Cleared Section 185? The same loan still has to pass the ceiling and interest-rate tests — run the Section 186 loan cap calculator — and a contract with the same party may need approval under the Section 188 related-party thresholds.
Section 185 of the Companies Act, 2013 was rewritten by the Companies (Amendment) Act, 2017 and has applied in its present form since 7 May 2018. It sorts every loan, guarantee or security into three boxes. Sub-section (1) is an outright bar: no company may, directly or indirectly, advance any loan — including a loan represented by a book debt — to, or give any guarantee or provide any security in connection with a loan taken by, a director of the company or of its holding company, a partner or relative of such a director, or a firm in which such a director or relative is a partner. No approval, by the Board or the shareholders, can authorise it.
Sub-section (2) is a conditional permission. A company may lend to, or guarantee or secure a loan taken by, "any person in whom any of the director of the company is interested" — which the Explanation defines as a private company of which the director is a director or member, a body corporate in which the director (alone or with other directors) controls 25% or more of the voting power at a general meeting, and a body corporate whose Board, managing director or manager is accustomed to act on the directions of the lending company’s Board or directors. Two conditions apply: a special resolution passed in general meeting, with an explanatory statement disclosing the full particulars and the purpose; and use of the loan by the borrowing company for its principal business activities.
Sub-section (3) takes four cases out of both rules: a loan to a managing or whole-time director as part of conditions of service extended to all employees, or under a scheme approved by special resolution; a company that lends or gives guarantees in the ordinary course of business, charging not less than the yield of the Government security closest to the loan’s tenor; a holding company’s loan, guarantee or security to or for its wholly owned subsidiary; and a holding company’s guarantee or security for a bank or financial-institution loan to any subsidiary — the last two only where the subsidiary uses the money for its principal business activities. Separately, MCA notification G.S.R. 464(E) of 5 June 2015 switches Section 185 off altogether for a private company in which no body corporate has invested, whose borrowings from banks, financial institutions and bodies corporate are less than twice its paid-up capital or ₹50 crore, whichever is lower, and which has no subsisting repayment default — provided, since 13 June 2017, it is not in default in filing its financial statements or annual return.
A private limited company with paid-up share capital of ₹1 crore wants to lend ₹25 lakh to one of its two directors. All shares are held by the two directors personally. The company has a bank term loan and cash-credit limit outstanding of ₹2.2 crore, serviced regularly, and its AOC-4 and MGT-7A are filed up to date.
