• Contravention of the provisions u/s 295 of the Companies Act 1956

In the contravention of the provisions u/s 295 of the Companies Act 1956 subsection (4) provides the punishment and subsection (5) provides the liability of loan repayment. My questions are:
1. Subsection (5) provide the provision of liability of repayment of loan. Advice on the provision of this subsection whether liability of a repayment of loan lies with the lending company or with the borrower?
2. Provide me at least two latest judgments each of Supreme Court/High Courts/Company Law Boards by which the punishment awarded under subsection (4) s upheld and the liability is fixed under subsection (5) on the lending company?
Asked 7 years ago in Business Law

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4 Answers

1) Section 295(5) deals with any person who is knowingly part of any contravention of the section 295(1). Such person shall be liable, jointly or severely, for repayment of the loan or making good of the sum equal to any amount attached with security/guarantee provided.

2) liability is on the borrower for having failed to repay the loan

Ajay Sethi
Advocate, Mumbai
94518 Answers
7485 Consultations

5.0 on 5.0

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;

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.

PENALTIES

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.

Devajyoti Barman
Advocate, Kolkata
22774 Answers
484 Consultations

5.0 on 5.0

With the new regime in place with respect to loans to directors, it can be concluded that no company can offer loan to its directors except in case such director is a managing director or a whole time director and such proposed loan is either a part of the conditions of service extended by the company to all its employees; or pursuant to any scheme approved by members vide special resolution, or such company is in the business of extending loans. The provisions of Section 185 of the Companies Act, 2013 does not provide any exemption to a private company as provided in the provisions of Section 295 earlier.

Every person who is knowingly a party to any contravention including in particular any person to whom the loan is made or who has taken the loan in respect of which the guarantee is given or the security is provided, shall be punishable either with fine which may extend to five thousand rupees or with simple imprisonment for a term which may extend to six months.

All persons who are knowingly parties to any contravention of sub- section (1) or (3) shall be liable, jointly and severally, to the lending company for the repayment of the loan or for making good the sum which the lending company may have been called upon the pay in virtue of the guarantee given or the security provided by such company.

T Kalaiselvan
Advocate, Vellore
84711 Answers
2172 Consultations

5.0 on 5.0

Provide me at least two latest judgments each of Supreme Court/High Courts/Company Law Boards by which the punishment awarded under subsection (4) s upheld and the liability is fixed under subsection (5) on the lending company?

Judgements are not supplied here.

You can get them from your own lawyer who you have engaged for the services.

No judgments will help you even if you possess them in your hand because the judgments of any higher court shall be related to the particular cases and in such cases like yours, the case laws will not be of any help to you because you cannot submit the judgments to the court in a case at any stage, the reference of any settled law can be made before court while making a final argument on any topic that is being tried by the court.

If you want to go through any citation, you may engage the services of the lawyers of this forum through private consultation.

T Kalaiselvan
Advocate, Vellore
84711 Answers
2172 Consultations

5.0 on 5.0

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