FACTS:
1) M/s. ABC Private Limited (The Company) incorporated on 1st April 2011 under the Companies Act, 1956 engaged in the business of trading of medical devices.
2) X is a Managing Director of the Company.
3) The Company has given a salary advance of INR 5 Lacs to Mr. X during FY 2021-22.
4) The Company has also given the advance amount of INR 1 Lac to Mr. X during FY 2021-22 for incurring day to day expenses of the Company;
QUERIES:
1) Whether salary advance to the Managing Director will hit the provisions of Section 185 and Section 186 of the Companies Act, 2013;
2) If yes, which compliances are required to be followed by the Company and the Director;
3) Which compliances are required to be followed by the Company for giving of advance to the Directors for day-to-day expenses;
4) Salary advances to the normal directors other than managing director or whole-time director will be covered under the provisions of Section 185 and Section 186 of the Companies Act, 2013.
ANALYSIS:
1) Section 185 of the Companies Act, 2013 deals with “Loan To Directors”. As per the said provisions, no company can advance any loan to any director of the Company.
However, nothing contained in this section is applicable to giving of loan to a Managing Director 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 the members by a special resolution;
2) Section 186 of the Companies Act, 2013 deals with “Loan and Investment by Company”. As per the said provisions, approval of board and/or shareholders is required for giving of loan to any person.
Approval of shareholders by way of special resolution is required in case the amount of loan exceeds 60% of paid-up capital, free reserves and securities premium account or 100% of free reserves and securities premium account, whichever is more.
3) Both the above sections talk about “LOAN”. There is no mention of “ADVANCE OR SALARY ADVANCE” in the said provisions. Though loans and advances are not defined under the Companies Act, 2013, both the terms have different meanings.
So, the main question remains unsolved here. Whether salary advance is a loan?
4) The Ministry of Corporate Affairs (MCA) had issued a specific circular on 10th March 2015 about advance against salary.
The circular states that “The Ministry has received a number of references seeking clarifications on the applicability of provisions of section 186 relating to grant of loans and advances to the employees. The issue has been examined and it is hereby clarified that loans and/or advances made by the companies to their employees, other than the managing or whole-time directors (which is governed by section 185) are not governed by the requirements of section 186 of the Companies Act, 2013.
EXEMPTIONS:
1) MCA, vide notification dated 5th June 2015 exempts the applicability of Section 185 to the private companies:
a) in whose share capital no other body corporate has invested any money;
b) if the borrowing of the company from banks and financial institutions is less than twice of its paid-up share capital or INR 50 crore, whichever is lower and
c) the company has no default in repayment of borrowings.
2. Section 185 is not applicable for giving of loan to a Managing Director or Whole Time Director:
a) as a part of the conditions of service extended by the company to all its employees or
b) pursuant to any scheme approved by the members by a special resolution:
CONCLUSIONS:
After analysing the facts and provisions, we may conclude that:
1) Whether salary advance to the Managing Director will hit the provisions of Section 185 and Section 186 of the Companies Act, 2013:
– From the circular dated 10th March 2015, it is clear that advances given to employees other than Managing Director and Whole-Time Director are exempt. Hence, salary advance received by the Managing Director and Whole-Time Director from company will attract the provisions of 185 and 186 of the Act.
2) If yes, which compliances are required to be followed by the Company and the Managing Director:
– Compliances under Section 185:
a) Pursuant to the exemptions given under Section 185 of the Companies Act, 2013, no compliances are required to be followed in case the loan is given as a part of the conditions of service extended by the company to all its employees (as a part of company’s policy for its employee and the same is mentioned in employment letter).
b) Approval of shareholders by way of special resolution is required for approving the loan under any scheme.
– Compliances under Section 186:
a) Approval of Board of Directors in the Board Meeting;
b) Approval of shareholders in the general meeting by way of special resolution in case the amount of loan exceeds 60% of paid-up capital, free reserves and securities premium account or 100% of free reserves and securities premium account, whichever is more;
c) Interest is to be charged on such salary advance at a rate not lower than the prevailing yield of one year, three-year, five-year or ten-year Government Security closest to the tenor of the loan;
3) Which compliances are required to be followed by the Company for giving of advance to the Directors for day-to-day expenses?
– No compliances are required for giving of advance for day-to-day expenses of the company as the same shall be adjusted against the actual expenses made for the company.
4) Salary advances to the normal directors other than managing director or whole-time director will be covered under the provisions of Section 185 and Section 186 of the Companies Act, 2013:
– All the executive director and the other directors who are in payroll of the company and are employed under the employment agreement shall be treated as employee of the Company. Thus, salary advance to such employee directors will not be covered under Section 185 and 186 of the Companies Act, 2013.
However, the salary advance given to the independent directors or to the other directors not covered under the employment agreement of the company will be considered as loan given to the directors which is not allowed under Section 185 of the Companies Act, 2013.
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Author Bio
Very informative.