Companies Act 2013 Section 185: Loans to Directors (2026)
What Section 185 of the Companies Act, 2013 does: it controls when a company may lend money, give a guarantee or provide security to its own directors and the people and firms connected to them. This explainer covers the ban, the exceptions, and the 2017 change. Last verified October 2026.
Explainer · Company Law · Companies Act 2013
Section 185 of the Companies Act, 2013 controls when a company can lend money to its own directors, or to people and firms connected to them. The worry it answers is simple: directors control the company, so without a rule they could quietly move the company's money to themselves or their relatives. Section 185 draws a line. Some loans are completely banned, and others are allowed only with strict conditions, including a special resolution of shareholders. This explainer sets out what is banned, what is allowed, and how the 2017 amendment changed the rule. Last verified October 2026.
- What it is: Section 185 of the Companies Act, 2013 restricts loans, guarantees and security a company gives to its directors and connected persons.
- Banned: loans to directors, their relatives and partners, and firms in which they are partners, cannot be given at all.
- Conditional: loans to entities in which a director is only interested are allowed with a special resolution and use for the borrower's main business.
- 2017 change: the section moved from a near total ban to this layered ban plus conditional permission, in force from 7 May 2018.
01The short answer
Section 185 of the Companies Act, 2013 is titled "Loan to directors, etc." It stops a company, directly or indirectly, from advancing a loan, giving a guarantee, or providing security in connection with a loan, to its own directors or to certain people connected with them.
After the Companies (Amendment) Act, 2017, which came into force on 7 May 2018, the section has two layers. There is a complete ban on loans to directors themselves and people closely linked to them, and a conditional permission for loans to entities in which a director is only interested, if the shareholders approve by special resolution and the money is used for the borrower's main business.
02What is prohibited
The hard ban under Section 185(1) covers loans, guarantees and security given to:
- any director of the company, or of its holding company;
- any partner or relative of such a director;
- any firm in which such a director or relative is a partner.
The core rule
A company cannot lend to, guarantee for, or give security for its own directors and the people closest to them. These loans are simply not allowed, and shareholder approval cannot save them.
03What is allowed, and on what conditions
Section 185(2) carves out a middle category: loans, guarantees or security for any person in whom a director is interested, such as a private company where a director is a director or member, or a body corporate where directors control the board or at least 25 per cent of the voting power. These are allowed if two conditions are met:
| Condition | What it means |
|---|---|
| Special resolution | The shareholders approve the transaction by a special resolution in general meeting, with the full details in the explanatory statement |
| End use | The borrowing entity uses the loan for its principal business activities |
So a loan to a sister company is not banned outright; it is permitted if the shareholders knowingly approve it and the money goes into the borrower's real business.
04The exempt transactions
Section 185(3) lists situations the section does not block at all, broadly:
- a loan to a managing or whole time director as part of conditions of service that the company offers to all its employees, or under a scheme approved by a special resolution;
- a loan given by a company in the ordinary course of its business, where the interest charged is not below the prescribed government security rate;
- a loan or guarantee by a holding company to its wholly owned subsidiary, or a guarantee or security by a holding company for a loan to its subsidiary, where the money is used for the subsidiary's main business.
These exemptions recognise that normal business lending and genuine group funding should not be caught by the ban.
05The 2017 amendment
The original Section 185 was close to a blanket ban, which made ordinary group funding difficult. The Companies (Amendment) Act, 2017, in force from 7 May 2018, substituted the section to create the current structure: a hard ban on loans to directors and their close connections, and a conditional permission, with a special resolution, for loans to entities in which a director is only interested.
Breaching Section 185 carries penalties on the company, the lending officer and the director or person who received the loan, which can include fines and in some cases imprisonment. The money lent is also usually recoverable.
06Why it matters
Section 185 is a frequent flashpoint in corporate disputes, investigations and audits. Diversion of company money to directors is a classic form of mismanagement, and Section 185 breaches often appear in oppression and mismanagement petitions under Sections 241 and 242, in auditor qualifications, and in Registrar prosecutions.
Section 185 is read together with Section 186 on loans and investments by a company and Section 188 on related party transactions. For a company secretary it is a board and shareholder approval checklist; for an investigator it is one of the first things to test in company due diligence.
07Where Claw fits
Claw is an all-in-one legaltech platform for Indian advocates, law firms, and corporate legal teams, combining AI-based case search, an AI legal assistant (Legal GPT), case management, and compliance automation across all Indian courts and tribunals.
Section 185 questions, whether a loan was banned, whether a special resolution was valid, or whether the exemption applied, are fought in NCLT petitions, Registrar prosecutions and High Court appeals. Claw lets you search more than 30 crore judgments, with Supreme Court decisions from 1950 and High Court decisions from 1990, to see how courts have read "person in whom a director is interested" and the exemptions, with results in under 5 seconds. You can also track a live matter, with its orders and hearings, by company or party name across 9,102 courts, benches and forums. Claw does not use the documents you upload to train its AI models.
Create a FREE Claw account to track any Section 185 matter by party name and follow every hearing, and use case search across Indian courts to find how courts have applied the loan to directors rule.
08Sources and further reading
- India Code (Companies Act, 2013, bare text): indiacode.nic.in
- Ministry of Corporate Affairs: mca.gov.in
- PRS Legislative Research (Companies (Amendment) Act, 2017): prsindia.org
- Claw: clawlaw.in
This explainer is general information, not legal advice. The conditions and exemptions under Section 185 can change, so check the current text and take advice from a company secretary or counsel before you act.
09Frequently asked questions
What is Section 185 of the Companies Act, 2013?
Section 185 restricts a company from giving a loan, guarantee or security in connection with a loan to its own directors and to persons and firms connected with them. Some such loans are completely banned, and others are allowed only with a special resolution and proper end use.
Can a company give a loan to its director?
No. A loan, guarantee or security to a director of the company or its holding company, to a relative or partner of such a director, or to a firm in which they are a partner, is prohibited under Section 185(1), and shareholder approval cannot save it.
When can a company lend to a related entity?
Under Section 185(2), a company can lend to an entity in which a director is only interested, such as another company controlled by the directors, if the shareholders approve by special resolution and the borrower uses the loan for its principal business.
What are the exemptions under Section 185?
Broadly, loans to a managing or whole time director under a scheme for all employees, lending done in the ordinary course of business at the prescribed interest rate, and genuine funding of a wholly owned subsidiary used for its main business.
Is Section 185 affected by the new criminal codes?
No. The BNS, BNSS and BSA replaced the IPC, CrPC and Evidence Act. They do not renumber the Companies Act, 2013, so Section 185 keeps its number.
Can I find Section 185 cases in Claw?
Yes. Claw lets you search more than 30 crore judgments on loans to directors with results in under 5 seconds, and track a live NCLT or court matter by party name across 9,102 courts, benches and forums. It researches and tracks the matter but does not give legal advice.