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 3^rd 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].

(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