Loans to Directors

By Trademark Bazaar - 14th September 2017

Loans to Directors

The Article elucidates the facts of Director can take from company or from funding institutes .

Earlier section 295 of the Companies Act 1956 provided for the loan to directors, which exempted the private limited companies. But with the introduction of Companies act 2013, private companies were also included in the section governing the loan to directors.

However, the provision of section (185) of loan to director does not apply in the below-mentioned cases-

•  A loan that is given to a managing director/whole-time director, as a part of the conditions of service extended by the Company to all its employees.

•  A loan that was given to a managing director/whole-time director in pursuant to any scheme approved by the members by a special resolution.

•  A Company which in the ordinary course of its business provides loans or gives guarantees or securities.

•  A loan that is given by a holding company to its wholly owned subsidiary company or guarantee given/security provided by a holding company in respect of any loan made to its wholly owned subsidiary company. One point to be noted here is that subsidiary company shall utilize the amount of loan provided only for carrying out its principal business.

•  Guarantee given/security provided by a holding company in respect of the loan made by any bank /financial institution to its subsidiary company. One point to be noted here is that subsidiary company shall utilize the amount of loan provided only for carrying out its principal business.

Penalty for providing loan to Directors

If a company provides the loan to its Director in contravention to the Companies Act, 2013, then the penalty of not less than Rs.5 lakhs to Rs.25 lakhs would be levied. Further, the Director to whom the loan was provided would also be punishable with imprisonment which may extend to 6 months or with fine which shall be not less than Rs.5 lakhs to Rs.25 lakhs, or both.

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