Article on section 185

Section 185

Applicability:This section applies to public and private company both except to a private company;

• in whose no other body corporate has invested any money.
• if the borrowings of such company from banks or financial institutions or any body corporate is less than twice its paid up share capital or Rs.50 crores whichever is lower;
• and such a company is not in default in repayment of such borrowing subsisting at the time of making transactions under this section.

Scope:This section provides that no company shall:

• advance any loan;
• any loan represented by a book debt;or
• give any gurantee;or
• provide any security in connection with any loan taken to any director of the company or such other person in whom such director is interested.

Exception:

1. This section does not apply when loan is given to a managing or whole time director:

•  as a part of the conditions of service extended by the company to all its employees;
• pursuant to any scheme approved by the members by a special resolution;

      2. A company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve bank of India.

    

      3.any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or 

      4.any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company:

 Provided that the loans made under clauses (3) and (4) are utilised by the subsidiary company for its principal business activities.".

Penalty:  If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1):

•  the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees;and
•  the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.