Can a Company grant Loans/ Security/ Guarantee?
A company, whether Public or Private, is allowed to grant any loan, guarantee, any loan represented by a book debt or book entry, or provide any security against any loan, to persons other than specified under Section 185.
Whom Company cannot grant Loans/ Security/ Guarantee?
Section 185 prohibits a Company to give loans/ guarantee/ security to the following:
- To any of its Director
- To any Director of Holding Company
- To any relative of any Director
- To any firm in which Director or his relative is partner
- To any Private Company in which such Director, is a Director or member
- To any Body Corporate, in which any such Director, or two or more Directors together, hold more than 25% of total voting power, or where Board of such Body Corporate, is accustomed to act in accordance with directions of Board of lending company
Interesting analysis: The applicability of Section 185 for granting the loan, shall be relevant at the time of entering the transaction. For example, if any loan is granted to any employee who later becomes a Director, will not come get covered under Section 185.
What can be construed as ‘Loan’?
Since the term ‘loan’ is not defined under the Companies Act, 2013, it becomes absolutely necessary to understand the precise and concise meaning of word ‘Loan’, as there are serious implications in the event of non-compliances.
Oxford Dictionary defines ‘Loan’, as “a thing lent, something the use of which is allowed for a certain pre-defined period”. The essential element of a loan is the advance of money upon the understanding that it shall be returned, fully or in instalments, and it may or may not carry interest. Even, a mere book entry to record amount payable to a person can be brought in ambit of loan, if above elements are satisfied.
What punitive action is defined for non-compliance’s?
A company will be punishable with fine upto Rs. 25 Lacs, and such Director and other person, to whom loan is advanced in contravention to provisions, will be punishable with fine upto Rs. 25 Lacs, or imprisonment for six months, or both
Exceptions to Loan prohibition?
Section 185 provides an exemption in the following circumstances for providing loans by the company:
- If Company is giving loan to any Managing Director or Whole-time Director as a part of service extended to all employees or pursuant to any scheme approved by the members by Special Resolution, or
- In case of NBFC company, where granting of loan is ordinary course of business, and such persons as specified under Section 185, takes loan in capacity of a consumer.
Hope the above information provides checkpoints to be taken into consideration by the Company, while granting any loan/ security/ guarantee in favour of any person.
You may get back to us for any more details on above provisions or any other matter related to Companies Act, 2013 at below mentioned contact details-
Malavika Bhatia | <malavika.bhatia@bluelotusstrategy.com>
Monika Bhardwaj | <monika.bhardwaj@bluelotusstrategy.com>
Visit: http://www.bluelotusstrategy.com/blog/ and signup to receive our blogs when they get published.
