Give a Loan explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
A company cannot directly lend to its directors under Section 185(1). It may lend to an entity in which a director is interested only by passing a special resolution, disclosing full particulars in the explanatory statement, ensuring the borrower uses the funds for its principal business, and filing Form MGT-14 within 30 days.
Overview
Section 185 of the Companies Act, 2013 restricts companies from advancing loans, guarantees or security to their directors and to persons and entities connected with them. The section was framed to protect company funds and creditors from misuse for the private benefit of directors. Understanding the prohibition, the exceptions, and the special-resolution route is essential before any such advance.
When It Is Required & Legal Basis
Section 185(1) prohibits loans, guarantees or security to a director or any person in whom the director is interested (relatives, partners, or a firm in which the director/relative is a partner). Section 185(2) permits loans to a private company, body corporate at a general meeting where the director holds voting rights, or a body corporate whose Board/MD acts on the director's directions — but only by special resolution and where funds are used for the borrower's principal business. Section 185(3) exempts loans to MD/WTD under approved employee schemes and companies engaged in the business of lending.
Step-by-Step Process
- Test the prohibition. Confirm whether the proposed borrower falls within Section 185(1) (barred) or 185(2)/(3) (conditionally allowed).
- Board meeting. Approve the proposal in principle and convene a general meeting.
- Special resolution. Pass a special resolution; the explanatory statement must disclose full particulars of the loan and its purpose.
- Confirm end-use. Ensure the borrowing entity will use the funds only for its principal business activities.
- File MGT-14. File the special resolution with the ROC within 30 days.
- Document and disclose. Record the loan in the register under Section 186 and disclose in the financial statements.
Forms, Attachments & Fees
| Form / Document | Purpose | Timeline |
|---|---|---|
| Special resolution + explanatory statement | Approve loan under 185(2) | At general meeting |
| MGT-14 | File special resolution with ROC | 30 days of the meeting |
| Register (MBP-2) | Record loan / guarantee particulars | On making the loan |
MGT-14 fees follow the standard capital-based slab (₹300–₹600 for most SMEs); additional fees apply on delay.
Timeline & Due Dates
Special resolution before the loan is advanced; MGT-14 within 30 days of passing the resolution. The register of loans must be updated at the time of making the loan.
Penalty for Delay / Non-compliance
Under Section 185(4), the company is punishable with a fine of ₹5 lakh to ₹25 lakh; every officer in default with imprisonment up to six months or a fine of ₹5 lakh to ₹25 lakh; and the director or person to whom the loan was given with imprisonment up to six months, or fine, or both.
Practical Tips
- Distinguish a "loan" from a legitimate business advance in the ordinary course backed by interest at prevailing rates.
- Get a written end-use undertaking from the borrower before disbursing.
- Read Section 185 with Section 186 — inter-corporate loan limits and rates still apply.
- When in doubt, treat the transaction as prohibited and take the special-resolution route.