Loan given by Holding Co. to Subsidiary Co. does not always attract Sec.185

 CA Nitesh More

There is a general conception that if subsidiary co do not utilize loan given by its holding co for its principal business, provisions of sec 185 is attracted each & every time. In other words, if loan given or guarantee given or security provided by holding co to its subsidiary is not exempted by the Rule 10 of the Companies (Meetings of Board and its Powers) Rules, 2014, Sec 185 is violated.

The above view is not correct. One should first examine whether the provision of 185 is attracted by examining shareholding & directorship of holding and subsidiary company. There can be many instances when the basic provisions of sec 185 is not attracted, if any loan is given by holding co to Its subsidiary co.. This can be explained as follows:

LOAN GIVEN BY HOLDING CO. TO SUBSIDIARY CO. & VICE VERSA: Let us first examine provision of sec 185:

Provisions of Section 185(1): “Save as otherwise provided in this Act, no company shall, 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 any security in connection with any loan taken by him or such other  person.

Explanation: For the purpose of this section, the expression “to any other person in whom director is interested” means –

(a) Any director of the lending company, or of a company which is its Holding Company or any partner or relative of any such director;

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

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

(d) Any body corporate at a general meeting of which not less than twenty five percent two or more such directors, together or

(e) Any body corporate, the Board of directors, managing director or manager, whereof of the total voting power may be exercised or controlled by any such director, or by is accustomed to act in accordance with the directions or instruction of Board, or of any director or directors, of the lending company.

Let us take an example & examine a situation:

Example:  H Ltd has given a loan of Rs 10 crores to S Ltd. There is neither any common director nor any common shareholder in between these two companies. Examine applicability of sec 185.

Ans: Assuming that there is neither any common shareholder nor any common director in holding co and subsidiary company, Sec. 185 is not attracted.

SUCH LOAN WILL NOT BE COVERED IN CLAUSE (a),(b),(c),(d) & (e)

• Clause (a) (as applicable for individual) or

 • Clause (b) (as applicable for Firm),

• Clause (c) (for Pvt Ltd co., only if director is a director or member),

• Clause (d) (only if the director either by himself or two or more such directors hold 25% or more of total voting power in the borrowing company,

• Clause (e) (only if borrowing company /its Board/Directors are accustomed to act as per the Directors of the board/Directors of the lending company. It is very difficult to prove that the board of subsidiary co has not only actually acted, but also accustomed to act as per the Directors of the board/Directors of the lending company.

Note: Any interest of director (or other person) in his “personal capacity (not holding as nominee of company)” is relevant to attract Sec. 185. Interest of holding co. in subsidiary is not relevant.

SPECIFIC EXEMPTIONS PROVIDED TO LOAN GIVEN BY HOLDING CO TO SUBSIDIARIES:

There can be many instances when the loan or security provided by holding company to subsidiary is attracted by the provisions of sec 185. Let us illustrate such situations:

Example 1: When subsidiary company is a pvt Ltd Co. & some shares of subsidiary co is held by one or more director(s) of holding Co.

Example 2: When subsidiary company is a pvt Ltd Co. & One of the director of holding co is also a director in subsidiary Co.

Example 3: When one or more of such directors hold 25% or more of total voting power in the subsidiary company

In such cases, Rule 10 provides specific exemptions from attractions of sec 185 provisions subject to some conditions mentioned in the said Rule. Rule 10 of the Companies (Meetings of Board and its Powers) Rules, 2014 states the following:

(1) Any loan made by a holding co to its wholly owned subsidiary co or any guarantee given or security provided by a holding co in respect of any loan made to its wholly owned subsidiary co is exempted from the requirements under this section; and

(2) 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 is exempted from the requirements under this section:

Provided that such loans made under sub-rule (1) and (2) are utilised by the subsidiary company for its principle business activities.

Conclusion:

1) Every loan by holding co to its subsidiary co is not attracted by sec 185 even if money is not utilized for principal business activities.

2) One should first examine whether the basic provision of 185 is attracted by examining shareholding & directorship pattern of holding and subsidiary company.

3) If provisions of sec 185 is attracted, than one should examine whether such loan is exempted under Rule 10 of the Companies (Meetings of Board and its Powers) Rules, 2014.

4) If it is not exempted under Rule 10, than only there will be violation of sec 185.

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