Proposed amendment in Section 185 of Companies Act 2013

CS Saptarshi Basu

A Comparative Analysis of Section 185 of Companies Act 2013 & proposed amendment in Companies Amendment Bill 2016

As we are all aware that the Central government on 16th of March, 2016 introduced in the Lok Sabha a bill to further amend the Companies Act, 2013 as part of efforts to address difficulties faced by stakeholders and improve the ease of doing business in the country, which is yet to get approval from Rajya Sabha very soon.

Under such circumstance, let us discuss on one of the critical sections of Companies Act 2013- Section 185- Loans to Director– how it is going to affect the industry if it gets approved.

Under the Existing Act

Section 185(1) strictly prohibits the companies of giving of any loans whether directly or indirectly including any loan represented by book debt to any of its directors or to any other person in whom director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person.

For the above purpose the term- “any other person in whom director is interested” shall mean-

• Any director of lending company or of a company which is holding company or any partner or relative of any such director
• A firm in which any such director is a relative or partner
• A private company in which any such director is a director or member
• Any body corporate at a general meeting of which not less than 25% of total voting power may be exercised or controlled by any such director or by two or more directors together
• Any body corporate, the Board of Directors, Managing Directors or Manager, whereof is accustomed to act in accordance with the directions or instructions of the Board or of any director(s) of the lending company

However Rule 10 of the Companies (Meetings of Board and its powers) Rules, 2014:

• Holding Company gives loan/guarantee/ security  Wholly Owned Subsidiary is exempted from complying with section 185.

• Any security provided or guarantee provided by Holding Company in respect of  loan made by any bank or financial institution to its Wholly Owned Subsidiary Company is exempted from complying with section 185 also.

Provided such loans under sub rule (1) and (2) are utilized by subsidiary company for its principal business activities.

Exemptions to section 185

• If lending company gives loan to MD or Whole time Director as a part of the conditions of service extended by the company to all its employees or pursuant to any scheme approved by Special Resolution by the members.

• A company whose normal business activity is to provide loan or give guarantee or provide security for due repayment of loan and in respect of such loan interest is charged at a rate not less than bank rate declared rate.

PENALTY For Contravention  [Section 185(2)]

• Lending Company: Rupees 5,00,00 – Rupees 25,00,000 AND
• Person to whom Loan/ Guarantee/ Security is given:
  • Imprisonment up to 6 months or
  • Fine of Rupees 5,00,00 – Rupees 25,00,000 or

                                BOTH

Points to be noted:

From the above discussion we conclude the following:

a) Section 185 is applicable on public and private companies.

b) Section 185 is hit only to the lending company.

c) Where a company gives loan or provides security or guarantee to its 100% WOS, then such holding company can also provide loan, guarantee or security to its Directors and relatives as well. If the WOS does not utilize the loan given by the Holding Company in its principal business activity, then in that case this section does not get hit on the lending company, which means lending company can provide loan, guarantee and security freely to its director(s) and their related persons.

d) “Indirect lending” means that the company does not give loan to director through any agency. But this word of “indirect” cannot be read by converting what is not a loan to loan as was stated in Dr. Fredie Ardeshir Mehta V/s Union of India (1991)

e) Ordinary Course of business means usual business to lend and accept loans and deposits from people. It has two tests:

• If the company is engaged in lending activity regularly
• Lends not only to director(s) or their relatives but also lends at arm’s length parties. Arm’s length means to give loans to reasonable parties or at reasonable interest rate at which two or more rational people will give their consent to the transaction

Under the Proposed Bill

Under the Amendment Bill 2016, the whole Section is proposed to be substituted by inserting new Section 185 with some major changes which are discussed below:

1. The meaning of the term “any other person in whom director is interested” is reduced to the following persons only to the extent that no company shall directly or indirectly advance any loan including loan represented by book debt or give any guarantee or provide any security in connection of any loan –

• Any director of lending company or of a company which is holding company or any partner or relative of any such director and
• Any firm in which such director or his relative is a partner

2. Now a company can give loan to following persons subject to approval from the members by a special resolution at a properly convened General Meeting, the explanatory statement to such notice of such General Meeting shall contain full particulars of loan given, guarantee given and security provided and the purpose for which such loan guarantee or security is proposed to be utilized; the loan are to be utilized by the borrowing company for its principal business activity:

• A private company in which any such director is a director or member
• Any body corporate at a general meeting of which not less than 25% of total voting power may be exercised or controlled by any such director or by two or more directors together
• Any body corporate, the Board of Directors, Managing Directors or Manager, whereof is accustomed to act in accordance with the directions or instructions of the Board or of any director(s) of the lending company.

This means when lending company is providing loan, guarantee and security to such a private company where such director who is also a director or a member in such private company OR, such body corporate where such director whether solely or in concert with other directors hold 25% or more voting power OR such body corporate whose directors, Managing Director or Manager is accustomed to act, in such circumstances a general meeting is required to be convened and a special resolution is required to be passed for giving such loan, guarantee or security.

Conclusion: Section 185 remains restrictive clause after the proposed amendment. Though proposed amendment still prohibits giving any loan, provision of any guarantee and security to directors and firm in which such director or his relative is a partner, it slightly loosens down  the restriction on other person in which director is interested where a company can take approval from its members by passing a special resolution and give loan, guarantee and security to such persons easily.

 Expecting a quick and positive response from Rajya Sabha with respect to this section at least as this will ease the manner of doing business to a large extent.

(Author is an Associate Member of the Institute Of Company Secretaries Of India)