Loan to Directors etc. – Deletion of Non-obstante clause by the Companies (Amendment) Act, 2017 

Section 185 of the Companies Act, 2013 (CA, 2013) was notified on September 12, 2013 and came into force on the same date replacing the old Section 295 of the Companies Act, 1956 (Erstwhile Act) which provides for loans to directors.

With the introduction of CA, 2013, Section 185 of thereof, being a prohibitory section, was of great importance for the Companies. There was no scope/ any route to apply to Central Government’s approval for non-applicability of such restrictions unlike Section 295 of the Erstwhile Act. Section 185 was introduced along with the applicability to both pubic as well as private companies, which was totally unacceptable by Private Companies.

Later on, Section 185 was amendment by Companies (Amendment) Act, (“Amendment Act, 2015”) w.e.f. 29.05.2015 by which a new clause (c) & (d) in the proviso to Section 185 of the CA, 2013 were inserted and an exemption was provided to Holding Company in respect of “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”.

It is also provided by the Amendment Act, 2015 in new clause (d) that “any guarantee given or security provided by a Holding Company in respect of loan made by any bank or financial institution or its Subsidiary Company. Provided that the loans made under clause (c) and (d) are utilised by the Subsidiary Company for its principal business activities”.

Thereafter, various Notifications were issued to give further exemptions to following Companies subject to the terms and conditions mentioned therein. The Ministry of Corporate Affairs (“MCA”) vide Exemption Notification No GSR 464(E), June 5, 2015 exempted ‘Private Companies’ form the provisions of section 185 which brought great relief to the ‘Private Companies’, however, such relief is even subject to stipulated conditions.

In exercise of the powers conferred to clauses (a) and (b) of sub-section (1) of Section 462 and in pursuance of sub-section (2) of said section of the CA, 2013, the Central Government has issued Exemption Notification No GSR 464(E), June 5, 2015, by which certain provisions of the CA, 2013 shall not apply or shall apply with such exceptions, modifications and adaptations, as specified in such Notification.

As per the said Exemption Notification No GSR 464(E), June 5, 2015

“In case of Private Companies Section 185 shall not apply to a private company-

(a) In whose share capital no other body corporate has invested any money;

(b) If the borrowing of such a company from banks or financial institutions or anybody corporate is less than twice of its paid-up share capital or fifty crore rupees, whichever is lower; and

(c) Such a company has no default in repayment of such borrowings subsisting at the time of making transactions under this section.”

In simple word, w.e.f. 05th June, 2015 if a 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 CA, 2013.

The Companies (Amendment) Act, 2017.

With the recommendation of the Company Law Committee (“CLC”) constituted by MCA, CA, 2013 got amended via Companies (Amendment) Act, 2017 (“Amendment Act, 2017”) effective from May 07, 2018. The Amendment Act, 2017 has brought many changes, out of these one Section 61 of the Amendment Act, 2017 completely substituted the existing Section 185 with new provisions w.e.f May 07, 2018 vide Notification No. S.O. 1833(E) dated 7th May, 2018.

In this regard, it is important to note that the Amendment Act, 2017 was brought on the recommendation of CLC, with the aim to strengthen corporate governance and ease doing business in the country.

It is stated that before the Amendment Act, 2107 the provision of Section 185 of CA, 2013 was started with the following words “Save as otherwise provided in this Act, no company…..”, which  was provided that if there is any other provision of the Act permitting lending as covered by the section then such specific permission shall prevail over this section.

Whereas, Section 186 of the CA, 2013 was stared with “without prejudice to the other provisions”. Therefore, there was a confusion in CA, 2013 whether section 186 of the CA, 2013 shall prevail over the Section 185.

As Section 185 of CA, 2013 has been completely substituted with new provisions w.e.f May 07, 2018, therefore, therefore there is no confusion such as earlier after the Amendment Act, 2017.

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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.

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