Can a Director Take a Loan From the Company? Section 185 & Section 186 Explained
This comes up constantly once a company has been running a while and cash needs shift — can the company lend money to a director, or borrow from one? The short answer is: it depends on the direction, and the rules are more specific than most people expect.
Section 185 — Loans to Directors (the restrictive one)
Section 185 of the Companies Act generally prohibits a company from giving a loan — or a guarantee/security for a loan — to its own directors, or to certain related entities in which a director has an interest. This is deliberately restrictive, because it exists to stop related-party lending from being used to quietly drain company funds.
The exceptions are narrow and specific, not a general "board discretion" carve-out:
- A loan to a Managing Director or Whole-Time Director, given under a scheme approved for all employees, or as part of their service conditions (similar to how any employee might get a salary advance)
- A company whose ordinary business is lending money (an NBFC, for instance) can lend to a director, provided the interest charged isn't below the prevailing yield of government securities
- Loans to a wholly-owned subsidiary, or guarantees given for loans to a subsidiary, are treated differently under the Act
Outside of these specific situations, a private company generally cannot simply advance a personal loan to its director, however good the reason seems at the time.
Section 186 — Inter-Corporate Loans & Investments
Section 186 governs a different situation: loans and investments a company makes to other companies, not to individuals. The key rules:
- A company generally can't lend or invest more than 60% of its paid-up capital, free reserves and securities premium combined, or 100% of its free reserves and securities premium alone — whichever figure is higher
- Going beyond that limit requires a special resolution passed by shareholders, not just a board decision
- The loan must generally carry interest at a rate not lower than the prevailing yield of government securities of comparable maturity
- A board resolution, passed unanimously at a meeting (not by circulation), is required before the loan or investment is made
Can a company borrow money from its own director?
This direction is much simpler. A company borrowing from its director is common and generally straightforward — provided the director gives a written declaration confirming the money isn't itself borrowed or secured from an external source. With that declaration in place, the amount is typically treated as exempt from the stricter "deposit" rules that would otherwise apply to money a company takes in from outsiders.
What happens if these rules are broken
Violating Section 185 is treated seriously — the company faces a monetary fine, and both the director involved and the person who actually received the loan can face fines and potential imprisonment, on top of being required to repay the amount. It's not a technical formality; it's one of the provisions the Registrar and auditors specifically look for during compliance reviews.
The practical takeaway
If you're a director thinking about taking money out of your company informally, or a company looking to lend to a group entity, this is exactly the kind of decision worth running past a professional before the transaction happens — not after, since the exceptions are specific enough that "it seemed reasonable" isn't a defence on its own.