Loans to Directors
Section 185 restricts a company from advancing loans, guarantees or securities to its directors and persons in whom directors are interested — the anti-self-dealing provision at the heart of corporate governance questions.
The provision, in plain terms
A company cannot advance any loan (including book-debt loans), guarantee or security to (a) any director of the company or its holding company, or any partner or relative of such director, or (b) any firm in which such director or relative is a partner. For 'any person in whom the director is interested' (private companies with common directors, bodies corporate with ≥25% director voting power, etc.), loans are permitted only with a special resolution and where the borrowing entity uses the loan for its principal business activities. Exemptions cover MD/WTD loans under employee schemes or approved by special resolution, companies in the ordinary business of lending (at not less than prescribed interest), and certain holding-to-subsidiary loans.
Points worth memorising
- Absolute bar: loans/guarantees/security to directors, their partners and relatives, and firms in which they are partners.
- Conditional route: entities in which directors are interested — special resolution + utilisation for principal business activity.
- Exemptions: MD/WTD under service-condition schemes or special resolution; lending companies in ordinary course; holding company loans to wholly-owned subsidiaries used for principal business.
- Consequences: penalties on the company, officers in default, and the director/recipient (including possible imprisonment for the recipient director).
- Read with section 186 (inter-corporate loans and investments) for the full lending framework.
How the exam tests it
Classic case-scenario territory in CA Intermediate Corporate Laws and Final IBS: 'can the company lend to X?' questions map exemptions and the special-resolution route; MCQs test who counts as a person in whom a director is interested.
Tested at: intermediate · final
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Talk to usCan a company give a loan to its managing director?
Yes, in two cases: as part of conditions of service extended to all employees, or under a scheme approved by special resolution. Ordinary loans to directors remain prohibited.
Can a holding company lend to its subsidiary?
Loans to wholly-owned subsidiaries, and guarantees/security for bank loans to subsidiaries, are exempt — provided the funds are used for the subsidiary's principal business activities.