Aman Sah

Aman SahLOANS TO DIRECTORS [SECTION 185]

(1) Save as otherwise provided in this act, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person.

Provided that nothing contained in this sub-section shall apply to-

(a) The giving of any loans to a Managing or Whole time director-

(i) As a part of the conditions of service extended by the company to all its employees; or

(ii) Pursuant to any scheme approved by the members by a special resolution; or

(b) 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 bank rate declared by the Reserve Bank of India.

ANALYSIS OF SECTION 185 OF COMPANIES ACT 2013 PRIOR TO AMENDMENT

Applicability: Section 185 applies to both Public and Private Companies.

Section 185 prohibits the companies:

I. For providing any loan to its directors or any other person to whom such a director is interested.

II. For giving any guarantee or security in connection with such loan taken by director or any other person to whom such a director is interested.

EXCEPTIONS TO SECTION 185:

Clause (a):

A company can provide a loan to Managing Director or Whole time Director as a part of condition of service extended by the company to all its employees; or any scheme approved by the members by a Special Resolution.Noted that:

I. “Any other person in whom the director is interested” is missing under exception; hence the company shall not provide any loan to any other person to whom such managing director or whole time director is interested.

II. Under exception the words “gives any guarantee or provide any security in connection with any loan taken by him or such other person” is missing; hence company shall not provide any guarantee or security taken by the managing director or whole time director or any other person to whom such managing director or whole time director is interested.

Clause (b):

A company whose principal course of business gives loans or gives guarantees or securities [SAY FINANCING COMPANIES] and interest is being charged in respect of such loans not being less than bank rate declared by the RBI.

AMENDMENT TO SECTION 185 BY COMPANIES (AMENDMENT) ACT 2015

Companies (amendment) act 2015 dated on 26th May 2015 inserted two more clauses after clause (b) under proviso to sub-section (1) of section 185 namely:-

(a) Any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or

Any guarantee given or security provided by a holding company in respect of loan made by a bank or financial institution to its subsidiary company:

Provided that the loans made under clause (c) and (d) are utilized by the subsidiary company for its principal business activities.

ANALYSIS TO SECTION 185 OF COMPANIES (AMENDMENT) ACT 2015:

Clause (c) states that a holding company shall provide a loan to its wholly owned subsidiary company and also provide a guarantee or security in respect of the any loan made to its wholly owned subsidiary company.

Clause (d) states that a holding company shall provide a guarantee or security to the banks or financial institutions in connection with the loan taken by the subsidiary company.

Provided that such loans shall be utilized by the subsidiary company for the purpose of its principal business activities; and not for any other activities.

Noted that:

Proviso of Clause (c) or (d) are not applicable if a wholly owned subsidiary company made a loan to holding company or a guarantee or security provided by the subsidiary company in respect of loans made by the banks or financial institutions to its holding company.

Author: AMAN SAH (Company Secretary Exam Qualified), B.Com (Hons) DU; CA FINAL

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Category : Company Law (4004)
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Tags : Companies Act (2468) Companies Act 2013 (2241)

0 responses to “Analysis of Section 185 of CA 2013 With Companies (Amendment) Act 2015”

  1. Harshil Shah says:

    With new amendment in the Rules. Rule no. 10 is supposed to be omitted. Does it mean that Loan from holding to subsidiary will be term as Loan to Director and the same will not be allowed.

    Please share your view.

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