Eligible Entities To Loan u/s 185

To Loan u/s 185
SHORT SUMMARY:
In this Research editorial, the author begins by
referring the provisions of Section 185 of Companies Amendment Act, 2017 (Loan
to Directors and entities in which directors are interested). The main focus of
this research editorial on “Which are the
entitites to whom Company can give Loan/ Guarantee/ Security etc” under Section
185 of Companies Act, 2013 after amendment by Companies Amendment Act, 2017 .
BACKROUND
Section
185 of Companies Act, 2013 corresponds to section 295 of the Companies Act,
1956, section 86D of the Indian Companies Act, 1913 and section 190 of the
English Companies Act, 1948. It has been made effective from 12-9-2013
PROVISION AS PER
COMPANIES AMENDMENT ACT, 2017:
Section 185 of
Companies Act, 2013 has ben completely substituted by New Section 185 under
Companies Amendment Act, 2017 (CA, 2017 got president assent on 3rd
January, 2018. Due to Complete substitution there are many changes occurs in
practical use of this Section.
A.
WHAT IS TERM ‘LOAN’:
Section 2 of Companies
Act, 2013, does not define “loan”. A loan is defined by the Oxford English
Dictionary as " a thing lent; something the use of which is allowed for a
time, on the understanding that it shall be returned or an equivalent given, a
sum of money lent on these conditions and usually with interest.
The Supreme Court in the
case of Shree Ram Mills Ltd v. Commissioner of Excess Profit Tax,
MANU/SC/0054/1954 ;
B. PROVISION OF SECTION 185 AS PER COMPANIES ACT, 2013: Same can be read in depth on the below
mentioned link:
C. PROVISION AS PER COMPANIES AMENDMENT ACT, 2017:
Section
185 of Companies Amendment Act, 185 Divided into 3 (three) Parts:
ü Subsection 1: This
Subsection states about “Ristricted Entites” to give Loan, provide Security or
Guarantee under Companies Act, 2013. This Subsection includes only
“Individuals” and “Firms”.
ü Subsection 2: This
Subsection states about “loan to Private Company / Body Corporate” by following
compliances.
ü Subsection 3: This
Subsection states about “entities Loan/ Guarantee/ Securities to whom allowed”
without complying with the conditions of Subsection 2.
NOTE: It can be
opine that entities which are not covered under above 3 situations are free to
Give Loan/ Guarantee / Securities without any default / compliance of Section
185.
Language of Section 185:
(1) No Company ( Private & Public)
·
Directly or Indirectly
·
Advanced any loan, including
Bood Debt
·
Or any Guarantee or provide any
security in connection with any loan taken by
Following Persons
i.
Any director of Company, or
ii.
Any director of a Company which is its
Holding Company, or
iii.
Any partner of Director of lender company,
or
iv.
Any relative of Directors of Lender Company,
or
v.
Any firm in which any of Director of
Lending Company is Director, or
vi.
Any firm in which any relative of Director
of lending Company is Director.
Points to be Kept in Mind while
Complying according to this Section
a) This
Subsection applicable on Public Limited as well as Private Limited Company
(whether small, OPC, Start ups etc.)
b) Guarantee
or Security in respect of only ‘Loan’ is covered.
c) Only
individuals/ firms are covered in sub section 1.
d) Companies
/ body corporates are not covered in above sub section
(2) Following loan can be given by company to Any Person in whom
directors are interested after fulfilling the Conditions mentioned below:
·
Advance any loan, including loan
represented by a book debt
·
Give any guarantee in connection with any loan
taken
·
Provide any security in connection with any
loan taken
Any Person:
i.
Any Private Company of which any such
Director is a Director or member;
ii.
Body Corporate in which 25% or more voting
power rests with one or more directors;
iii.
Body Corporate whose Board accustomed to
act on directions of BOD or Directors of lending company
Conditions:
i.
Special Resolution passed by the Company in
General Meeting.
ii.
The loans are utilized by the borrowing
company for its principal business activities.
Points to be Kept in Mind while
Complying according to this Section
a)
If borrower is Private Limited
Company having common directors/ members then by using this sub section loan
can be given.
b)
Body Corporate includes LLPs,
threfore as per, point (ii) of any person L/G/S can be given to LLP also.
[Condition 25% or more voting power vested with one or more director of lender
Company together].
3)
Restrictions of Sub Section (1) and (2) shall not be applicable on
following transactions:
i.
Clause (a): Loan to Managing Director & Whole Time
Director:
There are two ways to give Loan to Managing
and Whole Time Director only.
a)
Loan can be given to a Managing or Whole-Time
Director as a part of the condition of their service.
Conditions: Conditions should be available
for all the employees of the Company.
b)
Loan can be given to a Managing or Whole-Time
Director pursuant to any Scheme.
Conditions: Scheme should be approved by
Shareholders by passing of Special
Resolution.
ii.
Ordinary Course of Business:
a company which in the ordinary course of its business provides loans or
gives guarantees or securities for the due repayment of any loan and in respect
of such loans an interest is charged at a rate not less than the rate of
prevailing yield of one year, three year, five year or ten year Government
security closest to the tenor of the loan; or
iii.
Wholly owned Subsidiary: Any loan made by a
Holding Company to its Wholly own Subsidiary Company or any guarantee given or
security provided by a Holding Company in respect of any loan made to its
wholly own subsidiary Company Give any guarantee in connection with any loan
taken
iv.
Subsidiary: Any guarantee given or
security provided by a Holding Company in respect of Loan made by any Bank or
financial institution to its subsidiary Company.
Conditions:
In case of Guarantee on behalf of
Subsidiary loan made under this clause utilized by the subsidiary company for
its principal business activity only.
Food for Thought:
i.
Clause (a) :
Whether loan to “Manager” whether condition to its services or scheme shall be
exempt from the restriction / compliances u/s 185.
ii.
Clause (b): Whether
all the Loan/ Guarantee /Security given under ordinary course of business are
exempted u/s 185.
LIST OF PERMISSIBLE LOAN/ GUARANTEE/ SECURITIES UNDER
SECTION 185
As per provisions of Section 185 a Company can give Loan /
Guarantee / Security to following below mentioned Persons/ Entities after
complying with provisiosn of Section 186.
Note:
All Companies have to keep in mind i.e. “No Company can give Loan/
Guarantee / Security without complying with the provision of Section 186 of CA,
2013”. In other words ‘It is mandatory for each and every company to comply
with the provision of Section 186 while giving any L/G/S.
A.
List of Restricted Person:
A Company can’t give Loan/ Guarantee/ Security to following
below mentioned person:
I.
Not Allowed
i.
Any director of Company, or
ii.
Any director of a Company which is its
Holding Company, or
iii.
Any partner of Director of lender company,
or
iv.
Any relative of Directors of Lender Company,
or
v.
Any firm in which any of Director of
Lending Company is Director, or
vi.
Any firm in which any relative of Director
of lending Company is Director
II.
Not Allowed if fails to pass special resolution:
i.
Any Private Company of which any such
Director is a Director or member;
ii.
Body Corporate in which 25% or more voting
power rests with one or more directors;
iii.
Body Corporate whose Board accustomed to
act on directions of BOD or Directors of lending company
B.
List of Permissible Person:
III.
Allowed if, Special Resolution Passed:
i.
Any Private Company of which any such
Director is a Director or member;
ii.
Body Corporate in which 25% or more voting
power rests with one or more directors;
iii.
Body Corporate whose Board accustomed to
act on directions of BOD or Directors of lending company
Note:
Loan to above mentioned entities are
allowed after fulfilling below mentioned both conditions:
i.
Special Resolution passed by the Company in
General Meeting.
ii.
The loans are utilized by the borrowing company
for its principal business activities.
IV.
Allowed without falling u/s 185(1) and (2):
i.
Loan to Managing Director or Whole Time
Director.
ii.
L/G/S under ordinary course of business.
iii.
L/G/ S to wholly owned subsidiary Company
iv.
Loan to Subsidiary Company.
Note:
Loan to above mentioned entities are
allowed after fulfilling condition mentioned above on page No. 4 and 5.
V.
Allowed without falling u/s 185:
i.
Loan to any Public Company (having common
Director/ Shareholder or not).
ii.
Private Company fulfilling all 3 conditions
mentioned in Exemption Notification dated: 05th June, 2015.
iii.
Guarantee / Security provided for the
purpose other than loan taken by other entity.
iv.
Loan to Holding Company (subject
to condition that holding Company doesn’t have common directors)
v.
Loan to Subsidiary Companies (subject
to condition that subsidiary Company doesn’t have common directors)
Note:
Above mentioend entities are not fall u/s
185, therefore Company can give Loan/ Guarantee/ Securities to above mentioned
entities freely without any restriction / compliance of Section 185.
(Author
– CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice
from Delhi and can be contacted at csdiveshgoyal@gmail.com). Disclaimer: The entire
contents of this document have been prepared on the basis of relevant
provisions and as per the information existing at the time of the preparation.
Although care has been taken to ensure the accuracy, completeness and
reliability of the information provided, I assume no responsibility therefore.
Users of this information are expected to refer to the relevant existing
provisions of applicable Laws. The user of the information agrees that the
information is not a professional advice and is subject to change without
notice. I assume no responsibility for the consequences of use of such
information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT,
SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION
WITH THE USE OF THE INFORMATION
The Author
shall publish series of editorial to cover all the situations of Section 185,
FAQ’s in Provision of Section 185, Procedure of compliances u/s Section 185. So
Please read the series in contunation. Next Series are as follow:
Ø Series 328: Whether Company can
give loan/ Guarantee/ Securities to group companies or companies in which
director of lending Company are Director or Members?
Ø Series 329: Whether Company can
give loan/ Guarantee/ Securities to Subsidiary or Wholly own Subsidiary
Companies, if yes what are the provisions and compliances
Ø Series 330: Answers of all the
Above mentioend questions shall be share in this series.
(Author
– CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice
from Delhi and can be contacted at csdiveshgoyal@gmail.com). Disclaimer: The entire
contents of this document have been prepared on the basis of relevant
provisions and as per the information existing at the time of the preparation.
Although care has been taken to ensure the accuracy, completeness and
reliability of the information provided, I assume no responsibility therefore.
Users of this information are expected to refer to the relevant existing
provisions of applicable Laws. The user of the information agrees that the
information is not a professional advice and is subject to change without
notice. I assume no responsibility for the consequences of use of such information.
IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR
INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE
OF THE INFORMATION
http://www.csdiveshgoyal.info/2018/04/loan-to-group-companies-text-box-series.html
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