Loan to Holding Company by Subsidiary Company - Series 362
Loan to Holding Company
[Section 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 “Whether a Subsidiary / Wholly Owned
Subsidiary Company can give Loan, Guarantee, Security to Holding Company?”.
This article is in continuation of
Article Series No.327,
328, 329
BACKGROUND
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.
In this Research Editorial will research on
the provisions of Loan to Holding Company,
Language of Section 185:
(1) No Company ( Private & Public)
·
Directly or Indirectly
·
Advanced any loan, including
Book 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 corporate 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].
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.
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
ii.
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.
Section 185 of Companies Amendment
Act, 185 Divided into 3 (three) Parts:
ü Subsection 1: This Subsection states about “Restricted Entities” 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 compliance.
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.
Points
to be kept in Mind – In case of Dealing with HOLDING u/s 185
Sub Section 1
|
Sub Section 2
|
Sub Section 3
|
Restricted Loan to
Individual Only
|
Allowed Loan to Private Compan and Body Corporates
|
Allowed Loan to Specific entities
|
Holding Company Not
covered here.
|
Here May or May not be fall?
|
Here Not Covered.
|
Allowed under this Section
|
Depend upon situations. Below
analysis of same given.
|
Allowed under this Section
|
As per Sub Section 2 (mentioned in
detaileed above) lender Company (may or may not be subsidiary) can given loan
to borrower Company subject to conditions mentioend there.
Situations for Analysis:
Whether
Lender Company (i.e. Subsidiary) can give Loan/Guarantee/ Security
to Holding Company in any of the below mentioned situations:
i.
Where Directors of Lender
Company are Directors or shareholder of Holding Company.
a. Holding Company Private Limited
b. Holding Company Public Limited
ii.
Where directors of lender
company are not directors or shareholder of holding Company.
Situaion – I
i.
Where Directors of Lender Company are Directors or shareholder of Holding
Company.
SOLUTION:
a. Not fall u/s 185(1)
b. Not fall u/s 185(3)
c. May or May not fall u/s 185(2)
Holding
Company is Private Limited Company: In case holding Company (Borrower) is Private
Limited Company. Lender (Subsidiary) can give loan to such holding Company by
complying with conditions of sub section 2 of Section 185. Condition:
i.
Special Resolution passed by the Company in
General Meeting.
ii.
The loans are utilized by the borrowing
company for its principal business activities.
Holding Company is Public Limited Company: In case holding Company (Borrower) is Public Limited
Company. Lender (Subsidiary) can give loan to such holding Company because such
transaction shall not fall u/s 185.
Situation – II
ii. Where directors of lender company are not directors or shareholder of holding
Company.
SOLUTION:
The above
mentioned situation doesn’t fall under any sub section of Section 185.
Therefore, one can opine that subsidiary company can give loan/ guarantee/
investment holding company in the above mentioend situation.
Loan by Lender company to holding in all above mentioned
situatio:
Section
185(1): This sub-section restrict only
for Loan/ Guarantee/ Securities to Individuals not Companies or Body
Corporates. Therefore, this sub section doesn’t restrict the above mentioned
transaction.
Section
185(2): This Sub section allows by
passing of Special Resoluion to give loan to (Private Company, Body Corporate
in which directors of lender Company are Directors or Shareholders)
In situation where director of lender company are not
directors or members in other Company then this transaction doesn’t fall u/s
185(2) and no need to pass Special Resolution.
In situation where director of lender company are directors
or members in other Company then this transaction doesn’t fall u/s 185(2) and need
to pass Special Resolution.
there is no ristriction any where under Section 185(1), (2)
and doesn’t fall under 185 (3). Therefore, one can opine that in this situation
Company can freely give loan to Holding by complying the other provision of
Companies Act, 2013 (like Section179(3), 186 etc.)
In the above mentioned both
situation one can opine that, a Company
can give Loan its Holding Company.
(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
Sir,
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As per my knowledge, though LLP is a body corporate as per LLP Act but as per the definition of Body corporate under companies Act 2013, LLP is not a body corporate.
Kindly provide clarification on this.
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