Section 295 of Companies Act, 1956 was dealing with provisions realted to Loans to Directors etc. Now the same has been replaced by section 185 of the Companies Act, 2013. Section 295 was not applicable to private limited companies unless the same is subsidiary of a ltd. company and it was an umbrella to private limited companies and its directors. But new section 185 of the Companies Act, 2013 does not exclude private limited companies and the penalty provisions has also been made stringent. There is little bit consusion about this section. Therefore, as per my personal opinion, I try to explain the provisions in following manner:
- No Company – (All types of company whether Pvt Ltd or Public Company)
- Directly or indirectly advance any loan including any loan represented by a book debts to,
- or give any guarantee or provide any security in connection with any loan taken by
- any directors or any other person in whom director is interested.
Any other person in whom director is interested means:
Any director of lending company or its holding company
or relative or partner of above mentioned director.
Any firm in which abovementioned director or his relative is partner.
Any Pvt. Ltd. Co. in which above mentioned director is Director or member. (A relative or partner of above mentioned director is if Director or member of a Pvt Ltd is not covered under section 185)
Any Body Corporate at a general meeting of which not less 25% of the total voting power may be exercised or controlled by any abovementioned director or by two or more above mentioned directors
any body 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 above mentioned director or directors, of the lending company.
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.
Example:
A Ltd is having three directors namely A,B & C.
D Ltd. Is having three directors namely D, E & F.
D Ltd is holding Company of A Ltd.
A Ltd. Can not grant loan to any one out of A,B,C,D,E or F.
A Ltd. Can not grant loan to any one relative or partners of any one out of A,B,C,D,E or F.
A Ltd. Can not grant loan to any firm in which relative of any one of A,B,C,D,E or F or any one out of A,B,C,D,E or F is partner.
A Ltd. Can not grant loan to any private limited company in which any one out of A,B,C,D,E or F is either director or member or both.
A Ltd. Can not grant loan to any body corporate in which either alone or jointly A,B,C,D,E or F controls 25% voting power.
A Ltd. Can not grant loan to any body corporate, whose Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board of A Ltd or D Ltd. or one or more directors our of A,B,C,D,E or F.
Conclusion:
Therefore, as per my views,
A Ltd. can grant loan to any other limited company, in which there are common directors of A Ltd or D Ltd or borrowing limited company.
A Ltd. can grant loan to any private limited company, in which none of the directors of A Ltd or D Ltd are either members or directors but relatives of A Ltd or D Ltd. are members and directors.
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