Exception to section 185 loans to directors etc

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C.A.SUNIL HUKKERI

CHARTERED ACCOUNTANT

58 Points Joined October 2012

By incorporating new object clause regarding providing loans and advances in ordinary course of business and then granting loans and advances to directors or other entities in whom directors are interested amounts to non contranventionof section 185. for your easy reference related text of section 185 is attached.

Loan to directors, etc.

185. (1) Save as otherwise provided in this Act, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person:

Provided that nothing contained in this sub-section shall apply to—

(a) the giving of any loan to a managing or whole-time director—

(i) as a part of the conditions of service extended by the company to all its employees; 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 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 bank rate declared by the Reserve Bank of India.

Replies (2)

P C Agrawal

Registered independent director Past Ch

8229 Points Joined March 2007

The meaning of the term 'in the ordinary course of business' is quite different here. Simply by making provision in Object Clause of Memorandum one cannot come out of Sec.185. The aim of Sec.185 is to regulate transactions where there is conflict of interest. If the co. is lending only to directors only (even if frequently), it cannot escape Sec.185. However, if co. lends to other parties also regularly (e.g. banks, NBFCs etc.) on arms length basis, such lending will be out of Sec.185.

The Company Law Desk

CA Practice

103 Points Joined April 2014

As per our view, granting loans and advances cannot be practically be a a part of MOA of any company enagaged in any other trading or manufacturing business. Thus this route may be a violation of the provisions of the act.

But what comes as a way out is that a scheme can be formulated by the Company for granting loans to its employees and in the purview of that scheme loans can be advanced to the directors. The same can be found in the full text of Section 185.

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