Provision of Companies Act, 2013 related to Lending by Companies as amended by Companies (Amendment) Act, 2017

Section 185 – New Provisions with respect to giving loans or Providing any guarantee/security by the companies (made applicable with effect from 7th May 2018).

With effect from 7th May 018

Section 185 newly substituted, as under :

  • No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by, –
  • Any director of company, or of a company which is its holding company or any partner or relative of any such director.

Catch :  No loan/ guarantee to Director of company or director of holding company or any partner or relative of Director

  • Any firm in which any such director or relative is a partner.

Catch : No loan/ guarantee to any FIRM in which Director of company or director of holding company or any of his/her relative is PARTNER

  • A company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the director of the company is interested, subject to the condition that –
  • A special resolution is passed by the company in general meeting.

Provided that the explanatory statement to the notice for the relevant general meeting 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; AND

  • The loans are utilised by the borrowing company for its principal business activities.

Explanation. – For the purpose of this sub-section the expression “any person in whom any of the director of the company is interested” means –

  • Any private company of which any such director is a director or member.
  • Any body corporate at a general meeting of which not less that twenty-five percent of total voting power may be exercised or controlled by any such director or by two or more such direcotrs, together; or
  • 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.

Catch :  Loan/ guarantee may be given by the company, if – 

1. Lending company has passed special resolution in a general meeting, held after communicating details of such loan by way of explanatory notes to the notice of such general meeting,  

AND

2. Borrowing company use the borrowed fund for its principal business activities. (In loan agreement this clause must be inserted as a safety measure).

This Loan/guarantee can be given only to any of the following categories of persons

Category 1 Borrowing company is a Private Company in which any such Director is a director or member.

Category 2 Borrowing company is a body corporate in which not less than 25% of voting rights is exercised by the director or directors of lending company.

Category 3 Borrowing company is a body corporate of which directors/managing director/manager is accustomed to act on the instruction of board of directors or any director of the lending company.

  • Nothing contained in sub section 1 and 2 shall apply to –

(a) the giving of any loan to a managing or whole-time director

  • 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 rate of prevailing yield of one year, three years, five years or ten years Government security closest to the tenor of the loan;

OR

(c) 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

(d) any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company:

Provided that the loans made under clauses (c) and (d) are utilised by the

subsidiary company for its principal business activities.

Catch : No restriction in giving loan to MD/WTD as a part of the condition of service for ALL employees of the company (It should be applicable to ALL employees and not specifically for MD/WTD if not approved by members as special resolution in a general meeting).

No restriction in giving loan/providing guarantee/security if it is a normal business activity of lending company, such as NBFC. But interest should be charged according to yield on government securities of similar tenure.

No restriction in giving loan/providing guarantee/security by a holding company to its wholly owned subsidiary, provided the subsidiary company use this facility for its principal business activities.

  • If any loan is advanced or a guarantee or security is given or provided or utilised in contravention of the provisions of this section,—
  • the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees;
  • every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees;

AND

(iii) the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.

Penalty : To the lending company

Minimum Rs. 5 Lakhs, Maximum upto Rs. 25 Lakhs.

To the every officer of the lending company

Either imprisonment upto SIX months

OR

Fine of Minimum Rs. 5 Lakhs, Maximum upto Rs. 25 Lakhs.

To the borrowing side

To the director or other person of the borrowing entity who has availed benefit

Either imprisonment upto SIX months

OR

Fine of Minimum Rs. 5 Lakhs, Maximum upto Rs. 25 Lakhs

OR

Both.

(Author – CA Rajesh K Khetan (FCA, ACMA, DISA) – Past Chairman of Patna Branch of ICAI)

Author Bio

Qualification: CA in Practice
Company: Khetan Rajesh Kumar & Co.
Location: Patna, Bihar, IN
Member Since: 03 Sep 2019 | Total Posts: 2

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