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COMPARISION OF PROVISIONS RELATING TO LOAN TO DIRECTORS UNDER COMPANIES ACT, 1956 AND COMPANIES ACT, 2013

S.No Basis Companies Act, 1956 Companies Act, 2013 Difference
1. Section Section 295 and 296 Section 185 --
2. Approval criteria Previously the Central Government’s approval was required to be taken. No requirement of making an application to the Central Government for sanctioning the loan or guarantee or security. The requirement to obtain Central Government’s approval has now been dispensed with.
3. Loans to Managing or Whole-time director No such  exemption was provided under Companies Act, 1956

The managing or whole-time director can be given loan provided it is—

(i) 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;

Any loan availed by the managing or whole-time director pursuant to the conditions of service or approved scheme is brought under the purview of exemptions under the Companies Act, 2013
4. Banking companies Banking companies were exempted from the ambit of section 295. The exemption under Section 185 of Act is available for those companies which in the ordinary course of business provide loans etc. and interest is charged at a rate not less than RBI’s bank rate. Exemption is now given with a restriction.
5. Loans to subsidiary Any loan made or guaranty given or security provided by a holding company in respect of any loan made to its subsidiary was exempted under Section 295.

Loans made or guarantee given or security provided by a holding company to its wholly owned subsidiary company is exempt under Section 185 provided that the loan is utilized for its principal business activities.

However, any guarantee given or security made by a holding company to its subsidiary company is exempted.

Loans given to a subsidiary company by its holding company are not exempted under Section 185. However, the loans or guarantees or securities availed by the wholly owned subsidiary or subsidiary, as the case may be, are exempted only if such loans are utilized for its principal business activities.
6. Applicability to private companies Any loan made or guarantee given or security provided by a private company (unless it a subsidiary of a public company) is exempted under Section 295

Section 185 shall not apply to a private company-

a) in whose share capital no other body corporate has invested any money.

b) if the borrowings of such company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower, and

c) such a company has no default in repayment of such borrowings subsisting at the time of making transactions under this (185) section

Private companies are exempted from the ambit of Section 185 with increased restrictions.
7. Applicability to Government companies No such exemption was provided for the Government companies under the Companies Act, 1956 Section 185 shall not apply to Government company in case such company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the Company, or, as the case may be, the State Government before making any loan or giving any guarantee or providing any security under this section. Exemption is provided for applicability to Government companies if the Central Government’s approval is obtained
8. Penalty Every person who is knowingly a party to any contravention, including in particular any person to whom the loan is made or who has taken the loan in respect of which the guarantee is given or the security is provided, shall be punishable either with fine which may extend to five thousand rupees or with simple imprisonment for a term which may extend to six months If any loan is advanced or a guarantee or security is given or provided in contravention of this section, 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. The Company is also brought under the ambit of penal provision under the Companies Act, 2013 now.

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  • By Revanth Gopidi  0 Comments   

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