Advancing Loan/ Giving Guarantee, providing Security in connection with a loan to director or person in whom director are interested.
In accordance with the provision of Section 185 of Companies Act, 2013, Save as otherwise provided in this Act, a Company shall not, directly or indirectly, advance any loan, including any loan represented by a Book Debt to any of its directors or to any other person in whom the Director is interested or give any guarantee or provide security in connection with any loan taken by him or such other person.
1. Effective Date: – This Section notified by MCA on 12th day of September, 2013 and effective from 12.09.2013
2. Before Amendment:- As per Companies Act 1956, Companies used to grant loans, guarantees and securities to their subsidiaries Companies on a prior permission of Central Government. However, in case of any issue, Subsidiaries were left on their own to tackle it.
3. That’s when Section 185 of the Companies Act was formed putting certain restrictions for granting loans.
4. Section 185(1) of the Companies Act, 2013 states that a company cannot:
1. Advance any loan directly or indirectly,
2. Advance loan that includes a loan represented by a book debt,
3. Gives Security or provide loan in connection to any loan taken
To a director, director of its holding company, relative, partner of any director or any firm in which a director is interested.
5. Section 185(2) states that a Company shall not provide loan to the following category of person:-
1. Director of Lending Company, its Holding Company, Partner or Relative on any such director
2. Firm in which Directors are interested
3. Private Company of which any such director is a director or member
4. Body Corporate at a general meeting of which not less than 25% of the total voting power is exercised or controlled by any such director, or by two or more such directors together.
5. Any Body Corporate, the board of Director, 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.
6. Section 185 (3) provides exceptions to the restriction on the company for granting loans:-
1. Loans to the Managing Director or Whole time Director: as a part of conditions of service extended by the company to all of its employees or pursuant to any scheme approved by the members of the company by a Special Resolution.
2. Loans to Subsidiary Company: Where the holding company grants the loans, guarantee or security to its wholly owned subsidiary company, which uses the same for its principal activity of business only.
3. Loans to companies as part of Ordinary Business: the interest on such loans advanced is charged at a rate not lesser than the rate of prevailing yield of one year, three year, five years or ten years closest to the tenor of the loan
4. Loans given by the Bank and Financial Institutions to Subsidiaries: Where the holding company provides security or guarantee or security with respect to the loan made by the bank or any financial institution to the subsidiary company. The loans must be utilised for the Subsidiary’s Principal activity of the business.
7. Section 185(4) deals with Penalty Provisions:-
1. The Lending Company will be punished with the fines of less than 5 Lakh; this may extend to Rs. 25 Lakh
2. Every Officer who would be in default shall be liable to be punished with imprisonment which may extend to Six months or with fine which shall not be less than Rs. 5 Lakhs, but may also extend to Rs. 25 Lakh.
3. A person or any person related to the director to whom any loan is advanced or Security is given will be liable to be punished with the imprisonment for Six Months or with fine which shall not be less than Rs. 5 Lakh, but may also extend to Rs. 25 Lakh.
8. Following Procedure to be followed for advancing any loan/ giving guarantee or providing security in connection with a loan to director or person to whom director is interested under this section and Rule No. 10 of the Companies (Meetings of Board and its powers) Rules, 2014–
1. Issue not less than 7 days notice and agenda of Board Meeting, or a shorter notice and agenda in case of urgent business, in writing to every director of the company at his address registered with the Company and call a Board Meeting to consider the proposal for advancing loan, giving guarantee or providing security in connection with a loan to director or person to whom director is interested.
2. Hold a meeting of the Board of Directors-
i. To pass the necessary Board Resolution for approving the advancing loan/ giving guarantee or providing security in connection with a loan to director or person in whom director is interested.
ii. To authorize Company secretary or any director to sign and file the relevant form, if applicable with the Registrar of Companies and to do such acts, deeds and things as may be necessary to give effect to the Boards decision.
iii. Prepare and circulate draft minutes within 15 days from the date of conclusion of the Board Meeting, by hand/speed post/registered post/courier/e-mail/to all the directors for their comments. Also follow the procedure prescribed for preparing, circulation, signing and compiling of Board Minutes (as per Secretarial Standards-1, SS1)
iv. In case of a Public Company, file a certified copy of the Board Resolution approving the advancing loans/giving security or providing security in connection with a loan to director or person in whom director is interested with the Registrar in Form No. MGT-14 under Section 117 of the Act along with the fee as provided in the Companies Rules, 2014 within 30 days of passing the Board Resolution. [Section 117(3)(g)read with section 179(3)(f)].
v. Make necessary entries regarding advancing loan/giving guarantee/providing security in connection with a loan to director or person in whom director is interested in the Registrar of Loans, Guarantee, Security and Acquisition made by the company within Seven days of making such loan/ giving guaratee/ providing security. ( Rule 5(4) of Companies Rules, 2014)
9. Conclusion:– Hence we can say that Section 185 is framed in such a way that safeguards the interest of Shareholder of the company by prohibiting loan or guarantee or providing security given by the company. It also provides exemption and relaxations for ease of doing business.
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