Every finance team eventually runs into the same question from a promoter or director: "Can the company just lend me some money for a few months?" It sounds routine, the kind of internal transaction that happens between related businesses all the time. But under the Companies Act, 2013, this is one of the few areas where the law draws a hard line rather than leaving it to board discretion.

Section 185 governs loans, guarantees, and securities that a company extends to its directors and to persons or entities connected with them. It exists to stop directors from treating company funds as a personal credit line, and the penalties for getting it wrong are steep enough to matter. Yet it is not an absolute prohibition — it carries statutory exemptions, a separate relaxation for private companies, and a shareholder-approval route for lending to interested entities.

This guide covers who Section 185 applies to, the exemptions available, the compliance steps, and the penalties for non-compliance. As amended up to the latest publicly available notifications at the time of writing, this reflects Section 185 as substituted by the Companies (Amendment) Act, 2017, effective 7th May 2018, read with the applicable MCA exemption notification for private companies.

•      Section 185 of the Companies Act, 2013 restricts a company from advancing loans, guarantees, or security to its directors, holding-company directors, and their relatives or partner firms.

•      Loans to entities in which a director is "interested" are not banned outright — they are permitted if shareholders approve by special resolution and the funds are used for the borrower's principal business.

•      Statutory exemptions under Section 185(3) cover loans to MD/WTDs under approved schemes, lending-business loans at government-security-linked interest rates, and holding-to-subsidiary loans and guarantees.

•      Private companies meeting three cumulative conditions under MCA Notification G.S.R. 464(E) dated 5th June 2015 are exempt from Section 185 altogether.

•      Violations attract a fine of ₹5 lakh to ₹25 lakh for the company, and imprisonment up to six months or a fine in the same range (or both) for defaulting officers and the recipient of the loan.

•      Section 185 and Section 186 operate differently — 185 is director-focused and prohibition-based, while 186 applies more broadly to inter-corporate loans and investments with defined financial ceilings.

Section 185 traces its origin to Section 295 of the Companies Act, 1956, which similarly restricted loans to directors but required prior Central Government approval for any relaxation. When the Companies Act, 2013 came into force on 12th September 2013, Section 185 was framed as a near-absolute prohibition, which created friction for legitimate group-company funding structures.

The Ministry of Corporate Affairs, acting on Companies Law Committee recommendations, brought the Companies (Amendment) Act, 2017 into force for Section 185 from 7th May 2018. This substituted the section entirely — retaining the core prohibition but introducing a workable exception: companies could now lend to entities in which a director is interested, subject to shareholder approval by special resolution. This 2018 version governs today and is the version this guide addresses.

Section 185(1) prohibits a company from advancing, directly or indirectly, any loan (including a loan represented by a book debt), or giving any guarantee, or providing any security in connection with a loan taken by:

•      Any director of the company

•      Any director of the company's holding company

•      Any partner of such a director

•      Any relative of such a director

•      Any firm in which such a director, or his relative, is a partner

The restriction is deliberately broad — it extends up the chain to holding-company directors, and sideways to their relatives and business partnerships. A company that assumes the rule only concerns its own board is missing half the picture.

Section 185(2) covers a separate, wider category: any other person in whom a director is "interested" — including bodies corporate where the director controls 25% or more of the voting power, or where the board is accustomed to act on the lending company's directors' instructions. Loans to this category are not banned outright; they are permitted through a defined approval route, covered below.

Under Section 185(1), a company cannot advance a loan, give a guarantee, or provide security to a director, holding-company director, or their relative or partner firm, outside the specific exemptions in Section 185(3). This is an absolute bar that shareholder approval alone cannot cure.

Section 185(2) permits lending to an entity in which a director is "interested," but two conditions must both be met: a special resolution is passed in general meeting, with the explanatory statement disclosing full particulars and purpose of the loan; and the borrowing company uses the funds for its own principal business activities, not for re-lending or further investment.

Loans to managing or whole-time directors. Permitted if part of conditions of service extended to all employees, or under a scheme approved by special resolution.

Loans in the ordinary course of business. Companies whose ordinary business includes lending, or giving guarantees and securities, may lend to directors and related parties, provided interest is charged at a rate not lower than the prevailing yield of the one, three, five, or ten-year government security closest to the loan's tenor — replacing the earlier RBI bank-rate benchmark.

Holding company to wholly owned subsidiary. A loan, guarantee, or security given by a holding company to its wholly owned subsidiary is exempt, provided the funds are used for the subsidiary's own principal business.

Holding company guarantee for subsidiary's bank borrowing. A guarantee or security given by a holding company for a loan its subsidiary takes from a bank or financial institution is exempt.

Section 185 does not prescribe an interest rate benchmark for direct loans to a director personally, unlike the rate fixed for lending businesses above. Practitioners typically apply commercial prudence and internal group lending policy in such cases.

This is where many small and mid-sized companies get real relief. The MCA, exercising its powers under Section 462, issued Notification No. G.S.R. 464(E) dated 5th June 2015, exempting private companies from Section 185 entirely, provided all three conditions below are met simultaneously:

1.    No other body corporate has invested any money in the company's share capital.

2.    Its borrowings from banks, financial institutions, or any body corporate are less than twice its paid-up share capital, or ₹50 crore, whichever is lower.

3.    There is no default in repayment of such borrowings subsisting at the time of the transaction.

If all three hold, Section 185 does not apply at all — not even the Section 185(2) special resolution route is needed. A company that raises even a small equity round from a corporate investor loses this eligibility immediately, since condition one is breached.

One nuance worth flagging: this notification predates the 2018 substitution of Section 185, and the MCA has not re-issued it since. The predominant professional view is that the exemption continues to apply, but since no fresh clarification formally ties it to the substituted section, companies relying on it for a significant transaction should have counsel confirm the position, and should also confirm they have not defaulted in filing financial statements (Section 137) or annual returns (Section 92) — MCA Circular No. 08/2017 ties continued availability of such exemptions to filing compliance.

Where a company relies on Section 185(2) to lend to an interested entity, the practical sequence is:

1.    Board approval of the proposal and the commercial terms, and a resolution to call a general meeting.

2.    Notice and explanatory statement under Section 102, disclosing the loan amount, purpose, repayment terms, and the director's relationship to the borrower.

3.    Special resolution, requiring not less than three-fourths of votes cast in favour.

4.    Filing Form MGT-14 with the Registrar within 30 days of passing the resolution.

5.    Utilisation monitoring — records confirming the borrower used funds for its principal business, since this is a continuing condition, not a one-time formality.

6.    Disclosure in the notes to accounts and related-party disclosures under applicable Accounting Standards.

Illustration: ABC Private Limited has no corporate shareholder, bank borrowings well under twice its paid-up capital, and no loan defaults. Its director wants a personal loan of ₹15 lakh. Since ABC meets all three conditions of the MCA's 2015 exemption, Section 185 does not apply — though good governance would still call for a documented board resolution.

XYZ Private Limited, 40% owned by a corporate investor, cannot rely on this exemption since condition one is breached. If XYZ's director wants a loan routed through an entity he controls, XYZ must instead pass a special resolution under Section 185(2), disclose full particulars, and ensure the funds are used for the borrowing entity's principal business.

Section 185(4) prescribes penalties across three categories where a loan, guarantee, or security is given in contravention, or utilised in breach of an exemption's conditions:

"Officer in default" is defined broadly under Section 2(60) to include directors, managers, and key managerial personnel, and anyone whose instructions the board is accustomed to act on. Since these penalty provisions have not been converted into a purely civil, automatically compoundable framework, companies that discover an inadvertent contravention typically need to approach the Regional Director or NCLT for compounding, rather than simply paying a fixed fee.

In practice, a director-linked transaction is tested against Section 185 first. If it clears — either via an exemption or the special resolution route — it may still separately need to satisfy Section 186 if the recipient is a body corporate and the amount affects the company's overall lending and investment limits.

The most frequent difficulty is tracing the web of relationships Section 185 captures. A loan resembling ordinary inter-corporate lending can quietly fall within its scope if a common director connects lender and borrower through a partnership or controlling shareholding several layers removed. Groups with overlapping directorships need a disciplined related-party mapping exercise before disbursing any inter-company loan, not after.

A second recurring issue is monitoring end-use — the holding-subsidiary exemption and Section 185(2) approvals are conditional on funds being used for the borrower's principal business, and companies sometimes secure the resolution correctly but fail to track actual usage. A third is the private company exemption falling away silently once a company accepts corporate investment or its borrowings cross the threshold — eligibility should be re-tested before each transaction, not assumed.

Good practice means maintaining a current register of directors, their relatives, and the entities they're interested in; routing every director-linked loan through a documented Section 185 screening step before disbursement; recording that exemption conditions were checked at the time of each transaction; and retaining evidence of end-use wherever the special resolution route is used.

Can a private company give a loan to its director without any restriction?

Only if it simultaneously meets all three conditions in the MCA's exemption notification dated 5th June 2015 — no body corporate shareholder, borrowings under the prescribed threshold, and no subsisting default. If any condition fails, the company must rely on a Section 185(3) exemption or the Section 185(2) special resolution route.

Does Section 185 apply to loans given to relatives of a director?

Yes. Section 185(1) expressly covers relatives of a director, and any firm in which such a relative is a partner — a common oversight, since companies often focus only on the director and miss the extended connections.

What happens if a company advances a loan in violation of Section 185?

The company becomes liable to a fine of ₹5 lakh to ₹25 lakh. Every officer in default, and the person who received the loan, face imprisonment up to six months, or a fine in the same range, or both.

Can a holding company give a loan to its wholly owned subsidiary?

Yes — one of the specific Section 185(3) exemptions, provided the subsidiary uses the funds for its own principal business. A guarantee for the subsidiary's bank loan is similarly exempt.

Is there an interest rate requirement for loans exempted under Section 185(3)?

For lending businesses, yes — interest must be charged at a rate not less than the prevailing yield of the one, three, five, or ten-year government security closest to the loan's tenor.

Does an LLP need to comply with Section 185?

No. Section 185 applies to companies under the Companies Act, 2013. LLPs are governed by the LLP Act, 2008, which carries no equivalent restriction.

Can Section 185 violations be compounded?

Generally yes, through the Regional Director or NCLT depending on the quantum involved, though this is case-specific, and legal advice is recommended before initiating proceedings.

Section 185 sits at an uncomfortable intersection of corporate governance and everyday treasury management — the kind of provision that gets overlooked until an auditor or due diligence team flags an old inter-company loan during a funding round or M&A transaction. The framework, while strict, is not inflexible: private companies meeting the MCA's three conditions get a clean exemption, and others have a workable route through Section 185(3) or the special resolution mechanism. The discipline lies less in memorising the section and more in checking every director-linked transaction against it before, not after, the money moves.

Have questions about structuring inter-company loans or director transactions compliantly? Explore more in-depth compliance guides at TaxFlash.in.

Disclaimer: This article has been prepared by the Taxflash Editorial Team solely for educational and informational purposes. While every effort has been made to ensure the accuracy of the information, readers are advised to refer to the relevant provisions of applicable laws, rules, notifications, circulars, judicial pronouncements, and official government publications before taking any decision. The contents of this article should not be construed as professional legal, tax, or financial advice. Taxflash Editorial Team shall not be responsible for any loss or liability arising from reliance on the information contained herein.