My company in Hubli wants to give a loan to another company in which a director has interest; is this permissible under Section 186 of the Companies Act?

Detailed Legal Analysis

Yes, your company in Hubli can provide a loan to another company in which a director has an interest, but it must comply with the provisions outlined in Section 186 of the Companies Act, 2013.

Section 186 of the Companies Act, 2013 regulates loans and investments by companies, particularly in situations where there is a possibility of a conflict of interest due to the involvement of directors. Here are the key points and steps to consider:

• Definition of 'Interest': The term "interest" refers to any direct or indirect benefit in the company to which the loan is being proposed. This includes shareholding, directorship, or any other financial interest.
• Board Approval: The company must obtain prior approval from the Board of Directors for making such loans. This approval should be documented in the minutes of the meeting.
• Shareholder Approval: If the loan amount exceeds the prescribed limits (i.e., 60% of the paid-up share capital, free reserves, and securities premium account), the company must also seek approval from shareholders through a special resolution.
• Disclosure of Interest: The director having an interest in the borrowing company must disclose his/her interest at the board meetings, and these disclosures should be recorded in the minutes. This is mandated under Section 184 of the Companies Act.
• Compliance with Limitations: The amount of loan should not exceed the limits set under Section 186(2), which stipulates that no company shall directly or indirectly give any loan or guarantee, or provide any security in connection with a loan to any person or other body corporate, exceeding the limits specified.
• Register of Loans: The company must maintain a register of loans, guarantees, and securities, which should be accessible for inspection by members.
• Consequences of Non-Compliance: Non-compliance with the provisions of Section 186 can attract penalties as provided under Section 185 and Section 186 of the Companies Act, which may involve fines for the company and its officers in default.

In conclusion, while it is permissible for your company to give a loan to another company in which a director has an interest, it is crucial to adhere strictly to the requirements and procedures set forth in the Companies Act, 2013, to avoid any legal repercussions.