Loan to Director – Companies Amendment Act, 2017

The Companies (Amendment) Bill, 2017 is passed by Lok Sabha and Rajya Sabha on 27th July 2017 and 19th December, 2017 respectively and it Assent of Hon’ble President of India on 03rd January 2018.  The Companies (Amendment) Bill, 2017 has made significant Amendments to Companies Act, 2013 which includes amendment to Section 185 and 186 of Companies Act, 2013 related to Loans to directors, etc. In this Article I have tried to analyse the amendments to Section 185 and 186 of Companies Act, 2013. Readers can check Extract of  Section 185 of Companies Act, 2013 and amendment to Section 186 at the end of the article-

New amended Section 185 (1) of Companies Act, 2013

• Any director of Company, or of a Company which is its Holding Company or
• any partner or relative of any such director; or
• Any firm in which any such director or relative is partner.

New amended Section 185 (2) of Companies Act, 2013

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
• Provide any security in connection with any loan taken

Conditions:

a) Special Resolution passed by the Company in General Meeting

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

♣ Things to be mentioned in Explanatory statement while passing of Special Resolution:

√ Full Particular 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 other relevant facts

Sub-section 3 of New amended Section 185 of Companies Act, 2013: Nothing contained in sub-section (1) and (2) shall apply to–

Clause (a): Loan to Managing Director & Whole Time Director:

There are two ways to give Loan to Managing and Whole Time Director. The exception is extended to a particular class of directors, i.e. to the managing or whole-time directors only.

i. Loan can be given to a Managing or Whole-Time Director as a part of the condition of their service.

Condition: Conditions should be available for all the employees of the Company.

ii. Loan can be given to a Managing or Whole-Time Director pursuant to any Scheme.

Condition: Scheme should be approved by Shareholders by passing of Special Resolution.

Example: The Companies pass a resolution for appointment of Managing Director and it approves the terms and conditions of its appointment and if as a part of its terms, there is a loan which can be given to that director, then it falls under the exception given in section 185 of the Act.

Clause (b): Loan in Ordinary Course of Business:

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 year, five year or ten year government security closest to the tenor of the loan; or.

Clause (c): Loan by holding Company to its wholly own subsidiary Company:

Any loan made by a Holding Company to its Wholly own Subsidiary Company or any guarantee given or security provided by a Holding Company in respect of any loan made to its wholly own subsidiary Company.

Clause (d): Guarantee and Security by holding Company to its subsidiary Company:

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.

Condition: loan made under this clause utilized by the subsidiary company for its principal business activity only.

Sub-section 4: Punishment for violation–: According to sub-section 2 of Section 185 of the Act, if any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1):

(a) The Company shall be punishable with fine which shall not be less than 5 lakh rupees but which may extend to 25 lakh rupees, and

(b) 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 6 months or with fine which shall not be less than 5 lakh rupees but which may extend to 25 lakh rupees, or with both.

EFFECT OF AMENDMENT IN SECTION 185 VIDE THE COMPANIES AMENDMENT BILL, 2017 :

As per Companies Amendment Bill, 2017 following will be effects on Loan to director and person in whom director is interested:

1. Company can give loan, Guarantee, Security to person in whom director are interested after passing of special resolution in General Meeting.

Condition Company will use such money for the principle business activity of the Company.

Like: Private Company in which director is director or member. Exp. If person A is Director in Company XYZ Pvt Limited and PQR Private Limited. In such situation XYZ limited are allowed to give loan and guarantee to PQR limited after passing of special resolution.

2. Companies are still restricted to give loan, guarantee and security to

• Any director of Company, or of a Company which is its Holding Company or
• any partner or relative of any such director; or
• Any firm in which any such director or relative is partner.

3. The term “any person in whom any of the director of the Company is interested” has been changed.

Definition as per Companies Act, 2013	Definition as per Companies Amendment Act, 2017
Any other director of the lending company,
Any director of the holding company of the lending company
Any partner or relative of such director
Any private company of which director is a director or member	Any private company of which director is a director or member
Body Corporate in which 25% or more voting power rests with one or more directors	Body Corporate in which 25% or more voting power rests with one or more directors
Body Corporate whose Board accustomed to act on directions of BOD or Directors of lending company.	Body Corporate whose Board accustomed to act on directions of BOD or Directors of lending company.

New Section 186:

Subsection (1) shall be omitted

Sub Section (2): In sub-section 2 the word “Person” does not include any individual who is in the employment of the Company;

Sub Section (3): Where aggregate of any Loan & Guarantee or providing any security or the acquisition exceeds the limit mention in sub section 2 then no investment or loan shall be made or guarantee shall be given or security shall be provided unless previously authorised by a Special Resolution passed in the General Meeting.

Exemption to Sub Section (3):

Proviso: This sub-section 3 will not apply to

• Where a Loan or guarantee is given or Where security has been provided by a Company to

√ its wholly owned subsidiary Company or

√ Joint Venture Company; or

• Where any acquisition is made by a holding Company, by way of subscription, purchase or otherwise of the securities of its wholly owned subsidiary Company,

Sub Section (11): Section 186 not applicable to followings:

EXTRACT OF  SECTION 185 OF COMPANIES ACT, 2013 AS AMENDED BY – COMPANIES AMENDMENT BILL, 2017

‘185. (1) 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,

(a) any director of company, or of a company which is its holding company or any partner or relative of any such director; or

(b) any firm in which any such director or relative is a partner.

(2) 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) 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

(b) the loans are utilised by the borrowing company for its principal business activities.

Explanation.—For the purposes of this sub-section, the expression “any person in whom any of the director of the company is interested” means‑

(a) any private company of which any such director is a director or member;

(b) any body corporate at a general meeting of which not less than twenty-five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or

(c) 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.

(3) Nothing contained in sub-sections (1) and (2) shall apply to

(a) the 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; 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 year, five year or ten year 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.

“(4) If any loan is advanced or a guarantee or security is given or provided or utilised in contravention of the provisions of this section,—

(i) the company shall be punishable with fme which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees;

(ii) every officer of the company who is in default shall be punishable with
iomprisonment 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 fme which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.

EXTRACT OF PROPOSED SECTION 186 OF COMPANIES ACT, 2013 AS AMENDED BY – COMPANIES AMENDMENT BILL, 2017

62. In section 186 of the principal Act,—

(i) in sub-section (2), the following Explanation shall be inserted, namely:—

‘Explanation.—For the purposes of this sub-section, the word “person” does not include any individual who is in the employment of the company.;

(ii) for sub-section (3), the following sub-section shall be substituted, namely:

‘(3) Where the aggregate of the loans and investment so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate along with the investment, loan, guarantee or security proposed to be made or given by the Board, exceed the limits specified under sub-section (2), no investment or loan shall be made or guarantee shall be given or security shall be provided unless previously authorised by a special resolution passed in a general meeting:

Provided that where a loan or guarantee is given or where a security has been provided by a company to its wholly owned subsidiary company or a joint venture company, or acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the securities of its wholly owned subsidiary company, the requirement of this sub-section shall not apply:

Provided further that the company shall disclose the details of such loans or guarantee or security or acquisition in the fmancial statement as provided under sub-section (4).”.

(iii) for sub-section (11), the following sub-section shall be substituted, namely:

“(11) Nothing contained in this section, except sub-section (1), shall apply‑

(a) to any loan made, any guarantee given or any security provided or any investment made by a banking company, or an insurance company, or a housing fmance 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 of providing infrastructural facilities;

(b) to any investment‑

(i) made by an investment company;

(ii) made in shares allotted in pursuance of clause (a) of sub-section (1) of section 62 or in shares allotted in pursuance of rights issues made by a body corporate;

(iii) made, in respect of investment or lending activities, by a non-banking fmancial company registered under Chapter III-B of the Reserve Bank of India Act, 1934 (2 of 1934) and whose principal business is acquisition of securities.”;

(iv) in the Explanation, in clause (a), after the words “other securities” the following shall be inserted, namely:

“and a company will be deemed to be principally engaged in the business of acquisition of shares, debentures or other securities, if its assets in the form of investment in shares, debentures or other securities constitute not less than fifty per cent. of its total assets, or if its income derived from investment business constitutes not less than fifty per cent. as a proportion of its gross income.”.

(Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com). 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

Republished with Amendments