The Supreme Court’s (“Court“) decision in Satinder Singh Bhasin v. State (NCT of Delhi)[1] (“Case“), constitutes a significant reaffirmation of the principle imposed by Section 185 of the Companies Act, 2013 (“Companies Act“). Herein, while the proceedings arose in the context of cancellation of bail, the Court’s observations traverse beyond corporate criminal law and engage with the impermissibility of utilising corporate funds to meet personal liabilities of directors.
At its core, the decision underscores a fundamental position that corporate funds cannot be deployed for personal purposes under the guise of financial assistance, in the absence of strict statutory compliance.
Background
In the Case, Mr. Bhasin (“Petitioner“) was the director of Bhasin Infotech and Infrastructure Private Limited (“BIIPL” or “Company“). A number of miscellaneous applications were filed by the allottees of a project undertaken by BIIPL, seeking cancellation of bail granted to the Petitioner in line with the first information reports (“FIRs“) that were filed against him by the allottees. The FIRs had been filed due to alleged non-delivery of the units of the allottees, siphoning of their funds, and impropriety in allotment of land with the collusion of State officials.
The Petitioner had been granted bail in respect of all FIRs subject to stringent conditions, including the deposit of an aggregate amount of Rs. 50,00,00,000/- (Rupees Fifty Crores) before the Registry of the Court as a pre-condition for grant of bail. Additionally, the Petitioner was required to submit a personal bail bond of Rs. 5,00,000/- (Rupees Five Lakhs) with one surety in the like amount in connection with each FIR independently. The Petitioner was also required to make every possible attempt to settle the claims of the allottees as far as possible, within six to eight months.
Subsequently, the Court issued a show cause notice to the Petitioner when allegations of mismanagement of BIIPL’s affairs arose against the Petitioner. The Court took note of the following:
- The Petitioner continued to be in direct management of the affairs of BIIPL;
- There were allegations that the Petitioner siphoned off BIIPL’s funds for compliance with bail conditions; and
- The accounts of the allottees were reflected as settled by the Petitioner, however, despite the passage of six years since bail was granted to the Petitioner, he made no efforts to settle the claims of the allottees.
Thus, the conduct of the Petitioner reflected a pattern that was inconsistent with the obligations imposed upon him at the time of grant of bail. Further, the conduct of the Petitioner brought into focus the issue pertaining to legality of deploying company funds to discharge what was, in essence, a personal obligation of a company’s director.
Section 185 of the Companies Act: Statutory Framework
Section 185 of the Companies Act prohibits companies from directly or indirectly, advancing any loans, including any loan represented by a book debt, or providing any guaranty or security in connection with any loan taken by:
- Any director of the company, or of a company which is its holding company or any partner or relative of any such director; or
- Any firm in which any such director or relative is a partner.
However, even when permitted, such loans can only be granted upon two conditions being met: firstly, a special resolution being passed by the company in a general meeting, provided that the explanatory statement to the notice for such meeting discloses the full particulars of the loans being given, and the purpose for which the loan is proposed to be utilised by the recipient of the loan. Secondly, the loans must be utilised by the borrowing company only for its principal business activities.
Therefore, the provision is rooted in a clear legislative concern: preventing self-dealing and safeguarding corporate funds from being appropriated for personal benefit by those in control of the company.
The Judicial Approach
It was observed by the Court that the amount of Rs. 50,00,00,000/- (Rupees Fifty Crores) had originated from the funds of BIIPL and other related entities. Therefore, the contention before the Court was whether the impugned transaction could be legitimised as a loan within the scope of Section 185 of the Companies Act.
Delving into the conditions for permissibility of loans under Section 185 of the Companies Act, the Court found the issue to be against the Petitioner. The Court noted that the most alarming aspect was that no board resolution had been passed by BIIPL and any of the other related entities before disbursal of the amount to the Petitioner. Additionally, it could not be said that the loan to secure bail for the Petitioner was connected to BIIPL’s principal business activities by any stretch of imagination.
The condition requiring the deposit of the amount as a prerequisite for grant of bail was imposed upon the Petitioner in his individual capacity, and this condition required bonafide, if not strict, compliance. However, the Petitioner did not invest a single rupee from his personal funds. Rather, the Petitioner availed an interest free commercial benefit from BIIPL, which could not have been in furtherance of supporting the Company in any manner. The Court observed that the absence of basic safeguards, such as pledging of shares or provision of security were demonstrative of how the transactions lacked any bonafide or lawful financial structure. Therefore, the deposit of the amount through the purported loan taken by the petitioner from BIIPL, in the absence of any documentary approval or statutory compliance could not be sustained.
Further, the Petitioner had submitted that Rs. 24,00,00,000/- (Rupees Twenty-Four Crores) had been returned to the other related entities. The Court, however, held that the argument of the Petitioner was not tenable as it was established that taking the purported loan itself violated the condition imposed by the Court.
Conclusion
The Court’s decision in the Case reflects the protective scope of Section 185 of the Companies Act in the strict insistence of substance over form. The mere labelling of a transaction as a loan was held to be insufficient where the underlying purpose of the loan was personal and extraneous to corporate objectives.
Moreover, the continued control of the Petitioner as a director of BIIPL, coupled with allegations of diversion of funds reinforced concerns regarding breach of fiduciary duties of a director, erosion of corporate accountability and the misuse of corporate structure to secure personal benefit[2]. Lastly, the Court’s decision in not permitting retrospective characterization of diverted funds as loans, even after having been returned by the Petitioner, reflect a step towards greater corporate governance.
[1] 2026 SCC OnLine SC 521.
[2] Section 166, Companies Act, 2013.
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