Introduction

A corporation is an artificial being, invisible, intangible and existing only in contemplation of law. It has neither a mind nor a body of its own. A corporation, thus must act through living persons. This makes it necessary that the company's business should be entrusted to some human agents. Hence the necessity of directors. A director means as per the Section 2 clause (34) of the Companies Act, 2013 is a director appointed to the Board of a company. Director is responsible for company’s affairs. They are appointed to direct and manage the business of a company. A company, depending on its nature of incorporation can have more than fifteen directors, a company has to have at least one director at a time. A director after appointment shall be provided with a director identification number according to Section 152 clause (3) of the act.

The act has introduced provisions to regulate lending of money to directors, as there has been ambiguity regarding loans taken by or given to directors. The Section 185 states conditions, requirements, restrictions, exemptions and penalty regarding lending to directors. Every company incorporated under the Companies Act is required to abide by these conditions for granting loans, giving securities or guarantees to any director for loan.

Conditions under the section

It is stated that a company cannot furnish loans in the following conditions :–

• Loans to the directors of the company, or to the directors of its holding company or to any partner or relative of any director.
• Loans to any firm in which such a director or his relative is a partner.
• Loans to any private company of which any such director is a member or a director.
• Loans to any body corporate at whose general meeting any such director or directors control twenty-five per cent of voting.

Loans to any company whose Board or other managers are accustomed to act in accordance with the instructions of the Board of directors, any director or directors of the lending company.

The section prohibits not only direct lending of money by a company is directors but also giving of any guarantee for a loan taken by and from any other person and providing of any security for any such loan. It also prohibits providing any guarantee or security for a loan by a director to any person. However, the section does not prohibit giving of any loan to a managing or a full – time director as a part of the conditions of service extended by the company to all its employees under clause (3) of the section.

Under clause (2) of the section a company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the director of the company is interested. Provided that such loan will be utilised by the borrowing company for its principal business activities also that the company has passed a special resolution regarding furnishing of such loan.

Exemption

The conditions and restriction under this section shall not be applicable to a Private Company, provided –

• That no other body corporate has invested any amount in such company’s share capital
• The borrowing of such company from any financial institutions or body corporates is less than twice of its paid – up share capital or 50 Crore rupees, whichever is lower;
• That the company has not defaulted any repayment of any borrowings.
• This Section shall not be applicable to a Nidhi Company, that is a company incorporated with the objective of cultivating the habit of thrift and savings, receiving deposits and lending amongst its members only. Provided that the loan is given to a director or his relative in their capacity as member and such transaction is disclosed in the annual accounts by a note.
• This Section shall not be applicable to a Government Company, if such company has obtained approval from the Ministry or the Department which is in charge of such company.
• As mentioned above, this section does not prohibit giving of any loan to a managing or a full – time director as a part of the conditions of service extended by the company to all its employees.
• This section does not restricts giving loan to a company that provides loans or gives guarantees or securities for the due repayment of any loan in the ordinary course of its business. Provided that the interest in such loans advanced 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.
• This section does not restricts giving loan or security or guarantee by a holding company to its wholly owned subsidiary company with respect to a loan either provided by any financial institution or by the holding company itself. Provided that, such loan shall be utilised for its principal business activities.

Penalty under the section

The clause 4 of the section provides for penalty for non – compliance of the provision under this section. It is stated that the company will be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees. The person in charge of furnishing loan or guarantee or security in contravention of this section shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees. Moreover, the director or the person to whom such loan or guarantee or security will be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.