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Applicability of Section 295

Mitali Agarwal (Company Secretary) (638 Points)

06 January 2010

Hello Professional Colleagues,

ABC Ltd. (unlisted co.) wants to advance money to a firm in which all the directors are partners.

The Company carries on regular trade transaction with the firm at market prices in cash and thus exempt u/s 295.

But whether the above advance of money will be attracted by Section 295? The advance will be repaid by the firm in future.

If applicabel, then whether there is an alternative by which the above advance can be given without CG Approval u/s 295?

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2 Replies

CA RAJESH BALSARA (Proprietor) (262 Points)
Replied 06 January 2010

Yor company ABC Ltd is a Limited Company(unlisted) so definately covered under section 295.( i have given provision of section 295 below my comment).

One way could be ABC Ltd can give advance to a PRIVATE LIMITED Company in which any Relative of Director is a DIRECTOR such private ltd company.Because Such loans are NOT hit by the provisions of Section 295.

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295. Loans to directors, etc.

(1) Save as otherwise provided in subsection (2) no company (hereinafter in this section referred to as "the lending company" ¹[without obtaining the previous approval of the Central Government in that behalf shall, directly or indirectly,] make any loan to, or give any guarantee or provide any security in connection with a loan made by any other person to, or to any other person by,

(a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;

(b) any firm in which any such director or relative is a partner;

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

(d) any body corporate at a general meeting of which not less than twenty-five per cent of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or

(e) any body corporate, the Board of directors, managing director ²[***] or manager whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

³[(2) Sub-section (1) shall not apply to-

(a) any loan made, guarantee given or security provided-

(i) by a private company unless it is a subsidiary of a public company, or

(ii) by a banking company;

⁴[(b) any loan made by a holding company to its subsidiary company;]

⁵[(c) any guarantee given or security provided by a holding company in respect of any loan made to its subsidiary company.]

(3) Where any loan made, guarantee given or security provided by a lending company and outstanding at the commencement of this Act could not have been made, given or provided, without the previous approval of the Central Government, if this section has then been in force, the lending company shall, within six months from the commencement of this Act or such further time not exceeding six months as the Central Government may grant for that purpose, either obtain the approval of the Central Government to the transaction or enforce the repayment of the loan made, or in connection with which the guarantee was given or the security was provided, notwithstanding any agreement to the contrary.

(4) Every person who is knowing a party to any contravention of sub-section (1) or (3), including in particular any person to whom the loan is made or who has taken the loan is respect of which the guarantee is given or the security is provided, shall be punishable either with fine which may extend to ⁶[fifty thousand rupees] or with simple imprisonment for a term which may extend to six months.

Provided that where any such loan, or any loan in connection with which any such guarantee of security has been given or provided by the lending company, has been repaid in full, no punishment by way of imprisonment shall be imposed under this sub-section; and where the loan has been repaid in part, the maximum punishment which may be imposed under this sub-section by way of imprisonment shall be proportionately reduced.

(5) All persons who are knowingly parties to any contravention of sub-section (1) or (3) shall be liable, jointly and severally, to the lending company for the repayment of the loan or for making good the sum which the lending company may have been called upon to pay in virtue of the guarantee given of the security provided by such company.

(6) No officer of the lending company or of the borrowing body corporate shall be punishable under sub-section (4) or shall incur the liability referred to it sub-section (5) in respect of any loan made, guarantee given or security provided ⁷[after the 1st day of April, 1956] in contravention of clause (d) or (e) of sub-section (1) unless at the time when the loan was made, the guarantee was given or the security was provided by the lending company, he knew or had express notice that that clause was being contravened thereby.