SHORT SUMMARY:

Section 185 of Companies Act been Fully substituted vide Companies Amendment Act, 2017 and same been made applicable vide notification no. S.O. 1833(E) dated 7th May, 2018. Since 7th May there is one confusion in the mind of professionals, corporates etc i.e. “Whether after notification of new section 185 exemptions available to private limited companies by notification dated 05th June, 2015 in respect of section 185 shall be available or not?”

Article focuses on Section 185 of Companies Act, 2013 as amended by Companies Amendment Act, 2017 on the issue whether Exemptions are available to private limited companies u/s 185 as per notification?

Sr No. This Article has been divided into Five parts
I Provisions as per Exemptions Notification
II Provisions as per Companies Amendment Act, 2017
III Restriction on Private Limited Companies ever after new Section 185
IV Benefit if Exemptions are still available vice versa

PART –I – Exemption Notification

As per Exemption notification issued by MCA on 05th June, 2015, Section 185 shall not applicable on Private Limited Companies, if It fulfil the conditions mentioned therein.

Conditions as mentioned below:

Exemption in section 185

Effect on Exemption

Note:

As per above mentioned digammas’, Loan to Directors and enteritis in which directors are interested is possible in case of private limited companies, after fulfilling of above mentioned all 3 conditions.

In Simple Word w.e.f. 05th June, 2015 if Private Limited Company fulfilling above mentioned all three conditions simultaneously then provisions of Section 185 shall not applicable on such Private Limited Company. They can freely give Loan/ Guarantee/ Security by complying with provisions of Section 186 and any other provisions of Companies Act, 2013.

PART –II – Provisions as per Companies Amendment Act – 2017

Section 185 of Companies Act, 2013 has ben completely substituted by New Section 185 under Companies Amendment Act, 2017 (CA, 2017 got president assent on 3rd January, 2018. Due to Complete substitution there are many changes under this section as mentioned below.

Language of Section 185:

(1)  No Company ( Private & Public)

  • Directly or Indirectly
  • Advanced any loan, including Bood Debt
  • Or any Guarantee or provide any security in connection with any loan taken by

Following Persons

i. Any director of Company, or

ii. Any director of a Company which is its Holding Company, or

iii. Any partner of Director of lender company, or

iv. Any relative of Directors of Lender Company, or

v. Any firm in which any of Director of Lending Company is Director, or

vi. Any firm in which any relative of Director of lending Company is Director.

Points to be Kept in Mind while Complying according to this Section

a) This Subsection applicable on Public Limited as well as Private Limited Company (whether small, OPC, Start ups etc.)

b) Guarantee or Security in respect of only ‘Loan’ is covered.

c) Only individuals/ firms are covered in sub section 1.

d) Companies / body corporates are not covered in above sub section

(2)  Following loan can be given by company to Any Person in whom directors are interested after fulfilling the Conditions mentioned below:

  • Advance any loan, including loan represented by a book debt
  • Give any guarantee in connection with any loan taken
  • Provide any security in connection with any loan taken

Any Person:

i. Any Private Company of which any such Director is a Director or member;

ii. Body Corporate in which 25% or more voting power rests with one or more directors;

iii. Body Corporate whose Board accustomed to act on directions of BOD or Directors of lending company

Conditions:

i. Special Resolution passed by the Company in General Meeting.

ii. The loans are utilized by the borrowing company for its principal business activities.

Points to be Kept in Mind while Complying according to this Section

a) If borrower is Private Limited Company having common directors/ members then by using this sub section loan can be given.

b) Body Corporate includes LLPs, threfore as per, point (ii) of any person L/G/S can be given to LLP also. [Condition 25% or more voting power vested with one or more director of lender Company together].

Note:

As per above mentioned provisions, As per new Section 185(2) Company can give loan to persons in whom directors are interested after passing of Special Resolution however, still there is restriction on loan/ guarantee to directors or relative of Directors.

PART –III – Restrictions under New Section 185

Therefore, one can say that, Even after New Section 185 w.e.f. 7th May, 2018 there are following restrictions:

1. A Company (including private Limited) can’t give Loan to Directors or Relatives of Directors.

2. A Company (including private Limited) can’t give Loan to Firms in which Directors or relative of Directors are interested.

3. Company can give loan to Companies in which Directors are interested as covered in section 185(2), By passing of Special Resolution and borrowing company shall use only for business purposes.

Note:

Therefore, If we assume that exemption notification shall not available to private limited Company in such case after 07th May, 2018 private limited company shall not be allowed to give loan to directors, loan to entities in which directors are interested without complying with provisiosn of Section 185(2) and many more restrictions shall be there.

PART –IV – Benefits, if Exemptions shall be available

As mentioned above, it is clear that if Exemption shall not be available to private limited Companies w.e.f. 07th May, 2018 then it will be difficult for private limited companies to give loan, guarantee, and security to directors or relative of Directors.

Therefore we can opine that…………….

If Private Limited Company fulfills all the 3 conditions mentioned in Exemption Notification dated 05th June, 2015 then new Section 185 of Companies Act, 2013 “Shall not be available on such Private Limited Company”

Therefore, we can further opine that ………………….

Category of Loan Section 185 of Companies Amendment Act, 2017 Exemption Notification
Loan to directors Not Allowed to Give Allowed to Give
Loan to Relative of Directors Not Allowed to Give Allowed to Give
Loan to Firm in which Director / relatives are partners Not Allowed to Give Allowed to Give
Loan to  Private Company in which Such Director is Director Allowed after passing of Special Resolution along with conditions Allowed to Give without any compliance and conditions u/s 185
Loan to  Private Company in which Such Director is Member Allowed after passing of Special Resolution along with conditions Allowed to Give without any compliance and conditions u/s 185

CONCLUSION: Hence, one can opine that even after notification of new Section 185 exemptions to private Limited Companies are still available. Private Limited can take benefit of exemption for their business by fulfilling 3 conditions mentioned in Exemption Notifications.

(Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at [email protected]). Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION

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