Loan to Group Companies - Under Section 185(2
Loan to Group Companies
Under Section 185(2)
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 “Whether a Company
can give loan to other Companies or Body Corporates in which their directors
are interested” If NO, why? If yes, then what are the Compliance a company
required for the same”.
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
This refers that "Companies Act likely to jolt
Corporate World". Section 185 of the Companies
Act, 2013, which puts restrictions on inter-corporate loans, jolted the
corporate world. Until now, Companies were in the habit of borrowing funds from
banks and passing them on to subsidiaries and associate companies through
inter-
corporate loans. The holding companies never bothered to comply with the
terms of the loan agreement when it concerned the deployment of the borrowed
funds. The banks never monitored such fund deployment. Many amendments has been
made under this section since its notification.
B.
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 ;
C. PROVISION OF SECTION 185 AS PER COMPANIES ACT, 2013: Same can be read in depth on the below mentioned
link:
D. 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 under this section as mentioned below.
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].
Food for Thought:
i.
In case of Borrower if Public Limited Company and having
common directors from Lender Company then whether Lender Company can give L/G/S
?
ii.
Issue under Income Tax Act in case of loan given to a
Company in which Director of Lender Company are members?
iii.
What is meaning of “Principle Business Activity” for the
borrower?
E.
PROCESS OF GIVEN OF
LOAN UNDER SECTION 185:
As per above mentioned provisions of Section 185 (1)
& (2) a Lender Company can give loan to following below mentioned person /
entities.
Situatin I: In
case of Lender Company giving loan to any entities (Group Private Limited
Companies) as mentioned in Section 185(2)
i.
Holding of Board Meeting: Lender Company have to hold a
Board Meeting;
§ Pass Board resolituon [u/s 179
(3)(f)] (Passed Unanimous Board Resolutoin as per Section 186(5))
§ Pass resolution to call Extra
ordinary General Meeting
§ Issue Notice of EGM
§ Check Limit of Loan/ G/ S as per
Section 186(2) whether it is in limit or not.
ii.
If Lender Company is Public Company then file the Board Resolution in
e-form MGT-14 with Roc with in 30 days from the date of Board Meeting.
iii.
Conveining of General Meeting: Hold the EGM and pass the Speical
Resolution for granting loan, guarantee or security by mentioned following
informations in the Explanatory Statement:
§ Full Particular of the loans
given; or
§ Guarantee given or security
provided and
§ The purpose for which the loan
or guarantee or
§ security is proposed to be
utilized by the recipient of the loan or guarantee or security and other
relevant facts
iv.
File MGT-14 with ROC: File copy of Speical Resolution along with explanatory
statement with ROC in e-form MGT-14 within 30 days of EGM:
Other Conditions to be fulfiled:
v.
Declaraiton from Brorrower: Take a declaration from the
borrower Company that it will use this Loan for the Principle Business Activity
only.
vi.
Limits of L/G/S u/s 186(2): Check whether loan is in limit
u/s 186(2) if not then whether Special Resolution for such has been passed or
not. Limites as mentioned below:
§ 60% of Paid up share capital +
Free Reserve + Securities Premium Account OR
§ 100% of Free Reserve +
Securities Premium Account
vii.
Approval of Public Financial Institution: If Loan is not covered in above
mentioned Limit or there is any default in repaymtn of loan installments or
payment of inerest by lender to public financial institution then before
initiaiton loan to borrower take approval of public financial instituion also.
viii.
Disclosure by Lender: As per Section 186(4) Company shall disclose in the Financial
statement full particular of Loan/ G/ S and purpose for which such L/G/S is
proposed to be utilised by borrower.
ix.
Interest on Loan u/s 186 (7): Loan shall be given at a rate of
interest not lower than the prevailing yield of one year, three year, five year
or then year Government security closest to the tenor of the laon.
Food for Thought: (Authot shall share his thought on the below
mentioned questions in his upcoming Article Series No 330)
I.
Under Sub- Section
(1) or (2) no where it is restricted that a Company can’t give loan to a Public
Company having Common Director. Therefore, Whether a Company can give loan to
Public Company (Borrower) without any restriction u/s 185. OR
In simple language whether while
given loan Section 185 shall be check in case of borrower is Public Limited
Company?
II.
Whether exemptions given to private limited Company by
exemption notification dated 05th June, 2015 shall continue or dis
continue after notification of Section 185 of Companies Amendment Act, 2017?
III.
Whether Company can pass single resolution for the
transaction u/s 185(2) and 186(2)?
IV.
Whether this section shall cover security or guarantee
other than for loan?
V.
Whether investment in shares shall attract provisions of
Section 185?
VI.
Whether a Company can give loan to subsidiary Company in
Section 185(2)?
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 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: All the Situations /
persons/ entities to whom a Company can give loan u/s 185
Ø Series 331: 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
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