Aman Sah
LOANS 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
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.
can u elaborate with resoect to a case wherein immovable property owned by a Co.(e.g. A Pvt. Ltd) is given as security for loan taken by B Pvt Ltd. (loan is taken by B Ltd from a Bank).
One of the director of A Ltd is daughter of one of teh director of B Ltd.
Can A ltd give such security? and provide corporate guarantee as well??
Answer for query related to ” any other person to whom director is interested” as below:-
a) INDIVIDUAL: Director of lending co., or holding co. or any partner or relative of any “such director”;
b) FIRM: in which any such director or relative is a partner;
c) Private Limited Company: of which such director is a director or member; (it is to be seen that in case of companies, relative of director is not covered),
d) BODY CORPORATE at a general meeting of which at least 25 % of voting power may be exercised or “controlled” by such director, or by two or more such directors, together; (it is to be seen that in case of companies, relative of director is not covered), Meaning of word “control”: “Control” has been defined u/s 2(g) of Companies Act, 2013 as to include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholding or management rights or shareholders agreements or voting agreements or in any other manner.
e) BODY CORPORATE Board, Managing Director or manager, whereof is accustomed to act in accordance with the directions or instructions of Board, or of any director or directors, of lending company.
Sir explain clause d of the expression to any other person in whom director is interested
Thank You sir. My query is resolved now.
Hi Richa:
Your Query Answered below:
As per my opinion, No i.e. Holding Company cannot give loan to its Subsidiaries.
Reason as below:
The entities/ person covered in the ambit of “any other person to whom the director is interested” is exhaustive and means as per clause (e)
“Any Body corporate, the board of directors, the managing director or the manager, whereof is accustomed to act in accordance with the directions or the instructions of the board, or any of the director or directors, of the lending company”
Section 185(e) seems to include in its prohibition the giving of the loans, securities and guarantees provided by the holding companies to its subsidiaries.
hope its clear your doubts….
Any any further you can email me at csamansah05@gmail.com for a quick resolution.
Thanks,
Aman Sah
provide your email id……. or test mail me… for any query.. csamansah05@gmail.com
As per clause C, a company can provide loan to its wholly owned subsidary. Does it applies to Subsidiary Company also. I mean Can a holding company provide a loan to its subsidiary company also????
If so, then please provide the section under which it shall be covered?
Kindly provide the reply through mail also, if possible.
Very Helpful Article Sah Ji …………<<<<>>>>>>>>>
Hi Juhi;
Your query answered below:-
1. Any Loan represented by book debt:-
Any book debt in the books of the company in the name of any director or any other person in whom the director interested will be treated as Loan.
EXAMPLE: A company cannot make credit sale or cannot accept any contract or provide any service on credit basis to any person mentioned under section 185.
EXAMPLE FURTHER EXPLAINED:- Suppose a readymade garment Company Sell Garments (SAY TROUSERS, JEANS, T-SHIRTS, etc) to director for an amount of Rs 20,000 even at a prevailing market price and collects the money after a month from a director. Therefore there will be OUTSTANDING amount of Rs 20K in the books of the company on the last date of month (SAY 30th DATE); THEN such a amount represents as a loan by book debt even the director clears such amount on a due date.
2. Clause (a) proviso of Section 185
I. A company can provide a loan to Managing Director or Whole time Director as a part of condition of service extendable by the company to all
EXPLANATION: Loan facility should be extendable to all employees of the company not only to managing director or whole time director; because MD and WTD are also enjoyed the status of employees of the company.
II. Pursuant to any scheme approved by the members by a special resolution.
EXPLANATION: If company having any scheme to give loan to MD/WTD which is not in ordinary course of business then such a scheme shall be approved by the members by passing Special Resolution.
Hope I am able to clear your doubts……..
Thanks;
Further you can reach to author: csamansah05@gmail.com
Can u explain the words any ‘loan represented by a book debt’ and Clause (a) of proviso to Sec. 185(1)? Please provide example on the same.
Hi Deepak;
As per your question; Company C is holding Company and A & B are subsidiaries….Clause (c) of Companies (amendment) act states that Holding company can give loan to subsidiary; but as per my opinion clause (c) does not talk about subsidiary to subsidiaries; hence Company A cannot give loan to Company B.
If A is holding of B then it can do so…
Thanks for such a great & quick update
Great Aman thanks for sharing…
Sexy article
There are 3 pvt Companies( A, B, C). One Director is common in the 3 companies. C Pvt Company is major share holder of A & B.
can A give loan to B ????
Thanks Aman Sha…
Really appreciate the Hard Work in drafting this..
It is helpful…
– CA. Vidhyut Jain
Good job aman…. easily intrepreted and understandable….
Great work Aman.
Awesome..thnx for sharing this..
Great presentation and good knowledge on the topoc