Whether a Company CAN give A Loan to {Managing Director | Whole Time Director}

Whether a Company CAN give A Loan to  

{Managing Director | Whole Time Director}

SERIES 606                           Date June 23, 2020

SHORT SUMMARY:

In this editorial author shall discuss about Loan to Director. It is restricted under the Companies Act, 2013 to provide a loan to Director or entities in which director is  interested.

Main focus of this editorial is “Whether Public/ Private Companies can give loan to their Managing Directors/ Whole Time Director”

[1]Section 185 completely modified by the Companies (Amendment) Act, 2017 w.e.f. May 07, 2018.

 

Extract of Law:

As per Section 185 of Companies Act, 2013  (1) No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by,—

(a) any director of a Company, or of a Company which is its holding company or any partner or relative of any such director; or

(b) any firm in which any such director or relative is a partner.

 

Section 185(1) restrict Loan/ guarantee to Directors. As per the above-mentioned provisions, Companies can’t provide loan to Directors. However, there are some exemptions of Section 185(1) i.e. Section 185(3).


 

Extract of Section 185(3):

(3) Nothing contained in sub-section (1) and (2) shall apply to—

(a) the giving of any loan to a Managing or Whole-Time Director—

(i) as a part of the conditions of service extended by the company to all its employees; or

(ii) pursuant to any scheme approved by the members by a special resolution; or

 

 

Section 185(3) states “Nothing contained in sub-section (1) and (2) shall apply on the followings sub-clause i.e. giving any loan to a Managing or Whole-time director subject to conditions mentioned u/s 185(3)(a)(i)(ii).

Therefore, as per section 185(3), A Company (Public/ Private) can give loan to Managing Director/ Whole Time Director on the following conditions:

a)     as a part of the conditions of service extended by the Company to all its employees:

As per this provision, if there is a condition mentioned in the employment/ service agreement of employees, that they are eligible to obtain a loan from a Company.  However, for Managing Director/ Whole Time Director two questions arise:

      i.         Whether MD/ WTD considered as an employee of the Company?

     ii.         Whether it is mandatory to mention in service agreement regarding a loan to them?

Point I: Whether MD/ WTD considered as employees of the Company?

(94) "Whole-Time director" includes a director in the whole-time employment of the Company

 (54) MD means individual entrusted with the power of administrative acts of a routine nature.

Therefore, from the above definition, anyone can opine that MD/ WTD are the employees of the Company.

 

 

Point II: Whether it is mandatory to mention in Service agreement regarding loan?

As per 185(3)(a) it should be mentioned in Service agreement of MD/ WTD. If such clause is not mentioned in Service agreement then Company can amend the Service agreement by passing of  Board Resolution.

 

Therefore, one can opine that as per Section 185(3)(a), a Company (Public/ Private) can give loan to MD/ WTD as per condition mentioned in the Service agreement.

 

b)    pursuant to any scheme approved by the members by a special resolution

As per this provision, if members of  the Company has approved any scheme to give loan to MD/ WTD by passing of the special resolution, then the Company is allowed to give loan to MD/WTD.

Therefore, as per section 185(3) Company (Public/ Private) can give loan to Managing Director/ Whole Time Director by following condition mentioned in (a) or (b)

 

QUICK QUESTION

 

a)    Whether it is mandatory to charge interest on loan given to MD/WTD u/s 186?

As per 186,  if the Company give loan to any entity/ person, the company shall charge interest to them as per 186(7).

However, as per The Companies (Amendment) Act, 2017 w.e.f. May 07, 2017, MCA has added one explanation in section 186 i.e. “Explanation.—For the purposes of this sub-section, the word "person" does not include any individual who is in the employment of the company

 

As per 186, if the Company give loan to any entity/ person, the Company shall charge interest to them as per 186(7).

CONCLUSION:

As per the above-mentioned provisions:

·      It is clear that Companies can give a loan to their Managing Director/ WTD without any restriction under Section 185.

·      However, as per section 186, it is not mandatory to charge interest on such loan.

·      There is neither any limit on the amount of loan a Company can give to its Managing Director or Whole-Time Director nor any restriction as to the purpose for which a loan may be given.

 

 

Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES, Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com). ‘

 

Disclaimer: The entire contents of this document have been prepared based on the relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information.

 IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION

Comments

  1. This Article is very useful, I was really very confused about how to implement the provisions of sec. 185 to whole time director, but all my confusion are cleared after read this article. thanku very much.

    ReplyDelete
  2. Sir
    As per this article WTD are in employment of the company as mentioned clearly, but in case of the MD there is no clarity about them being as employee, How can we be sure about that, definition of MD just mention "individual entrusted with the power of administrative acts". how can this determine MD as employee?

    ReplyDelete
  3. Sir as per condition no 1 loan can be provided to MD/WTD as a part of the conditions of service extended by the company to all its employees; does that mean that condition should be mentioned in the service agreement of ALL employees or it would suffice to have that condition in the service agreement of MD/WTD only?

    ReplyDelete
  4. Thanks for sharing the best information and suggestions, it is very nice and very useful to us. I appreciate the work that you have shared in this post. Keep sharing these types of articles here. Mortgage broker in Fraser Rise

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