Introduction:

The Companies (Amendment) Act 2017 (The Amendment Act) seeks to make sweeping changes in the Companies Act 2013. The amendments are directed primarily to clarify and harmonies the variegated ambiguities and overlaps that existed between the Companies Act 2013, the Companies Rules and the SEBI Regulations. Some amendments are also aimed to facilitate ‘ease of doing business’. The Bill was passed by the Lok Sabha on 27th July 2017 and by the Rajya Sabha on 19th December 2017 and received Presidential assent on 3rd January 2018.

This article seeks to analyse Section 185 of Companies Act, 2013, before and after the Companies Amendment Act 2017. An effort is also made to ascertain the impact of the amendment in Section 185 vide Companies Amendment Act 2017 on other provisions of the Companies Act 2013.

Note: While analysing the impact on other provisions , the other provisions are considered in their post Amendment form.

SR.

NO.

Particulars Old provision New provision Remark
1. Whether the Company can advance loan, or provide guarantee or security to:
a) Director of the Company NO NO
b) Director of holding Company NO NO
c) Partner of the Director of the Company NO NO
d) Relative of the Director of the Company NO NO
e) Firm in which Director is a partner NO NO
f) Firm in which Relative of Director is a partner NO NO
g) Private company in which Director is a director NO YES Subject to Conditions *
h) Private company in which Director is a member NO YES Subject to Conditions *
i) Body Corporate at a general meeting of which not less than 25% of the total voting power may be exercised or controlled by any director, or by two or more directors, together NO YES Subject to Conditions *
j) 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

 

NO YES Subject to Conditions *
2. Conditions for Companies ordinarily engaged in providing loans, guarantees or securities Rate of interest of loan > bank rate Rate of interest > prevailing yield of 1 year, 3 year, 5 year or 10 year government security
3. Penalty for contravention
a) Company YES YES Rs. 5,00,000 to Rs. 25,00,000
b) Director or other person to whom loan, guarantee or security advanced YES YES Imprisonment extending to 6 months and/or fine of Rs. 5,00,000 to Rs. 25,00,000
c) Officer of the Company in default NO YES Imprisonment extending to 6 months or fine of Rs. 5,00,000 to Rs. 25,00,000

* To advance loans or provide guarantee or security, the Company is subject to following conditions:

i) Prior shareholders’ approval is required by passing a special resolution in a general meeting,

ii) The explanatory statement of the notice of the general meeting shall contain the detailed disclosures regarding the transaction

iii) The loan, guarantee or security shall be utilised by the borrowing company for its principal business.

Impact on other provisions :

Section 102

The explanatory statement accompanying the notice of the general meeting where the resolution to approve provision of the loan, guarantee or security to a person in whom director is interested, shall disclose the full particulars of the loans given, or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security and any other relevant fact

Section 114

The company shall have to pass a special resolution in general meeting for approving provision of loan, guarantee or security to person in whom director is interested.

Section 117

The company shall have to file form MGT-14 with the ROC in respect of the special resolutions approving provision of loan, guarantee or security to person in whom director is interested.

Section 134

The company shall disclose the particulars of loans, guarantee or security provided to persons in whom directors are interested in its board report u/s 134(3)(g).

Section 177

As per Subsection 4(v), the audit committee will have to scrutinise the loans provided to persons in whom director is interested, as they would come under inter corporate loans.

Section 179

As per subsection 3f), the board of directors can approve giving of loans or guarantees or securities by a bord resolution. However, inorder to approve loans or guaranty or security to any person in whom director is interested, approval will be via special resolution in general meeting.

Section 184

i) In case the loan, guarantee or security is advanced to a body corporate where a director holds not less than 2% of the shareholding, he shall disclose the nature of his direct or indirect concern or interest if any in form MBP-1 at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting

ii) Where any director who is not so concerned or interested at the time of advancing such loan, guarantee orsecurity, he shall, if he becomes concerned or interested after the loan, guarantee or security has been provided, disclose his concern or interest forthwith when he becomes concerned or interested or at the first meeting of the Board held after he becomes so concerned or interested

iii) In case a director fails to disclose his concern or interest or participates in the meeting stated in clause i), the contract of loan, guarantee or security provided, shall be voidable at the option of the company

iv) If a director of the company contravenes the provisions enshrined in clause i) or ii), such director shall be punishable with imprisonment for a term which may extend to one year or with fine which may extend to one lakh rupees, or with both

Section 186

i)Loan, guarantee or security given to persons in whom director is interested will come under limit of 60% or 100%

ii) Company shall have to disclose in financial statements complete particulars

iii) If term loan is subsisting from financial institution, approval of that institution is required: in case company has defaulted in the term loan and the loan given exceeds the aggregate limits

iv) loan shall be given at a rate of interest 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

v) The company cannot provide the loan or guarantee or security if it has defaulted in repaying of deposits

vi) The company shall maintain a register in Form MBP 2 and enter therein separately, the particulars of loans and guarantees given, securities provided. The entries shall be made chronologically within 7 days of giving the loan, guarantee or security.

vii) In loan, guarantee or security is given in contravention of the provisions of the Section, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees

viii) The provisions of this Section shal not be applicable, in case the company giving the loan or providing the guarantee or security is

a. A banking company or an insurance company or a housing finance company in the ordinary course of its business or a company established with the object of and engaged in the business of financing industrial enterprises, or

b. A government company engaged in defence production, or

c. An unlisted government company which has obtained the approval from the concerned department or ministry.

Interest

Rate of interest as per Section 186 for the loan shall be 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

Section 188

The transaction of giving loan, guarantee or security to persons in whom director is interested shall not fall under related party transactions u/s 188. Hence, provision of omnibus approval by audit committee shall not apply. Author details:

(Author: Turab Chimthanawala (ACS, BA LLB), Contact Details: Email: turabhvc@gmail.com)

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Tags : Companies Act (2469) Companies Act 2013 (2242)

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