Can a company lend money to its directors? Section 185 explained

The general rule

A company cannot directly or indirectly advance a loan, give a guarantee or provide security for a loan to:

• Any of its directors or directors of its holding company
• Any partner or relative of such a director
• Any firm in which such a director or relative is a partner

Loans to other entities in which directors are interested are allowed with a special resolution and conditions.

Exemption for private companies

Under the 2015 exemption notification, Section 185 does not apply to a private company that:

1. 1.Has no other body corporate investing in its share capital,
2. 2.Has borrowings from banks, financial institutions or bodies corporate below twice its paid-up capital or ₹50 crore, whichever is lower, and
3. 3.Has no default in repaying such borrowings at the time of the transaction.

Exceptions

Loans to a managing or whole-time director as part of conditions of service applicable to all employees, or under a scheme approved by special resolution, are allowed.