Loan to Directors u/s 185 — Permitted Transactions and Prohibitions in 2026

What does Section 185 of the Companies Act, 2013 cover?

Loans involving directors are subject to specific restrictions under Section 185 of the Companies Act, 2013. The provision is designed to prevent companies from using corporate funds for personal benefit or providing preferential financial support to directors and connected persons.

As of 2026, the operative framework is the amended Section 185 that came into effect from 7 May 2018. The provision does not impose a blanket prohibition on every transaction involving a director. Instead, it distinguishes between direct loans to specified persons, transactions involving entities in which a director is interested, and specific statutory exceptions.

This distinction is particularly important for private companies, family-owned businesses and startups where directors and shareholders frequently overlap and company funds may sometimes be used for personal or group-company purposes.

Key takeaway: A company cannot assume that a loan to a director becomes permissible merely because the Board approves it. Section 185 contains statutory prohibitions that Board approval alone cannot override.

Loans directly to directors are generally prohibited

Section 185(1) provides that a company cannot, directly or indirectly, advance a loan, including a loan represented by a book debt, to a director of the company or to a director of its holding company.

The restriction also extends to a partner or relative of such director and to a firm in which such director or relative is a partner. The provision additionally covers guarantees and security given in connection with a loan taken by these persons.

Therefore, a company should not treat an amount recoverable from a director as an ordinary receivable merely because the accounting entry is posted under “Director Current Account”. The substance of the transaction matters. An advance, financial accommodation or book debt can potentially fall within the scope of Section 185.

This is why companies should carefully review director-related debit balances, personal expenses paid by the company, advances and guarantees before finalising their financial statements.

What does “directly or indirectly” mean?

The wording of Section 185 is deliberately broad. The prohibition is not limited to a conventional loan agreement where the company formally lends money to the director.

A transaction structured through another person or entity cannot automatically be treated as outside Section 185 merely because the director is not shown as the immediate borrower. The statutory language specifically covers loans advanced directly or indirectly and also includes loans represented by book debt.

For example, if company funds are advanced and the accounting or contractual structure is used merely to disguise the director as the ultimate beneficiary, the arrangement requires careful legal examination. The safer approach is to evaluate the actual substance, purpose and beneficiary of the transaction rather than relying solely on its accounting description.

Loans to companies in which a director is interested

Section 185(2) is different from Section 185(1). It deals with a “person in whom any of the director of the company is interested”.

This includes a private company in which the relevant director is a director or member, a body corporate where the director or directors together can exercise or control at least 25% of the total voting power, and a body corporate whose Board, managing director or manager is accustomed to act in accordance with the directions or instructions of the lending company’s Board or its director or directors.

Such transactions are not automatically prohibited. Section 185(2) permits the company to provide the loan, guarantee or security subject to prescribed conditions.

The first major requirement is that a special resolution must be passed by the company in general meeting. The explanatory statement accompanying the notice must disclose the relevant particulars, including the loan, guarantee or security, its purpose and other relevant facts.

There is also a business-use condition: the loan must be utilised by the borrowing company for its principal business activities.

Important distinction: “Director is interested in the borrowing company” does not necessarily mean “loan is prohibited”. Section 185(2) creates a conditional route for such transactions.

When can a managing or whole-time director receive a loan?

One of the specific exceptions under Section 185 relates to a managing director or whole-time director.

A loan may fall within the exception where it is provided as part of the conditions of service extended by the company to all its employees. Alternatively, the exception applies where the loan is provided pursuant to a scheme approved by the members through a special resolution.

The wording is important. A company should not casually describe a one-off personal advance to a managing director as an “employee benefit” and assume that Section 185 is therefore irrelevant. The underlying employment scheme, eligibility, terms and consistency of treatment should support the exemption being relied upon.

What about companies whose ordinary business is lending?

Section 185 also contains an exception for a company which, in the ordinary course of its business, provides loans or gives guarantees or securities for repayment of loans.

For this exception, the statutory provision requires interest to be charged at a rate not less than the prevailing yield of the relevant one-year, three-year, five-year or ten-year Government Security closest to the tenor of the loan.

This exception is therefore particularly relevant to companies whose business genuinely consists of providing financing. It should not be interpreted as a general relaxation available to an ordinary trading or service company simply because it occasionally advances money.

The company should establish that lending is genuinely undertaken in the ordinary course of its business and that the statutory interest-rate condition is satisfied.

Holding company and wholly owned subsidiary transactions

Section 185 also contains specific exceptions for certain intra-group arrangements.

A loan made by a holding company to its wholly owned subsidiary, or a guarantee or security provided by the holding company in respect of a loan taken by its wholly owned subsidiary, is covered by an exception. There is also an exception for a guarantee or security provided by a holding company in respect of a loan taken by its subsidiary from a bank or financial institution. In these cases, the statutory condition concerning utilisation for the subsidiary’s principal business activities must be considered.

However, this should not be confused with a blanket exemption for every group-company transaction. Section 185 and other provisions of the Companies Act, including Section 186, need to be examined based on the precise structure of the transaction.

Section 185 is not the only compliance provision

A common misconception is that once a transaction passes Section 185, no further Companies Act compliance is necessary.

That is incorrect.

Section 186 separately regulates loans and investments by companies. Among other requirements, Section 186 contains provisions concerning limits, approvals, interest rates, defaults and maintenance of a register. The statutory framework also requires loans under Section 186 to comply with the prescribed minimum interest-rate requirement, subject to the applicable provisions and exceptions.

Accordingly, a transaction should be tested under Section 185 first and then under other applicable provisions, including Section 186, rather than treating Section 185 as the complete compliance checklist.

Depending on the facts, provisions relating to related party transactions, disclosure of interest, Board approvals and financial statement disclosures may also need consideration.

What happens if Section 185 is violated?

The consequences of contravention are significant.

Under Section 185(4), the company can be punished with a fine of not less than ₹5 lakh, which may extend to ₹25 lakh. An officer in default may face imprisonment for up to six months or a fine of not less than ₹5 lakh and up to ₹25 lakh, or both.

The director or other person receiving the loan, guarantee or security can also face imprisonment of up to six months or a fine of not less than ₹5 lakh and up to ₹25 lakh, or both. These consequences are expressly provided in the current statutory text.

Therefore, Section 185 should not be treated as a routine documentation issue. A transaction that appears commercially small can still create a statutory compliance problem if it falls within the prohibited category.

Practical compliance approach for companies in 2026

Before advancing money to a director, a company should first identify the actual recipient and ultimate beneficiary. It should then determine whether the transaction is a loan, advance, book debt, guarantee or security and examine whether Section 185(1) applies.

If the recipient is an entity connected with a director, the company should examine Section 185(2), including the requirement for a special resolution and the principal-business-use condition.

Where an exemption under Section 185(3) is being relied upon, the company should document the exact statutory basis rather than merely recording “Section 185 exemption” in its internal files.

The company should also independently check Section 186 and other applicable provisions, maintain the necessary corporate records and ensure that Board and shareholder approvals are obtained in the correct sequence.

Most importantly, directors should avoid using a company current account as a substitute for a properly analysed loan arrangement. Repeated personal withdrawals, personal expenses paid by the company or long-standing debit balances can require closer examination than their accounting labels suggest.

• Common misconception: “A private company can freely give loans to its directors”

This is one of the most common misconceptions surrounding Section 185.

The fact that a company is privately held does not, by itself, mean that Section 185 can be ignored. The restrictions and statutory exceptions have to be examined based on the nature of the company, recipient, transaction and applicable exemption.

Similarly, passing a Board resolution does not cure a transaction that falls within the absolute prohibition under Section 185(1). Where the law requires a special resolution or specifies particular conditions, those statutory requirements must be followed.

The current position in 2026 should therefore be understood from the enacted provisions rather than older articles or summaries based on the pre-2018 version of Section 185. The major restructuring of Section 185 became effective from 7 May 2018.

Conclusion

Section 185 of the Companies Act, 2013 creates a structured framework for loans, guarantees and securities involving directors and connected entities. Direct loans to directors, their specified relatives or partners and certain firms are prohibited, while transactions involving entities in which directors are interested may be permitted subject to the special-resolution and principal-business requirements.

Specific exceptions exist for qualifying managing or whole-time director employee schemes, companies engaged in lending as an ordinary course of business and certain holding company–subsidiary arrangements. However, these exceptions must be applied strictly according to their statutory conditions.

For companies in 2026, the right approach is not simply to ask whether a director loan is “allowed”. The transaction should be analysed under Section 185 first and then checked against Section 186 and any other applicable corporate-law requirements.