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 as part of the conditions of service the company gives all its employees, or under a scheme approved by the members by special resolution (section 185(3)(a))
• 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

One more route needs the shareholders. Under section 185(2), a company can lend to, or guarantee or secure a loan of, a company or body corporate in which a director is interested (for example a private company where the director is a director or member), if the members pass a special resolution, the notice explains the loan and what it is for, and the borrower uses the money for its principal business activities.

A private company may be outside section 185 altogether. Under MCA notification G.S.R. 464(E) of 5 June 2015 (as amended in 2017), the section does not apply to a private company that meets all three conditions: no other body corporate has invested in its share capital; its borrowings from banks, financial institutions or bodies corporate are below twice its paid-up capital or Rs 50 crore, whichever is lower; and it has not defaulted in repaying those borrowings. The exemption also requires that the company has not defaulted in filing its financial statements or annual return with the Registrar (paragraph 2A of the notification).

A company that fits none of these situations cannot simply advance a personal loan to its director, however good the reason seems at the time. See the section 185 explainer for the conditions and penalties in full.

Section 186 — Inter-Corporate Loans & Investments

Section 186 governs a different situation: loans, guarantees and security a company gives to any person or other body corporate, and its investments in other bodies corporate (section 186(2)). Its own employees are not a “person” for this purpose. 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.