Section 185: Prohibition on Loans to Directors — Exceptions and Board Approval

Section 185 CA 2013 bars a company from advancing a loan, guarantee, or security to any director, to a firm in which a director or their relative is a partner, or to a private company in which a director is a director or member — with only narrow exceptions. A breach costs the company a fine of ₹5 lakh to ₹25 lakh and the director imprisonment up to 6 months or a fine of ₹5 lakh to ₹25 lakh, or both. The route around the bar is not clever structuring; it is the specific exceptions plus clean board approval.

What the law actually requires

The core prohibition (s.185(1)). No company shall, directly or indirectly:

The word "indirectly" is the trap: routing money through a relative's account, an intermediary entity, or a book debt does not escape s.185 — the MCA and courts look at substance.

The statutory exceptions (s.185(2)). The Companies (Amendment) Act, 2017 inserted a narrow window:

• Loans to a wholly-owned subsidiary for its principal business activities.
• Guarantees or securities given for loans made to a subsidiary or associate by a bank or financial institution.

These require a special resolution (75% of voting power) and, for public companies, Form MGT-14 filed within 30 days.

Loans in the ordinary course of business. Where the company's main business is lending (a banking/NBFC-style business), loans made in the ordinary course are outside the bar. A manufacturing or services company cannot claim this exception.

The private company exemption — conditional. An MCA notification dated 5 June 2015 exempts private companies from the s.185(1) prohibition, but only if all three conditions hold simultaneously:

• No other body corporate has invested in the company (no company, LLP, or other incorporated entity holds shares);
• The company's borrowings from banks and financial institutions do not exceed twice its paid-up capital or ₹50 crore, whichever is lower;
• The company has not defaulted on repayment of any borrowing from a bank or financial institution.

Founders remember "private companies are exempt" and forget the conditions. A company that has taken angel funding from a body corporate, or carries bank borrowings above the cap, is not exempt.

Approval preconditions: s.186 and s.188

Even where a loan is permissible, it is not a board rubber-stamp. Three layers must be satisfied:

A loan that sails past s.185 but skips s.186 or s.188 is still a voidable RPT, with the director liable to indemnify the company.

Worked example: Karan's two-company structure

Karan runs Aster Goods Pvt Ltd (a standalone private company, no body-corporate investor, no bank borrowing) and wants ₹20 lakh for personal use. Three ways this can go:

Karan's cleanest route if the exemption fails: draw a salary by board resolution (s.192 TDS, deductible to Aster) or a declared dividend out of profits (s.123). The loan route, when it is prohibited, is the one that produces the ₹5–25 lakh penalty and 6-month imprisonment exposure — for money that was his own company's in the first place.

Practical implications

• The exemption is the exception, not the rule. After any funding round that brings in a body corporate investor, or once bank borrowings cross the cap, the private-company exemption dies and s.185's bar applies in full.
• Indirect lending is still lending. A loan to a director's relative's company, or a guarantee on a director's personal loan, is caught.
• The tax side follows. A loan to a 10%+ shareholder is also potentially deemed dividend under s.2(22)(e) ITA 1961 to the extent of accumulated profits — so a loan can be simultaneously a Companies Act violation and an income-tax charge. Both departments can act.
• MCA21 v3 flags it. Director loans appear in the financial statements and AOC-4; the board resolution behind any s.186 loan is a document the ROC expects on file. A loan with no resolution is a data mismatch in v3.
• CCFS-2026 amnesty. Belated filings relating to such transactions (MGT-14, AOC-4) can be regularised at reduced fees before 31 August 2026 — but the amnesty fixes filing, not an unlawful loan.

Changed FY 2025-26: No amendment to s.185 in this period — the relevant change is enforcement plumbing. MCA21 v3 cross-references director borrowings in AOC-4 against related-party disclosures, and the Companies Compliance Facilitation Scheme 2026 (closing 31 Aug 2026) is the last cheap window to correct filings connected to director loans.

Step-by-step: what to do

• Test the private-company exemption first: body-corporate investors? bank borrowings vs paid-up capital? any default? One "no" and s.185 bars the loan.
• If the loan is permissible, pass the correct resolution — board resolution for s.186, and a special resolution where s.185(2)'s subsidiary exception is used. Use the board resolution picker to generate the right one.
• Run the s.188 RPT test and obtain prior board (and where thresholded, shareholder) approval.
• Document the commercial rationale and repayment terms; keep the loan in the books with an interest rate, not buried in a current account.
• Check s.2(22)(e) ITA 1961 for deemed-dividend exposure to accumulated profits.
• Never route around the bar through relatives or intermediaries — "indirectly" catches it.

FAQ

Can a private company lend to its own director?
Only if the 5 June 2015 notification's three conditions all hold — no body-corporate investor, borrowings within the cap, and no default. Otherwise s.185 bars it.

Is a loan to a director's relative's company caught?
Yes. s.185(1) covers a private company of which the director is a director or member, and a firm in which a director or relative is a partner.

What is the penalty for a s.185 breach?
The company is liable to a fine of ₹5 lakh to ₹25 lakh; every officer in default is liable to imprisonment up to 6 months or a fine of ₹5 lakh to ₹25 lakh, or both (s.185(4)).

Can the company guarantee a director's personal bank loan?
Not without falling in s.185 — giving a guarantee or security in connection with a loan taken by a director is prohibited, subject to the same exceptions.

Does a salary advance count as a loan?
Advances against salary actually due, structured as salary (s.192), are generally treated as remuneration; but an advance far beyond salary due is scrutinised as a loan. Keep advances within the monthly salary cycle or document them as loans with approval.

Sources

• Companies Act 2013, s.185 (prohibition, exceptions, penalties), s.186 (investment and loan limits), s.188 (related party transactions)
• MCA notification dated 5 June 2015 — conditional private-company exemption from s.185(1)
• Companies (Meetings of Board and its Powers) Rules, 2014, Rule 15 — RPT thresholds
• Income Tax Act 1961, s.2(22)(e) — deemed dividend on shareholder loans

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