India 
Canada
In the corporate world, directors play a pivotal role in steering a company toward success. However, when it comes to financial dealings between a company and its directors, especially loans, the law steps in to ensure transparency, accountability, and protection of stakeholders. This blog explores the concept of loans to directors, the legal framework governing them, associated risks, and best practices for compliance.
What is a Loan to Director?
A loan to a director refers to any advance, credit facility, or financial assistance provided by a company (directly or indirectly) to its director or any person in whom the director is interested. These transactions are closely monitored due to potential conflicts of interest and misuse of corporate resources.
Legal Framework (India-specific, with brief global reference)
Under Indian Law: Companies Act, 2013
Section 185 of the Companies Act, 2013 lays down strict provisions relating to loans to directors:
Prohibited Loans: A company is prohibited from directly or indirectly advancing loans, giving guarantees, or providing security in connection with loans to:
Any of its directors;
Any director of its holding company;
Any partner or relative of such director;
Any firm in which such director or relative is a partner.
Permitted Loans (with Conditions):
Loans may be allowed to entities in which directors are interested (e.g., private companies or bodies corporate where directors hold stakes), provided:
A special resolution is passed in a general meeting;
The loan is utilized by the borrowing entity for its principal business activities;
Proper disclosures are made;
Approval from shareholders is obtained.
Exceptions:
Loans to managing or whole-time directors as part of conditions of service;
Loans under schemes approved by shareholders via special resolution.
Penalties:
Violation of Section 185 may attract:
Company: Fine up to ₹5 lakh;
Director/Recipient: Imprisonment up to 6 months or fine up to ₹5 lakh, or both.
