Loans to Directors under Section 185 of the Companies Act, 2013-Some perspectives

[2021] 129 taxmann.com 194 (Article)

The present version of the above provision represents a much-mellowed version as compared to what stood originally in its place at the time of inception of the Companies Act, 2013(hereinafter referred to as “The Act”). Readers will recall that Section 185 in its entirety was substituted to its present form by the Companies (Amendment)Act, 2017 with effect from 7-5-2018. The sting associated with the original version has been blunted substantially and in terms of its impact, the Section has been watered down presently to the status of a restrictive provision as opposed to being a prohibitive Section which it was. In many ways, it now resembles its predecessor clause (Section 295) in the erstwhile Act of 1956 with the only conspicuous difference being that the present Act does not provide for the approval of the Central Govt. as was contemplated in the previous Act. The Section seeks to impose fetters over the provision of loans to directors and others in whom the directors of the lending company may be interested and ensures insulation to the company when there is a potential conflict of interest as between the company and the Directors, ensuring thereby that the interest of the company is not sacrificed at the altar of the interest of the directors. In this exposition, we shall articulate the nuances of the law and endeavor to find answers to some vexatious issues surrounding the legislation.

Section applies to both direct and indirect loans as also to loans provided under the nomenclature of book debts

Sub-section (1) lays down that no company shall provide directly or indirectly any loan including a loan represented by a book debt or give any guarantee or provide any security in connection with any loan taken by-

(a) any director of the company or of a company which is its holding company or any partner or relative of such a director or

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

What constitutes a “Loan”

The Act does not define a “Loan”. Where the definition of a particular expression has not been provided in the statute, it should be construed in a popular sense as an expression of everyday use. In Mangulu Sahu Ramahari Sahu v. STO AIR 1974 SC 390it was observed that popular sense refers to that sense which people conversant with the subject matter with which the statute is dealing would attribute to it.

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