.

Part 2. A company may advance any loan including a book debt, or give any guarantee or provide any security in connection with any loan

(a) any private company of which any such director is a director or member;

(b) anybody corporate at a general meeting of which not less than 25% of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together;

(c) anybody corporate, the Board of directors, Managing Director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any directors of the lending company.

BUT, it has to comply the following conditions:

(a) a special resolution is passed by the company in general meeting:

Provided that the explanatory statement to the notice for the relevant general meeting shall disclose the full particulars of the loans given, or guarantee is given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security and any other relevant fact; and

(b) the loans are utilized by the above-mentioned borrowing company (a, b, c) for its principal business activities.

Part 3. The Company may do the following:

a) the giving of any loan to a Managing Director or Whole Time Director:

(i) as a part of the conditions of service extended by the company to all its employees(Like Education Loan, Housing Loan, Marriage Loan etc.); or

(ii) pursuant to any scheme approved by the members by a special resolution; or

(b) a company which in the ordinary course of its business (like NBFC, Baking Company etc) provides loans or gives guarantees or 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 rate of prevailing yield of one year, three years, five years or ten years Government security closest to the tenor of the loan; or

(c) any loan or any guarantee given or security provided by a holding company to its wholly owned subsidiary company

(d) 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

Condition

Provided that the loans made under clauses (c) and (d) are utilized by the subsidiary company for its principal business activities.

Section 2 of Companies Act, 2013, does not define the following:

1. Principal Business Activities means those business activities which are mentioned under the main objects of the company
2. Advance means literally a payment beforehand.  In certain cases, it may be a loan but it cannot be said that a sum paid by way of advance is necessarily a loan.
3. A loan is defined by the Oxford English Dictionary as ” a thing lent; something the use of which is allowed for a time, on the understanding that it shall be returned or an equivalent given, a sum of money lent on these conditions and usually with interest.”
4. Indirect loan means that the company shall not give loan through the mode of one or more intermediaries.

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