Short Summary

In this Research editorial, the author begins by referring the provisions of Section 185(3) of Companies Act, 2013 as amended by Companies (Amendment) Act, 2017 (Loan to Directors and entities in which directors are interested). The main focus of this research editorial on “Whether a Company can give Loan/ G / S to its Subsidiary Company, Wholly Owned Subsidiary Company or Holding Company”.

This article is in continuation of Article  Loan to Group Companies U/s. 185(2) of Companies Act, 2013

A. Background

Provision As Per Companies Amendment Act, 2017:

Section 185 of Companies Act, 2013 has ben completely substituted by New Section 185 under ompanies (Amendment) Act, 2017 (CA, 2017 got president assent on 3rd January, 2018. Due to Complete substitution there are many changes under this section as mentioned below.

In this Research Editorial will research on the provisions of Loan to Subsidiary Company,

Wholly owned Subsidiary Company or Holding Company under Section 185 and conclude the same in forms of FAQ’s at the end of the editorial.

Language of Section 185:

(1)  No Company ( Private & Public)

  • Directly or Indirectly
  • Advanced any loan, including Bood 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.

Points to be kept in Mind – In case of Dealing with

SUBSIDIARY u/s 185(3) (d)

a) As per Sub Section 3 Lender Company can give Guarantee / Security on behalf of Subsidiary Company.

b) Guarantee / Security shall be given only to Bank and Financial Institutions on behalf of Subsidiary.

c) Subsidiary shall use such money only for the “Principle Business Activity” of the Company.

In case Lender Company giving Guarantee / Security to Subsidiary as per above 3 conditions then no need to comply with the provisions of Section 185 of Companies Act, 2013.

Food for Thought:

a) Whether Lender Company can give guarantee / Security to Subsidiary Company when loan taken from other than Bank and financial Institution?

b) Whether Lender Company can give Loan to Subsidiary Company instead of Guarantee / Security in any of or both the below mentioned situations:

i. Where Directors of Lender Company are Directors or shareholder of Subsidiary Company. [Impact of Explanation of Section 185(2)]

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

Situations for Loan to “Subsidiary”:

a) Guarantee / Security in respect of Loan taken by subsidiary from Bank/ Financial Instituion. In such situation Lender Company can give loan u/s 185(3) without complying with the provisions of Section 185.

b) Guarantee / Security in respect of loan taken by subsidiary from other than Bank / Financial Institution. In such situation there are following situtions:

  • Where Director of Lender Company are Director / Member of Subsidiary Company?

In this Situation Lender Company can give loan as per provisions of Section 185(2) by passing of Special Resolution.

  • Where Director of Lender Company are not Director / Member of Subsidiary Company

In this situation there is no ristriction 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 guarantee / security on behalf of Subsidiary by complying the other provision of Companies Act, 2013 (like Section179(3), 186 etc.)

In the above mentioned both situation one can opine that,  a Company can give Guarantee/ Security on behalf of its subsidiary Company without falling under provisions of Section 185.

c) Loan by Lender company to subsidiary in both above mentioned situatio:

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 Resoluion 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.

there is no ristriction 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 Subsidiary by complying the other provision of Companies Act, 2013 (like Section179(3), 186 etc.)

In the above mentioned both situation one can opine that,  a Company can give Loan  its subsidiary Company without falling under provisions of Section 185.

C. Process Of Given Of Loan Under Section 185:

As per above mentioned provisions of Section 185 a Lender Company can give loan/ Guarantee/ Security to Subsidiary:

i. Holding of Board Meeting: Lender Company have to hold a Board Meeting;

  • Pass Board resolituon [u/s 179 (3)(f)] (Passed Unanimous Board Resolutoin as per Section 186(5))
  • Pass resolution to call Extra ordinary General Meeting

[if transaction fall u/s 185(2)]

  • Issue Notice of EGM
  • Check Limit of Loan/ G/ S as per Section 186(2) whether it is in limit or not.

ii. If Lender Company is Public Company then file the Board Resolution in e-form MGT-14 with Roc with in 30 days from the date of Board Meeting.

iii. Conveining of General Meeting: Hold the EGM and pass the Speical Resolution for granting loan, guarantee or security by mentioned following informations in the Explanatory Statement: [if transaction fall u/s 185(2)]

  • Full Particular of the loans given; or
  • Guarantee given or security provided and
  • The purpose for which the loan or guarantee or
  • security is proposed to be utilized by the recipient of the loan or guarantee or security and other relevant facts

iv. File MGT-14 with ROC: File copy of Speical Resolution along with explanatory statement with ROC in e-form MGT-14 within 30 days of EGM:

Other Conditions to be fulfiled:

v. Declaraiton from Brorrower: Take a declaration from the borrower Company that it will use this Loan for the Principle Business Activity only. (If guarantee / security given u/s 185(2) or 185(3) otherwise no need of same.)

vi. Limits of L/G/S u/s 186(2): Check whether loan is in limit u/s 186(2) if not then whether Special Resolution for such has been passed or not. Limites as mentioned below:

  • 60% of Paid up share capital + Free Reserve + Securities Premium Account OR
  • 100% of Free Reserve + Securities Premium Account

vii. Approval of Public Financial Institution: If Loan is not covered in above mentioned Limit or there is any default in repaymtn of loan installments or payment of inerest by lender to public financial institution then before initiaiton loan to borrower take approval of public financial instituion also.

viii. Disclosure by Lender: As per Section 186(4) Company shall disclose in the Financial statement full particular of Loan/ G/ S and purpose for which such L/G/S is proposed to be utilised by borrower.

ix. Interest on Loan u/s 186 (7): Loan shall be given at a rate of interest not lower than the prevailing yield of one year, three year, five year or then year Government security closest to the tenor of the laon.

Points to be kept in Mind – In case of Dealing with

WHOLLY OWN SUBSIDIARY u/s 185(3) (C)

a) As per Sub Section 3 Lender Company can give Loan/ Guarantee / Security on behalf of WOS Company.

b) WOS Company shall use such money only for the “Principle Business Activity” of the Company.

Therefore, one can opine that whatever is situation Section 185 shall not applicable while giving Loan/ Guarantee/ Security by Holding Company to its subsidiary Company.

In simple word we can say that Section 185 and Section 186(3) doesn’t Apply to private limited Company.

D. Process Of Given of Loan Under Section 185:

As per above mentioned provisions of Section 185 & 186 a Lender Company can give loan/ Guarantee/ Security to Wholly owned Subsidiary:

i. Holding of Board Meeting: Lender Company have to hold a Board Meeting;

  • Pass Board resolituon [u/s 179 (3)(f)] (Passed Unanimous Board Resolutoin as per Section 186(5))

ii. If Lender Company is Public Company then file the Board Resolution in e-form MGT-14 with Roc with in 30 days from the date of Board Meeting.

Other Conditions to be fulfiled:

iii. Limits of L/G/S u/s 186(2): Check whether loan is in limit u/s 186(2) if not then whether Special Resolution for such has been passed or not. Limites as mentioned below:

  • 60% of Paid up share capital + Free Reserve + Securities Premium Account OR
  • 100% of Free Reserve + Securities Premium Account

iv. Approval of Public Financial Institution: If Loan is not covered in above mentioned Limit or there is any default in repaymtn of loan installments or payment of inerest by lender to public financial institution then before initiaiton loan to borrower take approval of public financial instituion also.

v. Disclosure by Lender: As per Section 186(4) Company shall disclose in the Financial statement full particular of Loan/ G/ S and purpose for which such L/G/S is proposed to be utilised by borrower.

vi. nterest on Loan u/s 186 (7): Loan shall be given at a rate of interest not lower than the prevailing yield of one year, three year, five year or then year Government security closest to the tenor of the laon.

The Author shall publish series of editorial to cover all the situations of Section 185, FAQ’s in Provision of Section 185, Procedure of compliances u/s Section 185.

(Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com). Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION

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