article on loan to director under section 185

Posted on 31-03-2016        By ADMIN

article on loan to director under section 185 Section 185 of the Companies Act, 2013 and its impact on lending transactions sction 185, effective from September 12, 2013 and Section 186, effective from April 1, 2014 are two provisions of the (“Act”) which have created much anxiety among the business community because of its direct impact on capability of the businesses to raise finance. A bare reading of Section 185 of the Act, suggests that advancing of loans or giving of corporate guarantee or providing any security by any company (for the purposes of this article, the “Lending Company”) to a firm and/or body corporate with common management with such Lending Company is completely proscribed. Also prohibited are transactions where the Lending Company is advancing loans, providing security or guarantee to body corporate, the management of which is accustomed to act in accordance with the direction or instructions of the board of directors/or any director of such Lending Company. No guidance has been provided as to what constitutes “acting in accordance with the direction or instructions of the board of directors/or any director”. Furthermore, this provision has been made applicable both to the public and private companies and even the provision of undertaking such transactions with the approval of the Central Government (as under Section 295 of the Companies Act, 1956) has been omitted under the new Act. The compliance of Section 185 of the Act has been ensured by putting in stringent punishments for contravention, the fine being as high as Rs.5,00,000 (Rupees Five Lakhs) extendible to Rs. 25,00,000 (Rupees Twenty Five Lakhs) for the Lending Company. The director or any other person to whom the loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the person shall be punishable with imprisonment which may extend to six (6) months along with a fine which shall not be less than Rs.5,00,000 (Rupees Five Lakhs) but may extend to Rs.25,00,000 (Rupees Twenty Five Lakhs) or both. The stakes being this high for both the Lending Company and the persons receiving such loan and/or the benefit of the guarantee/

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