Section 185 Of the Companies Act 2013
5paisa Research Team
Last Updated: 26 Apr, 2023 05:18 PM IST
Want to start your Investment Journey?
Content
- Introduction
- What is Section 185 Of the Companies Act 2013
- Loan to directors section 185
- What is the purpose of Section 185 of the Companies Act of 2013?
- Exemptions to the Loans that are given to the Directors
- Penalties
- Checklist
Introduction
Section 185 of the Companies Act 2013 governs a company’s lending and borrowing activities. The provision lays down certain conditions under which a company can provide loans, guarantees, or security to its directors or other persons in whom directors are interested. This blog highlights various aspects of Sec 185 of the Companies Act 2013 and its implications for companies.
What is Section 185 Of the Companies Act 2013
According to Section 185 of the Companies Act 2013, a company cannot directly or indirectly give any loan to its director or any other person in whom its director is interested or provide any guarantee or security in connection with a loan taken by such a person. However, there are certain exceptions to this rule.
Loan to directors section 185
Loans to directors Section 185 is a sensitive issue for companies and provides the legal framework for such loans. This section protects the interests of a company's shareholders and stakeholders and prevents company funds' misuse by directors or related parties.
What is the purpose of Section 185 of the Companies Act of 2013?
Now that you know what is section 185 of the Companies Act 2013, let’s see why it is necessary. Section 185 Companies Act ensures that companies do not provide loans or guarantees to directors or other related parties without appropriate checks and balances. The section lays down stringent conditions for companies to provide loans, guarantees or security to their directors or other interested parties.
Exemptions to the Loans that are given to the Directors
Under Section 185 of the Companies Act 2013, a company is prohibited from providing any loan, guarantee, or security concerning a loan to its director or any other person with whom its director is interested. The section defines a director as an individual appointed to the company’s board of directors.
A person in whom a director is interested includes a firm or a company in which the director is a partner or director or a person who is a director’s relative. However, there are certain exemptions to this prohibition.
1. Loans to Managing Director or Whole Time Director
A company may grant any loan to its Managing Director (MD) or Whole Time Director (ETD) as a part of the conditions of service of the MD or WTD. Such situations need the Board of Directors’ approval and must be disclosed in the company’s financial statements.
The loan should not exceed 60% of the paid-up share capital, free reserves, and securities premium account or 100% of the free reserves and securities premium account, whichever is higher.
2. Loans to Other Directors
With prior approval from the Board of Directors, a company may grant any loan, guarantee or provide security in connection with a loan to a director who is neither an MD nor a WTD, subject to certain conditions.
The loan should not exceed 25% of the paid-up share capital, free reserves, and securities premium account or Rs. 1 crore, whichever is lower.
3. Loans Subsidiaries
A company can grant a loan to its wholly-owned subsidiary for its usage in its principal business activities only.
4. Loan to Companies as part of the ordinary business
Loans can be provided to companies during their regular business operations as long as the interest rate charged is not lower than the rate mandated by RBI at that particular time.
5. Loans given by Banks and Financial Institutions to Subsidiaries
Banks and financial institutions can lend money to their subsidiaries if they meet certain conditions.
● The holding company should provide security or guarantee for the loan given by the bank or financial institution to the subsidiary.
● The loan must be used for the primary business activity of the subsidiary.
Penalties
The penalties for contravention of Section 185 Companies Act are as follows.
1. Monetary penalty: The company shall be liable to pay a fine of at least Rs. 5 lakhs which may extend to Rs. 25 lakhs.
2. Imprisonment: Punishable imprisonment can be for a term which may extend to 6 months or with a fine of at least Rs. 5 lakhs that may extend to Rs. 25 lakhs, or with both.
In addition to the above penalties, the company may face other consequences such as damage to its reputation, loss of investor confidence, etc. Therefore, companies must comply with the provisions of Section 185 to avoid any legal or financial repercussions
Checklist
Section 185 of the Companies Act of 2013 pertains to the prohibition of loans and guarantees to directors. To ensure compliance with this section, companies should follow a checklist that includes the following steps.
● Check the company’s Articles of Association (AoA to determine the scope of the authority of the Board of Directors to grant loans.
● Review the company’s financial position and assess whether it has sufficient funds to grant a loan or provide a guarantee.
● Ensure that the transaction is in the ordinary course of business of the company, done on an arm's length basis.
● Obtain prior approval from the Board of Directors for any proposed transaction with a director and record the same in the meeting’s minutes.
● Verify the transaction is approved by a resolution passed at a meeting of the Board of Directors with the requisite majority.
● Ensure that the director concerned does not participate in the Board of Directors meetings when the transaction is being considered.
● Disclose the transaction details in the company’s financial statements and file the same with the Registrar of Companies.
● Ensure the transaction complies with any other applicable laws, rules or regulations.
● Periodically review all transactions with directors to ensure compliance with Section 185
● In case of any violation of Section 185, take corrective action and report the same to the Registrar of Companies.
With the above checklist, companies can ensure compliance with Section 185 and avoid penalties or other legal consequences.
More About Tax
- Section 115BAA-Overview
- Section 16
- Section 194P
- Section 197
- Section 10
- Form 10
- Section 194K
- Section 195
- Section 194S
- Section 194R
- Section 194Q
- Section 80M
- Section 80JJAA
- Section 80GGB
- Section 44AD
- Form 12C
- Form 10-IC
- Form 10BE
- Form 10BD
- Form 10A
- Form 10B
- All About Income Tax Clearance Certificate
- Section 206C
- Section 206AA
- Section 194O
- Section 194DA
- Section 194B
- Section 194A
- Section 80DD
- Municipal Bonds
- Form 20A
- Form 10BB
- Section 80QQB
- Section 80P
- Section 80IA
- Section 80EEB
- Section 44AE
- GSTR 5A
- GSTR-5
- GSTR 11
- GST ITC 04 Form
- Form CMP-08
- GSTR 10
- GSTR 9A
- GSTR 8
- GSTR 7
- GSTR 6
- GSTR 4
- GSTR 9
- GSTR 3B
- GSTR 1
- Section 80TTB
- Section 80E
- Section 80D Of Income Tax Act
- Form 27EQ
- Form 24Q
- Form 10IE
- Section 10(10D)
- Form 3CEB
- Section 44AB
- Form 3CA
- ITR 4
- ITR 3
- Form 12BB
- Form 3CB
- Form 27A
- Section 194M
- Form 27Q
- Form 16B
- Form 16A
- Section 194LA
- Section 80GGC
- Section 80GGA
- Form 26QC
- Form 16C
- Section 1941B
- Section 194IA
- Section 194D
- Section 192A
- Section 192
- Supply without consideration under GST
- List of Goods & Services Exempt Under GST
- How to Pay GST Online?
- GST Impact on Mutual Funds
- Documents Required for GST Registration
- How to Deposit Self Assessment Tax Online?
- How to Get Income Tax Return Copy Online?
- How can traders avoid income tax Notices?
- Income Tax Return Filing For Futures And Options
- Income Tax Return (ITR) for Mutual Funds
- What Are Tax Benefits on Gold Loan
- Payroll Tax
- Income Tax for Freelancers
- Tax Saving Tips for Entrepreneurs
- Tax Base
- 5 Heads of Income Tax
- Income Tax Exemptions for Salaried Employees
- How to Deal with Income Tax Notice
- Income Tax For Beginners
- How to save tax in India
- What Taxes Has GST Replaced?
- How to Register for GST India Online
- How to File GST Returns for Multiple GSTINs
- Suspension of GST registration
- GST vs Income Tax
- What Is HSN Code
- GST Composition Scheme
- History of GST in India
- Difference Between GST and VAT
- What is Nil ITR Filing and How to File It?
- How to File ITR for Freelancer
- 10 Tips for First-time Taxpayers While Filing for ITR
- Tax Saving Options Other Than Section 80C
- Tax Benefits of Loans in India
- Tax Benefit on Home Loan
- Last minute Tax Filing Tips
- Income Tax Slab for Women
- Tax Deducted at Source (TDS) under Goods and Service Tax
- GST Interstate vs GST Intrastate
- What is GSTIN?
- What is Amnesty Scheme for GST
- Eligibility for GST
- What is Tax Loss Harvesting? An Overview
- Progressive Tax
- Tax Write Off
- Consumption Tax
- How to Pay Off Debt Faster
- What is Withholding Tax?
- Tax Avoidance
- What is Marginal Tax Rate?
- Tax to GDP Ratio
- What is Non Tax Revenue?
- Tax Benefits From Equity Investment
- What is Form 61A?
- What is Form 49B?
- What is Form 26Q?
- What is Form 15CB?
- What is Form 15CA?
- What is Form 10F?
- What is Form 10E in Income Tax?
- What is Form 10BA?
- What is Form 3CD?
- Wealth tax
- Input Tax Credit (ITC) under GST
- SGST – State Goods and Service Tax
- What are Payroll Taxes?
- ITR 1 vs ITR 2
- 15h Form
- Excise Duty on Petrol and Diesel
- GST on Rent
- Late Fees and Interest on GST Return
- Corporate Tax
- Depreciation under Income Tax Act
- Reverse Charge Mechanism (RCM)
- General Anti-Avoidance Rule (GAAR)
- Difference Between Tax Evasion and Tax Avoidance
- Excise Duty
- CGST - Central Goods and Services Tax
- Tax Evasion
- Residential Status Under the Income Tax Act
- 80EEA Income Tax
- GST on Cement
- What is Patta Chitta
- Payment of Gratuity Act 1972
- Integrated Goods and Services Tax (IGST)
- What Is TCS Tax?
- What Is Dearness Allowance?
- What Is TAN?
- What Are TDS Traces?
- Income Tax for NRI
- ITR Filing Last Date FY 2022-23 (AY 2023-24)
- Difference Between TDS and TCS
- Difference Between Direct Tax vs Indirect Tax
- GST Refund Process
- GST Invoice
- GST compliance
- Income Tax Rebate under Section 87A
- Section 44ADA
- Tax Saving FD
- Section 80CCC
- What Is Section 194I?
- GST On Restaurants
- Advantages and Disadvantages of GST
- Cess on Income Tax
- Standard Deduction Under Section 16 IA
- Capital Gain Tax on Property
- Section 186 Of the Companies Act 2013
- Section 185 Of the Companies Act 2013
- Section 115 BAC of the Income Tax Act
- GSTR 9C
- What is Memorandum of Association?
- 80ccd of Income Tax Act
- Types of Taxes in India
- GST on Gold
- GST Slab Rates 2023
- What is Leave Travel Allowance (LTA)?
- GST on Car
- Section 12A
- Self Assessment Tax
- GSTR 2B
- GSTR 2A
- GST on Mobile Phones
- Difference Between Assessment year and Financial year
- How to Check Income Tax Refund Status
- What Is Voluntary Provident Fund?
- What Is Perquisites
- What Is Conveyance Allowance?
- Section 80DDB Of Income Tax Act
- What is Agriculture Income?
- Section 80u
- Section 80gg
- 194n TDS
- What is 194c
- 50 30 20 rule
- 194h TDS
- What is Gross Salary?
- Old vs New Tax Regime
- What Is Short Term Capital Gains Tax?
- What Is 80TTA Deduction?
- Income Tax Slab 2023
- Form 26AS - How to Download Form 26AS
- Income Tax Slab for Senior Citizens: FY 2023-24 (AY 2024-25)
- What is a Financial Year?
- Deferred Tax
- Section 80G - Donations Eligible Under Section 80G
- Section 80EE- Income Tax Deduction for Interest on Home Loan
- Form 26QB: TDS on Sale of Property
- Section 194J - TDS for Professional or Technical Services
- Section 194H – TDS on Commission and Brokerage
- How to Check TDS Refund Status?
- Securities Transaction Tax
- How To Save Tax In India Without Investment?
- What is Indirect Tax?
- What is a Fiscal Deficit?
- What is Debt-to-Equity (D/E) Ratio?
- What is Reverse Repo Rate?
- What is Repo Rate?
- What is Professional Tax?
- What are Capital Gains?
- What is Direct Tax?
- What is Form 16?
- What is TDS? Read More
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing. For detailed disclaimer please Click here.
Frequently Asked Questions
No, LLP need not follow the provision of Section 185 of the Companies Act 2013.
A company is prohibited from providing a loan to any person or corporate entity exceeding 60% of its paid-up share capital, share premium, and free reserves, either directly or indirectly.
The Companies (Amendment) Act of 2015 allows a company to provide loans, security or guarantee to its wholly-owned subsidiary without contravening the provisions of the Companies Act. The subsidiary is permitted to use the loan for its primary business activities.
A Private Limited Company (PLC) can grant a loan to a director.