Scenario post Companies (Amendment) Act, 2017: Loan to Directors

MCA has amended section 185 of the Companies Act, 2013. With this amendment relaxation is given to the Companies for providing loans/guarantee/security to the persons in whom any of the directors of the Company is interested. 

1.         Relaxations: Pursuant to this amendment, the Company can now advance loans or provide guarantee or security to the following:

i)      any private company of which any such director is a director or member;

ii)     any body corporate at a general meeting of which not less than twenty-five per cent of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together;

iii)       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 of any director or directors, of the lending company.

2.         Restrictions: Restrictions to advance loans or provide guarantee or security still continues in following cases:

i)     any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;

ii)         any firm in which any such director or relative is a partner

3.         Terms and Conditions Further, to advance loans or provide guarantee or security the lending Company is subject to following terms and conditions:

i)  Prior shareholders’ approval is required by passing a special resolution in a general meeting,

ii)     The explanatory statement of the notice of the general meeting shall contain the detailed disclosures regarding the transaction

iii)  The loan, guarantee or security shall be utilised by the borrowing company for its principal business

4.         Penalty: In case of contravention of the provisions of the section 185, along with the Company and Director or other person to whom loan, guarantee or security advanced now additionally every officer of the Company who is in default shall be punishable with Imprisonment extending to 6 months or fine of Rs. 5,00,000 to Rs. 25,00,000.

5.         Applicability to Private Companies:  Conversely, the amendment has no impact on private companies subject to terms and conditions due to exemptions available to private companies vide notification dated 5 June, 2015.  

Conclusion: Though the relaxation are provided but not as whole. Out of 5(Five) categories, Restrictions to 2 (two) categories still continue.