Legitimate Entities To Loan u/s 185 - Series 569
Legitimate Entities
To Loan u/s 185
Dated: 26th March, 2020
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
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