No Company shall directly or indirectly advance
a. any loan or
b. loan represented as a book debt or
c. guarantee or
d. security
to any of its Director or any other person where the Director is interested.
Following are the persons where the Director is interested:
1. Director of lending Company or Director of holding Company or any partner or relative of such Director.
2. any firm in which any such director or relative is a partner.
3. any private company of which any such director is a director or member
4. any body corporate where such Directors together or singly hold or control 25% or more voting rights.
5. any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.
From the above it can be noted that a Private Company can give loan to a Public Company even if there are common Directors but the common Directors shall not hold 25% or more in that Company. (Point 3 speaks of Private Limited)
Further if Directors are holding more than 25% of preference shares in a body corporate and there are no common directors, then 185 will not get attracted as it speaks about voting power and preference shares do not give any voting power.
Exemptions
1. giving of any loan 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.
2. Company giving loans and advances in its normal course of business.
3. Holding Company advancing loan or guarantee or security to its wholly owned subsidiary for its principle business purpose.
4. Holding Company giving guarantee or security to is subsidiary for its principle business purpose.
Non applicability of Section 185 to Private Limited if
1. No Body corporate is holding shares in that Private Limited Company.
(Please note that even LLP is a body corporate.)
2. Borrowings (from Banks or Financial Institutions or Body Corporate) of that Private Limited Company is less than
a. 2 times of its paid up capital or
b. 50 Crores
Whichever is lower
(So a Private Limited Company which has only unsecured loan from members or Directors and fulfilling the above 1 and below 3, provisions of Section 185 will be exempt to such Companies.)
3. No default in repayment of borrowings has occurred.
There are 2 Companies in which all the Share holders and Directors are common. One company proposes to give guarantee to the bank on behalf of another. Considering 185, 2nd Provision “(c) Any Private Company of which any such Director is a Director or Member”, will this be a non compliance?