SECTION 185 OF COMPANIES ACT (LOAN TO MANAGING DIRECTORS AND WHOLETIME DIRECTORS BY THE COMPANY)

Section 185(1) of the Companies Act, 2013

No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by,—

(a) Any director of company, or of a company which is its holding company or any partner or relative of any such director; or

(b) Any firm in which any such director or relative is a partner.

Exemption under Section 185(3):

Nothing contained in sub-sections (1) and (2) 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.

With the clarification above, we can say that a company (Whether Public / Private Company) can give loan to its Managing Director/ Whole –time Director on the Conditions mentioned u/s 185(3)(a)(i)(ii)

Section 185(3)(a)(i): As a part of the conditions of service extended by the company to all its employees:-

Clarification on consideration of MD/WTD as employee of the Company:-

Sec 2(94): Meaning of the term ‘whole-time director’ “Whole-time Director” has been defined to include a director in the whole-time employment of the company. The definition of ‘whole-time director’ is an inclusive definition. A whole-time director refers to a director who has been in employment of the company on a fulltime basis and is also entitled to receive remuneration.

Section 2(54): MD means individual entrusted with the power of Administrative acts of routine nature.

From above mentioned definition one can opine that MD/WTD is the employees of the company.

As per Section 185(3)(a)(i):- It should be mentioned in Service agreement of MD/WTD, in absence of such clause in the service agreement then company can amend the Service agreement by passing of Board Resolution.

Section 185(3)(a)(ii):- Pursuant to any scheme approved by the members by a special resolution:- As per the above provision, if a member of the Company has approved any scheme to give loan to MD/WTD by passing the Special resolution, then Company can give loan to MD/WTD.

Conclusion:-

Therefore as per  Section 185(3) of Companies Act,2013, A Company (Public/ Private can give loan to Managing Director/ Whole Time Director by following condition mentioned in Section 185(3)(a)(i)&(ii).

Important Notes:-

  • Companies can give a loan to their MD/WTD without any restriction under Section 185.
  • Charge interest on such loan is not mandatory (as per the Companies Amendment Act 2017 w.e.f. May 07, 2017, Explanation in Section 186 i.e. for the purpose of this sub-section, the word “person” does not include any include any individual who is in the employment of the Company).
  • Neither there is any limit on the amount of loan a company can give to its Managing Director or Whole –Time Director for such loan purpose.