Unit 5

Introduction (corporate criminal liablity )

Indian law imposes both civil and criminal liability on corporate entities. Criminal liability was
earlier not associated with corporate entities due to the absence of mens rea in Indian law, and
Indian Courts were of the view that corporate entities could not be criminally prosecuted.
However, the case of Standard Chartered Bank and Ors. v Directorate of Enforcement the
Supreme Court held that corporate entities are liable for criminal offenses and can be prosecuted
and punished, at least with fines. This decision has settled the position of law regarding the
criminal liability of a corporate entity.

The Companies Act 2013 (Companies Act) has enhanced corporate governance requirements. It
has also expanded the definition of “officer in default”. The Companies Act has also broadened
the range of circumstances under which, if the obligations imposed on the corporate entity under
the Act are not complied with, the company and/or its officer in default could either be fined or
imprisoned.

Other relevant statutes include the Environment Protection Act 1986, the Industrial Disputes Act
1947 and the Water (Prevention and Control Pollution) Act 1974, which lay down circumstances
under which corporate entities may be prosecuted. Under these statutes, when a “person”
committing an offence is a company or other body corporate, every officer or person concerned
with or in charge of the management shall, unless he proves that the offence was committed
without his knowledge or consent, be deemed to be guilty of such offence.

Liability

In what circumstances can a corporate entity incur criminal or quasi-criminal liability? The
decision of the Supreme Court referred to above holds that corporate entities are liable for
criminal offences and can be prosecuted and punished, at least with fines, and overrules all prior
decisions to the contrary. Corporate entities may be convicted of criminal offences and are
criminally liable even if the recommended punishment for such an offence is imprisonment
alone. The definition of “person” in the Indian Penal Code 1860 (IPC), the principal law
governing criminal law in India, includes a company or a body corporate. Many other statutes in
India such as the Income Tax Act 1961 and the Foreign Exchange Management Act 1999 also
include corporate entities within their definition of the word “person”.

One of the circumstances under which a corporate entity can incur criminal liability is when the
company is liable for the acts of its employees, agents or any other person responsible for its
affairs. In other words, a company will be vicariously liable for the actions of its employees and
agents in the ordinary course of business.
A corporate entity may also be held criminally liable for the criminal acts of its directors or other
key managerial personnel who are in charge of the day-to-day affairs of the corporate entity and
are its directing minds.

Under the Companies Act, criminal as well as civil liability can arise against corporate entities
for non-compliance with requirements under the Act such as:

(i) filings of annual returns, financial statements, registration of charges, etc;

(ii) failure to comply with pre-requisites to be followed in respect of the purchasing by a
company of its own securities, loans and investments by companies, etc;
(iii) and for violations such as misstatements in prospectuses, and investments of company
to be held in its own name etc.

The Companies Act has also introduced the concept of fraud (section 447) though fraud is
defined as any act or concealment or omission or abuse of position in relation to the affairs of a
company, committed with an intent to injure the interests of a company or its shareholders or
creditors or any other person, whether or not there is wrongful gain or loss. Punishment for fraud
shall include imprisonment for the persons associated with the fraud and fine.

Persons or officers in default shall also be liable for action under section 447 in the following
circumstances:

(i) Furnishing false or incorrect particulars in relation to the registration of a company

(section 7(5));
(ii) Misstatements in prospectus (section 34);
(iii) Fraudulently inducing persons to invest money (section 36);
(iv) Depository or depository participant transfers shares with an intention to defraud a
person (section 56 (7))
(v) The auditor of the company shall be liable if it has conducted in a fraudulent manner
(section 140);
(vi) Where business of a company has been or is being carried on for a fraudulent or
unlawful purpose (section 206);

Foreign Exchange and Prevention of Smuggling Activities Act (COFEPOSA)).

(i) the Directorate of Enforcement (for foreign exchange and money laundering
offences)
(ii) the Central Bureau of Narcotics (for drug related offences).
(iii) the Directorate General of Anti-evasion (for central excise related offences).
(iv) the Directorate General of Revenue Intelligence (for customs, excise and service tax
related offences).
Punishment

Corporate entities Corporate entities can be punished by the imposition of fines and other
penalties. In the Standard Chartered Bank case, the Bank was prosecuted for the alleged violation
of certain provisions of the Foreign Exchange Regulation Act 1973. The Supreme Court did not
follow the literal and strict interpretation rule required for penal statutes. Rather it held that the
corporate entity could be prosecuted and punished with fines, regardless of the mandatory
punishment required under the statute.

Since the decision of the Standard Chartered Bank case, courts have generally taken the view
that companies are not exempt from prosecution merely because the prosecution is in respect of
offences for which punishment prescribed is mandatory imprisonment.

Individuals

Individuals such as the directors and officers can be punished with imprisonment or a fine or
both. Directors, key management personnel and senior officers could be liable for misconduct
including non-compliance with regulatory requirements, aiding and abetting crimes and for
falsifying records, financial statements. Directors may also be liable for regulatory action if a
director (including a nominee/independent director) was aware of a default or wrongdoing by the
company, either by participation in board meetings or receiving the minutes of the meeting and
not objecting to a default or wrongdoing. Consent or willingness by the directors may also make
them liable to prosecution.

What factors are taken into consideration when determining the penalty? In most cases, the
statute itself provides for the minimum or maximum penalty to be imposed upon the accused.
The Criminal Procedure Code 1973 provides wide discretionary powers to sentencing judges.

Generally, the court, in determining the penalty, considers: (i) seriousness of the offence; (ii) any
prior transgressions; (iii) the intent with which the offence was committed; and (iv) the
likelihood of the offence being repeated by the offender.

Section 19(4) of the Competition Act 2002 sets out the factors required to be taken into account
when imposing penalties in respect of abuse of dominant market position. However, it has taken
an expansive view. For example, in January 2013, the Competition Commission of India (CCI),
in its assessment of abuse of dominance in the case of Belaire Owners’ Association v DLF
Limited, imposed a penalty of 6.3 billion Rupees on DLF Limited for having abused its
dominance. The CCI took into account various factors other than market share such as
statements issued by DLF Limited in the public domain relating to its dominance in the market in
its red herring prospectus and annual report, the size of its fixed assets and capital, turnover and
brand value. In December 2013, the CCI imposed a penalty of 17.73 billion Rupees on Coal
India Limited and its subsidiaries in Maharashtra State Power Generation Limited v Coal India
Limited and Others for abuse of its dominant position in the market.
Is there a mechanism for entities to disclose violations in exchange for lesser penalties? For
certain offences under the Indian Penal Code, plea bargaining can be used. Plea bargaining was
introduced [in the Code of Criminal Procedure by the Criminal Law (Amendment) Act 2005
(Actz 2 of 2006) through Chapter XXIA to the Code having sections 265 A to 265 L]53 with
effect from 5th July 2006 in respect of offences punishable by imprisonment below seven years.

Plea bargaining is not available: n if the accused has been previously convicted of a similar
offence by any court; n for offences which might affect the socio-economic conditions of the
country; or n for offences committed against a woman or a child below fourteen years of age.

Current position

Corporate criminal liability is still developing as a concept in India. Although the Companies Act
2013 has increased the liability of corporate entities, levels of enforcement activity remain low.

In Iradium India telecom ltd v. Motorola incorporated and Ors [AIR 2011 SC] the court held that
a corporate entity is virtually in the same position as any individual and may be convicted under
common law as well as in respect of statutory offences including those requiring mens rea.

The Supreme Court in Iradium appears to have crystallized the law, placing emphasis on the
theory through which the intention of the directing mind and will of a company is attributed to
the company, and confirming that a corporate entity can be held liable for crimes of intent. The
judgment further clarifies that a company is not immune from any prosecution for offences for
which a sentence of mandatory imprisonment is prescribed, as a fine can be imposed instead.

In another recent case of Sunil Bharti Mittal v Central Bureau of Investigation & Others54 the
Supreme Court, while referring to the Standard Chartered Bank judgment (supra) observed that
the criminal intent of the “alter ego” of the company, that is the personal group of persons that
guide the business of the company, can be imputed to the company/corporate entity.

In the Sunil Bharti Mittal case, however, this principle was applied in an exactly reverse
scenario. In this regard, the Court held that it is the cardinal principle of the criminal
jurisprudence that there is no vicarious liability unless the statute specifically provides so. Thus,
an individual who has perpetrated the commission of an offence on behalf of a company can be
made accused, along with the company, if there is sufficient evidence of his active role coupled
with criminal intent. Individuals may also be prosecuted in cases where the statutory regime
itself attracts the doctrine of vicarious liability, by specifically incorporating such a provision.
Hence, when the company is the offender, vicarious liability on the part of the Directors cannot
be imputed automatically, in the absence of any statutory provision to this effect.
The Companies Act has emphasised the importance of good corporate governance and effective
fraud prevention measures. Audit committees have been given more stringent regulatory duties
to look into potential corporate fraud.

Corporate criminal liability

• “Corporate Criminal Liability (hereinafter CCL) is attached to only those

acts where there is a violation of Criminal law i.e.

• Thus, Corporate liability in criminal law outlines the extent to which a

corporation as a legal body can be made liable for the wrongdoings of the
natural persons it employ.

• In layman’s terms, the doctrine of CCL is essentially the “Doctrine

of Respondeat Superior”

2nd wala
According to Palmer, “the rule in Foss vs Harbottle” is a phrase used to refer to two distinct, but
linked proposition of law. The first shall which is that the court will not ordinarily interfere in
the case of an internal irregularity if the matter is one which the company can ratify or condone
by its own internal procedure.

The second is that where it is alleged that a wrong has been done to a company, prima facie, the
only proper plaintiff is the company itself.” Critically analyse the above paragraph. What are the
possible exceptions to the second proposition as mentioned by Palmer?

The general principle of company law is that every member holds equal rights with other
members of the company in the same class. The scale of rights of members of the same class
must be held evenly for smooth functioning of the company. In case of differences amongst the
members the issue is decided by a vote of the majority. Since the majority of the members are in
an advantageous position to run the company according to their command, the minorities of
shareholders are often oppressed. The company law provides for adequate protection for the
minority shareholders when their rights are trampled by the majority. But the protection of the
minority is not generally available when the majority does anything in the exercise of the powers
for internal administration of a company. The court will not usually intervene at the instance of
shareholders in matters of internal administration, and will not interfere with the management of
a company by its directors so long they are acting within the powers conferred on them under the
articles of the company. The articles act as the protective shield for the majority of shareholders
who compose the Board of directors for carrying out their object at the cost of minority of
shareholders.

The basic principle of non-interference with the internal management of company by the court is
laid down in a case of Foss v. Harbottle that no action can be brought by a member against the
directors in respect of a wrong alleged to be committed to a company. The company itself is the
proper party of such an action.

The rule of majority does not apply in the following exceptional circumstances:

1. Acts ultra vires company: where the act done is ultra vires memorandum (ie. Beyond the
powers of the company) It is so because ultra vires acts cannot be ratified by any majority.

2. Acts ultra vires statutes: Where the act done is inconsistent with any law of the land
including the Companies Act, it is illegal and the majority rule does not apply. For instance,
directors get passed a resolution by huge majority to pay dividend out of capital or to forfeit
share illegally. Such resolutions can be challenged even by a single member because these are
against the provisions of Companies Act.

3. Acts requiring special majority: According to the provisions of Companies Act certain acts
can be done by a special resolution passed at a general meeting of the company. If any such act is
done without passing special resolution

4. Infringement of individual membership rights: Every individual shareholder has certain rights
against the company. For instance, a shareholder has a right to receive notice of general meeting,
to vote at the meeting, to contest for directorship, to claim payment of declared dividend etc.
These are the individual membership rights conferred by the act. Some other rights may be
conferred by the Articles of the company. In such cases, the majority rule does not operate and
no majority can take away the individual rights of a member. If any individual member is denied
of any such right, he is entitled to sue the company.

6. Exceptions under the Companies Act: The Companies Act makes many provisions which
provide protection to minority shareholders. Some of such provisions are as follows:

(a) Variation of rights attached to shares: A company may divide it's share capital into different
classes of shares. In such a case, the rights attached to the shares of any class can be varied with
the consent of the three fourth majority of shareholders of that class. But the minority
shareholders (the holders of not less than 10 per cent of the issued shares of that class) who had
not asserted to the variation many apply to the Tribunal for cancellation of such variation [Sec.
48].

(b) Request for investigation: Sometimes minority shareholders (ie. 100 or more members or
members holding at least 10 per cent of the total voting power) make an application to the
Tribunal for investigation into the affairs of the company. In case the company is without share
capital, the application may be made by at least 20 per cent of the members. The Tribunal may
order such investigation for safeguarding the interests of minority shareholders [Sec. 213].

(c) Prevention of Oppression and Mismanagement: The majority rule does not apply where the
majority uses its power in a manner which is oppressive to some of the members of the company,
or which results in Mismanagement of the company [Sec.241 to 244].

Class Action: Sometimes, an application is made by the prescribed number of members before
the Tribunal seeking certain reliefs on the grounds that the affairs of the company are being
conducted in a manner prejudicial to the interest of the company or it's members. The Tribunal
may grant such reliefs to the minority shareholders as it seems appropriate [Sec.245].
3rd wala

“The Tribunal may also order for the winding up of a company if it is of the opinion that it is just
and equitable that the company should be wound up.” Elaborately explain the circumstances with
case laws in which the NCLT may order for the winding up of a company on just and equitable
reasons.

Section 271 (l) (g) of the Companies Act, 2013 provides that the Tribunal can order winding up
of a company when the Tribunal is of the opinion that it is just and equitable that the company
should be wound up. In this case, the Tribunal has wide powers and has a complete discretion to
decide when it is just and equitable to order winding up of a company. The discretionary
authority of the Tribunal even enables it to subject the exercise of legal rights to equitable
considerations.

The expression, just and equitable is general in nature and it is undesirable to attempt to define
the circumstances in which it will apply.
Case 1

Mohanlal Dhanjibhai Mehta v. Chunilal B. Mehta;- The Gujarat High Court expressed its
unwillingness to order winding up when it was found that the majority of shareholders did not
want the company to be wound up. The Court observed that the disputes of internal character
such as distribution of properties of family concern, cannot be allowed to be pursued through
winding up petitions.

Case 2

Ebrahimi v. Westbourne Gallaries Ltd. & others:- Referring to the 'just and equitable' clause in
relation to the discretionary power of the Tribunal in ordering winding up of a company, Lord
Wilberforce in the case observed that, "the general words of the sub-section should remain
general and not be reduced to the sum of particular instances." The discretion of the Tribunal
under this clause is very wide and the courts have exercised this discretion on a variety of
grounds which may be generalised in the following categories:

1). Deadlock in the management of a company.- Where there is a complete deadlock in the
management of the company, the Tribunal may order winding up on just and equitable ground.

Case 3 :-In Re Yenidje Tobacco

In the instant case, two cigarette manufacturers Wand R who were trading separately, agreed to
amalgamate their business by forming a private limited company of which they were the only
shareholders and directors. They had equal voting rights and therefore their disputes were to be
resolved by arbitration, but one of them dissented from the award. They became so hostile that
they were not even on speaking terms with each other. Thus there was a complete deadlock and
therefore the company was ordered to be wound up although its business was flourishing well

2). Where the company has lost its substratum.- The substratum of a company is deemed to have
been lost where:

(a) subject-matter of the company is gone

(b) The main object for which the company was formed failed to materialise

(c) it is impossible to carryon the business of the company except at a loss

(d) the existing and possible future assets are insufficient to meet the liabilities of the company.

Case 4:- Seth Mohan Lal v. Grain Chambers

The court refused to order winding up of the company whose business had badly been paralysed
and virtually came to a stand-still due to long drawn litigation and a part of the business was
banned by the legislation. The Court held that it could not direct winding up of the company as it
could always restart its business with assets it possessed.

3). Mismanagement & Losses.-The Tribunal is justified in ordering winding up of a company

under the "just and equitable" clause where it is not possible for the company to carryon business
except at losses and there are no prospects of achieving profits.

Case 5:- Vijay Laxmi Talkies v, Kotilingeswara.:-

Held by court that where a company is not able to payoff its debts and its amount of interest is
constantly increasing and consequently it is leading towards financial crisis. and there is no
possibility of improvement in its financial condition, it could be wound up by the Tribunal on
just and equitable ground,

4). Oppression of minority shareholders by the majority.-It would be just and equitable on the
part of the Tribunal to order winding up of a company where majority shareholders have adopted
oppressive or squeezing policy towards the minority shareholders.

Case 6:- R. Sabapathy Rao v. Sabapathi Press

The Court was justified in ordering winding up on the ground of oppressive tactics adopted by
the directors representing majority shareholders against the minority of shareholders. In this case
directors of the company exerted dominating influence on the management and the managing
director which was oppressive to minority of shareholders The dividend were also not regularly
paid and the rate of dividend was constantly falling. Under these circumstances, there was a just
and equitable ground to order winding up of the company by the Court.

5). Fraudulent or illegal purpose.-Where a company has been conceived or brought into
existence fraudulently for some illegal purposes it is just and equitable to order its winding up.

Case 7:- Universal Mutual Aid & Poor Houses Association v. A.D. Thippa Naidu

The main object of the company was conduct of a lottery, therefore, the mere fact that some of
its objects were philanthropic was not a sufficient ground to prevent the company being wound
up as it was mainly formed for an illegal purpose.

6). Where a private company is in essence a partnership.-Where it is proved that an incorporated

private company is in substance a partnership, it may be ordered to be wound up when there is
abuse of power or breach of good faith which the partner's owe to each other.
4th wala

“The essence of the matter seems to be that the conduct complained of should at the lowest,
involve a visible departure from the standards of their dealing, and a violation of the conditions
of fair play on which every shareholder who entrusts his money to the company is entitled to
rely.” Write a note on the meaning of oppression of the minority referring to suitable examples.
Who can give relief to the petitioners in a case of oppression? What are those possible reliefs?

The words oppression is not defined in the Act. The meaning of this word for the purpose of
Company Law should be used in a broad generic sense and not in any strict literal sense.

In General sense Oppression can be defined as an act or instance of oppressing the state of being
oppressed and the feeling of being heavily burdened, mentally or physically, by troubles, adverse
conditions, and anxiety.

Oppression as per section 241-244 of Companies Act 2013 has been defined as when affairs of
the company are being conducted in a manner prejudiced to public interest or in a manner
prejudicial to public interest or in a manner oppressive to any member or members. Although, a
company has an existence independent from its members, its affairs are carried on by the
management. Difficulty arises when the interests of shareholders vary. However, the
management of companies depends upon the majority.

Though a shareholder cannot bring action relating to the internal disputes between the
shareholders as per the Foss v Harbottle Rule, there arise certain exceptions to this provision.
This includes the cases of oppression and mismanagement in the affairs of the company.

Section 241-244 talks about the power of the tribunal and the relief provide by them

1. By the members

Section 241 of the Companies Act, 2013 states that any member of a company, who has right to
apply under section 244, may apply to the Tribunal for complains that—

(a) The affairs of the company have been or are being conducted in a manner prejudicial to
public interest, or in a manner prejudicial or oppressive to him or any other member or members,
or in a manner prejudicial to the interests of the company
(b) The material change, has taken place in the management or control of the company, whether
by an alteration in the Board of Directors, or manager, or in the ownership of the company’s
shares, or if it has no share capital, in its membership, or in any other manner whatsoever, And
that by reason of such change, it is likely that the affairs of the company will be conducted in a
manner prejudicial to its interests or its members or any class of members, However, such
material change shall not be a change brought about by, or in the interests of, any creditors,
including debenture holders or any class of shareholders of the company

2. by central government

The Central Government, if it is of the opinion that the affairs of the company are being
conducted in a manner prejudicial to public interest, it may itself apply to the Tribunal for an
order.

Sub – section (1) of Section 244 states that following members of a company shall have the right
to apply under section 241.

(a) In the case of a company having a share capital - (i) not less than one hundred members of the
company, or (ii) not less than one-tenth of the total number of its members, Whichever is less; or
(iii) any member or members holding not less than one tenth of the issued share capital of the
company, subject to the condition that the applicant or applicants has or have paid all calls and
other sums due on his or their shares;

(b) In the case of a company not having a share capital - not less than one-fifth of the total
number of its members shall have the right to apply under section 244.

5th wala

“A company can only act through human beings and a human being who commits an offence on
account of or for the benefit of a company will be responsible for that offence himself. The
importance of incorporation is that it makes the company itself liable in certain circumstances,
as well as the human beings-  Glanville Williams”
 In the light of the above statement, write a note on the various aspects of the criminal
liability of a company, the difficulties faced in imposing the said liability and a solution for
the future.

Ans

Indian law imposes both civil and criminal liability on corporate entities. Criminal liability was
earlier not associated with corporate entities due to the absence of mens rea in Indian law, and
Indian Courts were of the view that corporate entities could not be criminally prosecuted.

Case 1). Standard Chartered Bank and Ors. v Directorate of Enforcement

The Supreme Court held that corporate entities are liable for criminal offenses and can be
prosecuted and punished, at least with fines. This decision has settled the position of law
regarding the criminal liability of a corporate entity.

The Companies Act 2013 (Companies Act) has enhanced corporate governance requirements. It
has also expanded the definition of “officer in default”. The Companies Act has also broadened
the range of circumstances under which, if the obligations imposed on the corporate entity under
the Act are not complied with, the company and/or its officer in default could either be fined or
imprisoned.

A corporate entity may also be held criminally liable for the criminal acts of its directors or other
key managerial personnel who are in charge of the day-to-day affairs of the corporate entity and
are its directing minds.

Under the Companies Act, criminal as well as civil liability can arise against corporate entities
for non-compliance with requirements under the Act such as:

(i) filings of annual returns, financial statements, registration of charges, etc;

(ii) failure to comply with pre-requisites to be followed in respect of the purchasing by a
company of its own securities, loans and investments by companies, etc;
(iii) and for violations such as misstatements in prospectuses, and investments of company
to be held in its own name etc.

The Companies Act has also introduced the concept of fraud (section 447) though fraud is
defined as any act or concealment or omission or abuse of position in relation to the affairs of a
company, committed with an intent to injure the interests of a company or its shareholders or
creditors or any other person, whether or not there is wrongful gain or loss. Punishment for fraud
shall include imprisonment for the persons associated with the fraud and fine.

Punishment
Corporate entities Corporate entities can be punished by the imposition of fines and other
penalties. In the Standard Chartered Bank case, the Bank was prosecuted for the alleged violation
of certain provisions of the Foreign Exchange Regulation Act 1973. The Supreme Court did not
follow the literal and strict interpretation rule required for penal statutes. Rather it held that the
corporate entity could be prosecuted and punished with fines, regardless of the mandatory
punishment required under the statute.

Since the decision of the Standard Chartered Bank case, courts have generally taken the view
that companies are not exempt from prosecution merely because the prosecution is in respect of
offences for which punishment prescribed is mandatory imprisonment.

Individuals

Individuals such as the directors and officers can be punished with imprisonment or a fine or
both. Directors, key management personnel and senior officers could be liable for misconduct
including non-compliance with regulatory requirements, aiding and abetting crimes and for
falsifying records, financial statements.

In most cases, the statute itself provides for the minimum or maximum penalty to be imposed
upon the accused. The Criminal Procedure Code 1973 provides wide discretionary powers to
sentencing judges.

The court, determines the penalty, considers: (i) seriousness of the offence; (ii) any prior
transgressions; (iii) the intent with which the offence was committed; and (iv) the likelihood of
the offence being repeated by the offender.

Corporate criminal liability is still developing as a concept in India. Although the Companies Act
2013 has increased the liability of corporate entities, levels of enforcement activity remain low.

Case 2:- Iradium India telecom ltd v. Motorola incorporated and Ors

The court held that a corporate entity is virtually in the same position as any individual and may
be convicted under common law as well as in respect of statutory offences including those
requiring mens rea.

Case 3:- The Supreme Court in Iradium appears to have crystallized the law, placing emphasis
on the theory through which the intention of the directing mind and will of a company is
attributed to the company, and confirming that a corporate entity can be held liable for crimes of
intent. The judgment further clarifies that a company is not immune from any prosecution for
offences for which a sentence of mandatory imprisonment is prescribed, as a fine can be imposed
instead.
1st
A).

Section 186 is applicable to both private and public companies. It is clearly mentioned in
the section that a subsidiary of a holding company, which clearly means that all the
functions of the subsidiary company whether its board composition or share capital of
that company were controlled by the subsidiary of the holding company. Therefore to
restrict this power of holding company the two layer of company investment were
applied.

Yes, there are companies in which this section is not applicable which are given under
section 186(11) which provides that the section 186 shall not be applicable to the
following companies which enables them to form as many as numbers of layers:

a). banking companies

b). non- banking financial company

c). insurance company

d). government company

this rule does not restrict Indian companies to acquire with this two layer restriction. But
this rule can be valid if the foreign company laws of jurisdiction allows it.

B).

Section 185 talkas about loan to the directors it provides certain condition in that aspect
which shall be as follows-

1). no company shall, directly or indirectly, advance any loan, including any loan
represented by a book debt, to any of its directors or to any other person in whom the
director is interested or give any guarantee or provide any security in connection with any
loan taken by him or such other person

2). If any loan is advanced or a guarantee or security is given or provided in

contravention of the provisions the company shall be punishable with fine which shall
not be less than five lakh rupees but which may extend to twenty-five lakh rupees, and
 the director or the other person to whom any loan is advanced or guarantee or security is
given or provided in connection with any loan taken by him or the other person, shall be
punishable with imprisonment which may extend to six months or with fine which shall
not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or
with both.
The original Section 185 prohibited the companies from advancing any loan and/or
giving any security or guarantee in relation to the loan taken by the Directors of the
company or any other person in whom the Director is interested. If found guilty of non-
compliance, penalties were allowed only to companies or to any recipient to whom such a
loan, security, or a guarantee is provided.

Section 185 (as amended by the Companies (Amendment) Act, 2017):

 Limits the prohibition on loans, advances, etc. to Directors of the company or its holding
company or any partner of such Director or any partner of such Director or any firm in
which such Director or relative is a partner.
 Allows the company to give a loan or guarantee or provide security in connection with
any loan to any person/ entity in whom any of the Directors are interested, subject to:-
– Passing of Special Resolution by the company in a General Meeting (Approval of at
least 75% of the members is required).
– Utilization of loans by the borrowing company shall be solely for its principal business
activities.
 The penalty provisions as set out under Section 185 (4) of the Act, in addition to the
Company, now extends to an officer in default of the company (which includes any
Director, Manager or KMP or any person in accordance with whose directions BODs are
accustomed to act).