Why can’t your company simply lend money to its own director?
Section 185 restricts loans to directors and connected persons, with narrow exceptions and a special-resolution route for some cases.
- Published
- Reading time
- 4 min
- Level
- Foundation
01 The question
A founder-director needs a short-term personal loan. The company has surplus cash. What stands in the way?
02 Short answer
Section 185 of the Companies Act, 2013 generally prohibits a company from advancing loans to, or giving guarantees or security for, its directors and certain related persons. Limited exceptions apply, and certain other connected persons may be funded only with a special resolution and use of funds for principal business activities.
03 The rule
Section 185(1) prohibits loans, guarantees and security to directors of the company or its holding company, and to partners or relatives of such directors, and firms in which they are partners.
Section 185(2) permits loans to other persons in whom a director is interested, subject to a special resolution and the condition that the borrower uses the funds for its principal business activities. Certain private companies are exempt by notification if they meet specified conditions.
04 Simple example
Scenario
Ganga Foods Pvt Ltd plans to lend ₹25 lakh to its managing director for a home renovation.
This falls squarely within the prohibition in Section 185(1). Unless an exception applies — such as a loan to a managing or whole-time director as part of conditions of service extended to all employees, or under a members-approved scheme — the loan is not permitted.
Separately, a loan from a closely held company to a substantial shareholder can be treated as deemed dividend under the Income-tax Act.
05 Why it matters
Contraventions carry significant penalties for the company and the director and can surface during audits, due diligence and fund-raising.
Statutory auditors report on compliance with Sections 185 and 186 under CARO.
06 Practical takeaway
- 01Route any director-related funding through company secretarial review first.
- 02Check whether a notified exemption applies to your private company.
- 03Consider the income-tax implications of such loans alongside corporate law.
07 Source / reference
- Companies Act, 2013 — Section 185
- Income-tax Act, 1961 — Section 2(22)(e)
- CARO 2020 — Clause 3(iv)
References are to the provisions as generally understood at the time of writing. Provisions may since have been amended, renumbered (including under the Income-tax Act, 2025) or interpreted differently.
8. Educational disclaimer
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