Company law stipulates the requirements for direct or indirect borrowing or advances from company directors in section 185 of company law. In addition to loans and advances represented by the book debt, the director may also provide assurances regarding or assurances regarding any loans he or that other person takes. Any loan or advance shall be included in loans. According to Article 185 of the Act on Companies of 2013, loans or advances to directors must be filed with the company and the penalty for violations is specified.
- Specifically, the Company Act of 2017 (“Amendment Act”) has completely replaced the original section 185 of the Companies Act of 2013 (the “Amendment Act”) regarding Loan to Directors.
- As part of the legislation replacing section 185, companies’ advance or guarantee or guarantee of any loan is limited, along with those permitted to offer such loans, guarantees, or securities. Further, this section provides relief for individuals and entities under certain circumstances from the provisions of section 185, and punishment for those violating it.
- It is the purpose of this article to provide a clear understanding of the newly replaced provisions of Section 185 and the practical questions involved.
Directors’ Loans: What Are They?
Several conditions must be met before a loan can be granted to a director. For example, the corporation is prohibited from providing the director with direct or indirect loans, including those represented by credit cards.
- Any of its directors
- The Director may also contact any other person who interests him or her
- The Director or any other person may provide security in respect of loans taken by them
In accordance with Section 185 of the Companies Act, 2013, the expression “any other person to whom a director has an interest” means:
- Companies whose relatives are partners
- Relatives of directors of any company
- Relatives of directors of private limited companies
- Corporate bodies that hold or control 25% or more of the voting power
- An organization that is headed by a Director, Manager, or Board of Directors acts according to its directive.
Section 185 of the Companies Act, 2013, read with Act 10 of the Companies Act (Board Meeting and its Powers), 2014 provides that a Company may not guarantee or lend to directors or any other person related to a Company Director. The rules and the above provisions make it clear that the Director must not be involved in any activity that benefits him or her personally.
Conclusion
A total ban on lending to directors and individuals or organizations affiliated with directors is enforced by Section 185. In the future, it was considered that improvements could be made to the Section for greater accountability and governance of the Company’s affairs. As part of the update, the section was updated to make business easier for the Directors. The adjustments were made to keep an eye on the Directors’ fiduciary character. As a result of Section 185 of the Companies Act, 2013, directors can now be loaned by the company and its officers with sufficient protections and additional liability.
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