Section 185 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.
Section 185 stops a company funding its own directors. The 2017 amendment softened it from an absolute ban into a two-tier structure — outright prohibition for one class of borrower, a special-resolution route for another.
On top of that sits an exemption for certain private companies. It's conditional, it's strictly construed, and it disappears the moment one share is held by a body corporate.
That last point is why most funded start-ups think they have this exemption and don't.
Directors, their relatives and partners, and firms they're partners in — absolutely prohibited. Entities a director is interested in — allowed with a special resolution, if used for the borrower's principal business. A private company escapes all of it only if no body corporate holds any of its shares, its borrowings are under the lower of 2× paid-up capital and ₹50 crore, there's no subsisting default — and its annual filings are current.
The three tiers of Section 185
Sub-section (1) — absolute prohibition
No company shall, directly or indirectly, advance any loan — including any loan represented by a book debt — or give a guarantee or provide security for a loan taken by:
- any director of the company or of its holding company, or any partner or relative of such a director; or
- any firm in which any such director or relative is a partner.
There is no approval route here. No special resolution fixes it. It's simply prohibited.
Sub-section (2) — the special-resolution route
A company may lend, guarantee or secure for any person in whom any director is interested, provided:
- a special resolution is passed, and the explanatory statement discloses full particulars of the loan, guarantee or security and the purpose for which the recipient will use it; and
- the borrower uses the money for its principal business activities.
"A person in whom a director is interested" means:
- any private company of which such a director is a director or member;
- any body corporate where 25% or more of the voting power is exercised or controlled by such a director, alone or with others;
- any body corporate whose Board, MD or manager is accustomed to act on the directions of the lending company's Board or directors.
So a loan from Company A to Company B with a common director is a Section 185(2) transaction. Special resolution, and B must use it for its principal business.
Sub-section (3) — the exclusions
Section 185 doesn't apply at all to:
- a loan to a managing or whole-time director as part of conditions of service extended to all employees, or under a scheme approved by special resolution;
- a company that lends in the ordinary course of business, where interest is charged at not less than the prevailing yield on the closest-tenor Government security;
- a loan by a holding company to its wholly owned subsidiary, or a guarantee or security for such a loan;
- a guarantee or security by a holding company for a bank or FI loan to its subsidiary.
For the last two, the money must be used by the subsidiary for its principal business activities.
The holding-to-WOS exclusion is the workhorse in group structures — a parent can fund a wholly owned subsidiary with no resolution at all.
The private company exemption — and why you probably don't have it
The Section 462 notification disapplies Section 185 for a private company that satisfies all three conditions:
(a) no other body corporate has invested any money in its share capital; (b) borrowings from banks, financial institutions or any body corporate are less than twice its paid-up share capital, or ₹50 crore, whichever is lower; and (c) no default in repayment of such borrowings is subsisting at the time of the transaction.
Here's how each actually behaves.
Condition (a) is binary and unforgiving. One share held by a company, an LLP (which is a body corporate), a foreign parent or an investor SPV — and the exemption is gone. It doesn't matter that the holding is 0.1%. This condition alone excludes almost every funded start-up and every group subsidiary in the country.
Condition (b) is a running test. Note it says banks, financial institutions or any body corporate — so inter-corporate loans count, not just bank debt. A company with ₹1 crore paid-up capital fails at ₹2 crore of borrowing.
Condition (c) is tested at the moment of the transaction. A default cured before the loan is made doesn't disqualify; one subsisting on the date does.
And the overarching condition applies to all of it. The exemption is only available to a private company that hasn't defaulted in filing under Section 137 or Section 92. A late AOC-4 takes away your Section 185 exemption along with everything else. The full exemption picture →
Where this actually bites
| Scenario | Position |
|---|---|
| Founder-owned company, no corporate shareholder, ₹50L capital, ₹40L bank loan, no default, filings current | Exempt. Loan to a director is permitted. |
| Same, but an investor LLP holds 5% | Not exempt — an LLP is a body corporate. Section 185 applies in full, so a director loan is prohibited. |
| Same, ₹50L capital but ₹1.5 crore inter-corporate borrowing | Not exempt — borrowings exceed twice paid-up capital. |
| Holding company lends to its wholly owned subsidiary | Permitted under 185(3)(c), exemption irrelevant, provided the WOS uses it for principal business. |
| Company lends to another private company with a common director | Section 185(2) — special resolution, and the borrower must use it for principal business. |
| Company lends to a director's proprietorship | Prohibited. A proprietorship is the director himself, so 185(1)(a) applies. |
| Company carries a director's personal expenses as a receivable | This is a book debt. Section 185(1) expressly covers "any loan represented by a book debt". |
That last row deserves its own paragraph. Companies routinely park a director's personal spending as a receivable and treat it as outside Section 185 because "it isn't a loan". Section 185(1) says otherwise, in terms. Genuine reimbursement of company expenses is fine; a round-sum advance sitting on the balance sheet is not.
The penalty — and why it's different
| Who | Consequence |
|---|---|
| The company | Fine of ₹5,00,000 to ₹25,00,000 |
| Every officer in default | Imprisonment up to 6 months, or ₹5,00,000–₹25,00,000, or both |
| The director or person who received the loan, guarantee or security | Imprisonment up to 6 months, or the same fine range, or both |
This is a fine with imprisonment, not a penalty. It was not decriminalised. Three consequences follow:
- Section 446B relief doesn't apply — no half-rate for a small company.
- Section 454 adjudication doesn't apply — this goes to prosecution, not the ROC.
- Compounding under Section 441 is only possible in the fine limb, and where imprisonment is an alternative it needs the NCLT, not the Regional Director.
Checklist before advancing anything
- Is the borrower in the Section 185(1) prohibited class? If yes — stop. No resolution cures it.
- Does the company satisfy all three exemption conditions and is it current on Section 92 and 137 filings?
- Does a Section 185(3) exclusion apply — MD/WTD under employee terms, ordinary-course lending, holding-to-WOS, or a holding guarantee for a subsidiary's bank loan?
- If the borrower is a "person in whom a director is interested" — is there a special resolution with full particulars, and will the borrower use the funds for its principal business activities?
- Is it entered in the MBP-2 register under Section 186(9)?
- Have the Section 186 limits and approvals been separately satisfied? Section 186 is not exempted for private companies.
- Is it disclosed in the Board's Report under Section 134(3)(g)?
- Is it also a Section 188 related party transaction?
Key takeaways
- The prohibited class has no approval route. Directors, relatives, partners, and firms they're partners in.
- One body corporate shareholder — including an LLP — kills the exemption.
- Borrowings test counts inter-corporate loans, not just bank debt.
- A book debt is a loan. Director's personal expenses on the balance sheet are caught.
- Holding-to-WOS is freely permitted under 185(3)(c).
- This one carries imprisonment, so no 446B relief and no ROC adjudication.
- Section 186 applies regardless. The 185 exemption doesn't touch it.
Read next
- Exemptions and Carve-Outs for Private Companies
- Section 186: Loans, Guarantees and Investments
- Related Party Transactions under Section 188
- Form DPT-3: Return of Deposits
- Penalties for Non-Compliance: Section-wise Chart
Disclaimer: Section 185 has been substantially amended and its exemption is condition-bound and strictly construed. Positions stated as on 4 September 2026. Take professional advice before advancing any loan, guarantee or security to a director or connected entity.