Loan to Directors etc. Exemption to Private Company by Notification June 5, 2015-Whether still available after Companies (Amendment) Act, 2017

[Ref: Exemption Notification No GSR 464(E), June 5, 2015 & 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.

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.

Notifications Companies
Notification No. GSR 463(E), dated 05.06.2015 Exemption to Government Company
Notification No. GSR 464(E), dated 05.06.2015 Exemption to Private Company
Notification No. GSR 465(E), dated 05.06.2015 Exemption to Nidhi Company

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.

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.

It is stated that these Notifications were issued prior to substitution of Section 185 by 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.

The aforesaid amendments were based on suggestions of the CLC in its report dated 1st February 2016, with the aim to strengthen corporate governance and ease doing business in the country.

As Section 185 of CA, 2013 has been completely substituted with new provisions w.e.f May 07, 2018, therefore, there is a question mark on the Exemption Notification No GSR 464(E), June 5, 2015. Whether the said exemption notification is still in force and the exemption provided by the said notification shall be continued even Amendment in Section 185 by Amendment Act, 2017?

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.

The recommendation of CLC regarding loan to directors may reproduced before for reference:

“Loans to Directors, etc.

12.14 The Committee acknowledged that there are difficulties being faced in genuine transactions due to the complete embargo on providing loans to subsidiaries with common directors, but at the same time there is no doubt that the route has been misused in the past for siphoning of funds by controlling shareholders. The Committee noted that limited relaxation has already been provided to private companies not having other body corporates invested in them and therefore any further relaxation should be subject to greater safeguards. The Committee, therefore, recommended, that it may be considered to allow companies to advance a loan to any other person in whom director is interested subject to prior approval of the company by a special resolution. Further, loans extended to persons, including subsidiaries, falling within the restrictive purview of Section 185 should be used by the subsidiary for its principal business activity only, and not for further investment or grant of loan.

12.15 The Committee also felt that there was no rationale as to why the interest rate prescribed in the proviso (b) to Section 185(1) should not be aligned with the rate prescribed under Section 186(7). Thus, it recommended that this be aligned, keeping in mind further changes suggested to the provision, in the succeeding paragraphs dealing with other issues in Section 186.”

Remark: In the background of above, one can opine that even after completely substitution of existing Section 185 with new provisions w.e.f May 07, 2018 vide Notification No. S.O. 1833(E) dated 7th May, 2018, exemptions to Private Limited Companies are still available. Private Limited can take benefit of exemption for their business by fulfilling three conditions mentioned in Exemption Notifications.

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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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