Under the Companies Act, 1956 the provisions relating to Loan to directors by a Company were governed by Section 295 of the Companies Act, 1956. Section 295 of the Companies Act, 1956 had a wide scope and for the purposes of Section 295 of the Companies Act, 1956, there was no distinction between the loan and deposit. The provisions of the said section were applicable even if the monies advanced to the directors are shown as deposits or described as deposits as in both the cases the relationship created is one of the creditor and the debtor.
However 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 loan taken by Director or such other person.
Thus, a Company (hereinafter referred to as 'Lending Company') cannot advance a loan to:
Any Director of Holding company of the Lending company;
Any Partner or Relative of any such Directors mentioned above;
Any Firm in which any such Director or Relative is partner;
Any Private Company of which any such Director is a Director or Member of Lending Company;
Any Body Corporate (i.e. Company or LLP) at a general meeting of which not less than 25% of total voting power may be exercised individually or jointly by any such Director/(s) of Lending company;
Any Body Corporate, the Board of Directors of which is controlled by the any Director(s) of Lending Company.
On Lending Company
In case of contravention of this section, the Lending Company shall be punishable with a minimum fine of Rs.5 lacs but which may extend to Rs.25 lacs;
On Recipient Director/ Entity
In case of contravention of this section, the recipient Director or other entity shall be punishable with imprisonment which may extend to six months or with a minimum fine of Rs.5 lacs but which may extend to Rs.25 lacs, or with both.