Loan to Holding Company [Section 185]

Short Summary

In this article author analyses provisions of Section 185 of Companies Act, 2013 as substituted by Companies Amendment Act, 2017 related to Loan to Holding Companies.

Language of Section 185:

(1)  No Company ( Private & Public)

• Directly or Indirectly
• Advanced any loan, including Book Debt
• Or any Guarantee or provide any security in connection with any loan taken by

Following Persons

i. Any director of Company, or

ii. Any director of a Company which is its Holding Company, or

iii. Any partner of Director of lender company, or

iv. Any relative of Directors of Lender Company, or

v. Any firm in which any of Director of Lending Company is Director, or

vi. Any firm in which any relative of Director of lending Company is Director.

Points to be Kept in Mind while Complying according to this Section

a) This Subsection applicable on Public Limited as well as Private Limited Company (whether small, OPC, Start ups etc.)

b) Guarantee or Security in respect of only ‘Loan’ is covered.

c) Only individuals/ firms are covered in sub section 1.

d) Companies / body corporates are not covered in above sub section

(2)  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 in connection with any loan taken
• Provide any security in connection with any loan taken

Any Person:

i. Any Private Company of which any such Director is a Director or member;

ii. Body Corporate in which 25% or more voting power rests with one or more directors;

iii. Body Corporate whose Board accustomed to act on directions of BOD or Directors of lending company

Conditions:

i. Special Resolution passed by the Company in General Meeting.

ii. The loans are utilized by the borrowing company for its principal business activities.

Points to be Kept in Mind while Complying according to this Section

a) If borrower is Private Limited Company having common directors/ members then by using this sub section loan can be given.

b) Body Corporate includes LLPs, threfore as per, point (ii) of any person L/G/S can be given to LLP also. [Condition 25% or more voting power vested with one or more director of lender Company together].

(3) Restrictions of Sub Section (1) and (2) shall not be applicable on following transactions:

i. 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 Give any guarantee in connection with any loan taken

ii. 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.

Conditions:

In case of Guarantee on behalf of Subsidiary loan made under this clause utilized by the subsidiary company for its principal business activity only.

Section 185 of Companies Amendment Act, 185 Divided into 3 (three) Parts:

√ Subsection 1: This Subsection states about “Restricted Entities” to give Loan, provide Security or Guarantee under Companies Act, 2013. This Subsection includes only “Individuals” and “Firms”.

√ Subsection 2: This Subsection states about “loan to Private Company / Body Corporate” by following compliances.

√ Subsection 3: This Subsection states about “entities Loan/ Guarantee/ Securities to whom allowed” without complying with the conditions of Subsection 2.

NOTE: It can be opine that entities which are not covered under above 3 situations are free to Give Loan/ Guarantee / Securities without any default / compliance of Section 185.

Points to be kept in Mind – In case of Dealing with HOLDING u/s 185

As per Sub Section 2 (mentioned in detailed above) lender Company (may or may not be subsidiary) can given loan to borrower Company subject to conditions mentioned there.

Situations for Analysis:

Whether Lender Company (i.e. Subsidiary) can give Loan/Guarantee/ Security to Holding Company in any of the below mentioned situations:

i. Where Directors of Lender Company are Directors or shareholder of Holding Company.

a. Holding Company Private Limited

b. Holding Company Public Limited

ii. Where directors of lender company are not directors or shareholder of holding Company.

Situaion – I

i. Where Directors of Lender Company are Directors or shareholder of Holding Company.

SOLUTION:

a. Not fall u/s 185(1)

b. Not fall u/s 185(3)

c. May or May not fall u/s 185(2)

Holding Company is Private Limited Company: In case holding Company (Borrower) is Private Limited Company. Lender (Subsidiary) can give loan to such holding Company by complying with conditions of sub section 2 of Section 185. Condition:

i. Special Resolution passed by the Company in General Meeting.

ii. The loans are utilized by the borrowing company for its principal business activities.

Holding Company is Public Limited Company: In case holding Company (Borrower) is Public Limited Company. Lender (Subsidiary) can give loan to such holding Company because such transaction shall not fall u/s 185.

Situation – II

ii. Where directors of lender company are not directors or shareholder of holding Company.

SOLUTION:

The above mentioned situation doesn’t fall under any sub section of Section 185. Therefore, one can opine that subsidiary company can give loan/ guarantee/ investment holding company in the above mentioned situation.

Loan by Lender company to holding in all above mentioned situation:

Section 185(1): This sub-section restrict only for Loan/ Guarantee/ Securities to Individuals not Companies or Body Corporates. Therefore, this sub section doesn’t restrict the above mentioned transaction.

Section 185(2): This Sub section allows by passing of Special Resolution to give loan to (Private Company, Body Corporate in which directors of lender Company are Directors or Shareholders)

In situation where director of lender company are not directors or members in other Company then this transaction doesn’t fall u/s 185(2) and no need to pass Special Resolution.

In situation where director of lender company are directors or members in other Company then this transaction doesn’t fall u/s 185(2) and need to pass Special Resolution.

there is no restriction any where under Section 185(1), (2) and doesn’t fall under 185 (3). Therefore, one can opine that in this situation Company can freely give loan to Holding by complying the other provision of Companies Act, 2013 (like Section 179(3), 186 etc.)

In the above mentioned both situation one can opine that,  a Company can give Loan  its Holding Company.