Section 185 and Section 186 is one of the sections that companies have to deal with on a regular basis. The snapshot of all the compliances required to be undergone for lending and borrowing are summarised for reference purpose.
GIVING OF LOANS/ GUARANTEE/ SECURITY
A. Section 185 prohibits loans (incl. Book debt)/ guarantee/ security to Director or person in whom he is interested as follows –
a. Any Director of the company
b. Any Director of Holding company
c. Partner / Relative of (a) and (b) above
d. Firm in which Director (a)/ (b) or Relative is partner
e. Private company in which Director (a)/(b) is Director or Shareholder
f. Body corporate – 25% voting power in general meeting exercisable by Director singly or jointly with other Directors
g. Body corporate – whose Board, MD, Manager accustomed to act as per Director(s) or Board of the lending company
Relative means –
a. Members of HUF
b. Husband / Wife/ Father/ Mother
c. Brother/ Sister (+ Step bro/sis)
d. Son/ Daughter and their Spouse
B. Exemptions available –
a. Loan to MD/ WTD as part of conditions of service extended to all employees, or, as per scheme approved by members by special resolution
b. To company providing loans in ordinary course of business provided minimum interest @ RBI’s Bank Rate has to be charged
c. Loan/ guarantee / security to WOS – loan to be utilised for principal business activity only
d. Guarantee / security to other than WOS – loan to be utilised for principal business activity only
C. Punishment for contravention –
a. Giver – Minimum fine of Rs. 5,00,000/- upto Rs. 25,00,000/-
b. Taker – Imprisonment upto 6 months or Minimum Fine Rs. 5,00,000/- upto Rs. 25,00,000/- or Both
D. Private companies are exempt from section 185 if all the 3 conditions are met –
a. Does not have a body corporate shareholder
b. Borrowing is less than twice paid up share capital or Rs. 50 crore whichever lower
c. No default in repayment of borrowing at the time of entering into such transaction
CONDITIONS FOR GIVING LOANS/ GUARANTEE/ SECURITY/ ACQUISITION
A. Not more than two layers of investment companies shall be used to invest funds of the company
B. Overall limits on loans/ guarantee/ security/ acquisition –
a. 60% (Paid up share capital + Free Reserves + Securities Premium Account), or,
b. 100% (Free Reserves + Securities Premium Account) whichever is higher.
C. Beyond limits as above, prior approval by special resolution is required, specifying the limit upto which the Board can give loan/ guarantee/ security/ acquire. Not required for L/G/S to WOS/JV or acquisition of securities of WOS.
D. Unanimous board resolution required
E. Prior approval of PFI required if term loan is subsisting provided that it is not required if L/G/S/A is within limits of 60% or 100% and there is no default in repayment
F. Rate of interest cannot be lower than prevailing yield of one/ three/ five/ ten year Govt. security closest to the tenure of the loan
G. No L/G/S/A by company which is in default of repayment of any deposit or interest thereon
H. Register to be maintained in MBP – 2 format and disclosure in financial statement, Entry in register within 7 days authenticated by company secretary/ person authorised by Board
I. Punishment for contravention –
a. On company – Minimum fine of Rs. 25,000/- upto Rs. 5,00,000/-
b. Every Officer in default – Imprisonment upto 2 years AND Min. Fine Rs. 25,000/- upto Rs. 1,00,000/-.
A. Decisions of lending and borrowing (both) are to be taken by the Board of Directors as per section 179 of the Companies Act, 2013.
B. As per Section 117, decisions taken by the Board as specified under section 179(3) are required to be filed in Form MGT – 14.
C. Private companies have been exempted from filing resolutions passed under section 179(3) vide Exemption Notification – MGT – 14 need not be filed.
D. The power to lend and borrow u/s. 179 can be delegated by the Board by resolution passed at meeting to the MD, Committee, Manager, Principal officer, Branch’s principal officer – Delegation resolution to be filed in MGT – 14.
E. Exercise of delegated power by MD, Committee etc. need not be filed.
About the Author
Abhishek Seth is a Kolkata based Company Secretary with working experience in financial services, health care, steel and real estate. He holds a Masters degree in Economics from the University of Calcutta and is an Associate Member of the Institute of Company Secretaries of India, New Delhi. Email: firstname.lastname@example.org.