CA Gaurav Mittal
The section 185 of Companies Act,2013 was notified on 12th September 2013 and was applicable from that day itself. If there is any deviation from the conditions laid under this section then the Auditor is required to report the same in his Audit Report. A non qualified report would hold auditor in default.
The lending company and the receiver both would be liable for the penalty under the same section.
Now let us understand the basic of section 185 and 186
Section 185:- This primarily deals with the subject of person to whom company cannot give loan.
Section 186:- This section enlists the exceptions and specifies the limits up to which a company can give loan.
The section 185 of CA, 2013, restrict the company on giving loans, guarantee or provide security to Directors or any other person in whom Director is interested.
The ways via which a director can be interested has been covered via 5 inclusions:-
Point 1 & 2
The inclusion in point 1 and 2 covers the Director and his relatives too.
It Says
1) Any Director of Lending Company.
2) Any Relative of Director.
3) Director of a Company which is its holding company.
4) Any firm in which such director is partner or relative is a partner.
5) Any partner of such Director.
Point 3,4 & 5
The inclusion in point 3,4 & 5 only include Director but not his relatives.
It Says
1) Any PRIVATE Limited company in which such director is a Director or member.
2) Body corporate in which such Director or Directors hold more than 25% shares.
3) Body Corporate, MD, BOD or manager accustomed to act in accordance with direction of board or Director of lending company.
- A body corporate does not include a co-operative society. But it includes a foreign company.
EXCEPTION TO SECTION 185
1) WD/WTD
a) As a part of service extended to all of its employee.
b) Any Scheme Approved by members by special resolution.
2) Given in ordinary Course of Business
How to check ordinary Course
a) Is the company engaged in lending activity regularly.
b) Lend not only to Directors and related parties but also to Arm Length Parties or unrelated parties.
KEY TAKEAWAY :- All NBFC may not be engaged in lending activities in ordinary course.
NOW LET US UNDERSTAND THE SECTION WITH THE HELP OF PRACTICAL EXAMPLES
EXAMPLE 1
Company A has two Directors Mr. X and Mr. Y. Both holds 50% share each of Company.
Company A wish to give loan to following and have asked for your views on same.
A) Loan to Director X.
B) Loan to a relative of Director Y.
C) Director of company D which is the holding company of A.
D) A partner of Director of Holding Company.
E) A partner of Director of company A.
F) To a firm in which Mr. X is a partner.
G) To a firm in which relative of Mr. Y is a Partner.
SOLUTION 1
| S No | Loan To | Whether Co Can | Reason |
| 1 | Loan to Director X. | NO | Included in definition |
| 2 | Loan to a relative of Director Y. | NO | Do |
| 3 | Director of company D which is the holding company of A. | NO | Do |
| 4 | A partner of Director of Holding Company. | YES | A partner of Director of Holding co is not included. |
| 5 | A partner of Director of company A. | NO | Included in definition |
| 6 | To a firm in which Mr. X is a partner. | NO | Included in definition |
| 7 | To a firm in which relative of Mr. Y is a Partner. | NO | Included in definition |
EXAMPLE 2 (PRIVATE LTD CO WITH COMMON DIRECTOR)
| Particulars | Company A (Pvt Ltd or Ltd) | Company B (Pvt Ltd) |
| Directors Cum share holder | A (shareholding 60.0%)B (shareholding 40.0%) | B (Shareholding 75.% )D (Shareholding 25% ) |
| Only Share Holder | Nil | Nil |
A and B are Husband and wife. D is their Son.
Company B wish to avail loan from Company A, Whether Possible?
SOLUTION 2
Company A cannot give loan to company B as it would be in contravention of Section 185 and would attract penalty.
Planning
1) Mr B should resign from the post of Director of Company A and gift his shares to Mr A (gift of shares is tax free). They shall appoint another Director in the company.
As B resigns and transfer the shares then the provisions of section 185 wont apply and company A would be able give loan to company B.
OR
2) Converting Company A into a LLP.
OR
3) Converting Company B into a Public Limited Company and Mr B reducing his shareholding in Company B to less than 25%.
EXAMPLE 3 (Private Ltd Co To Public Ltd Co)
| Particulars | Company A Pvt Ltd or Ltd | Company B (Ltd) |
| Directors Cum share holder | A (shareholding 60.0%)B (shareholding 20.0%)C (Shareholding 15.0%) | B (Shareholding 10.0% )A (Shareholding 10.0% )C (Shareholding 5.0%) |
| Only Share Holder | D (Shareholding 15.0%) | Others (75.0%) |
Company B wish to avail loan from Company A, Whether Possible?
SOLUTION 3
No it is not possible to advance loan to company B as Director A, B and C collectively are holding 25% of shares of Company B. And hence get covered under the clause 4 of interested party to Director.
PLANNING
1) Either Mr A or Mr B or Mr C should resign from the post of Director of Company A. This would bring down the holding of shares to less than 25% and will enable the borrowing between two Companies.
OR
2) Converting Company A into a LLP.
OR
3) Either Mr A or Mr B Or Mr C should give up atleast 1% of their share held in Company B to bring down the holding under 25%.
AMOUNT ALREADY EXISTING ON 12Th SEPTEMBER 2013
Q. In Case any amount is outstanding on 12th September as a loan to Director or anyone in whom Director is interested.
A. The loan can still continue to appear in the books of accounts of Company; however it can’t be renewed and is to be repaid on the end of the term. If it’s a loan repayable on demand then still it is suggested to make a formal agreement with tenure specified in it.
Q. Company A holds more than 5 % share of company B and have common Director. Company B has availed a loan from bank and because company A holds more than 5% of share of company B it has to be give corporate guarantee for company B to bank.
A. These types of cases are common between related private limited companies. Banks usually takes corporate Guarantee of the companies. In such a case again company cannot renew the Guarantee given to Bank.
However, the CC limits of a company are renewed each year and new Sanction ticket is issued. In such a case corporate Guarantee also gets renewed. It is advised to approach bank and get the clause of Corporate Guarantee removed.
KEY POINTS
The section is applicable only at the time of granting the loan and any change in circumstances thereafter will not make the section applicable.
Thus, section 185 will not be attracted in respect of a loan given to an employee, who does not fall within the ambit of specified persons as listed above, but who subsequently becomes a member of the board, because at the time of the loan, no contravention was involved.
KEY POINT IN CONVERSION OF A COMPANY INTO A LLP
As per Sec 47(xiiib) of Income tax Act, for tax neutrality of such conversion, turnover of Private Limited Company in any of last 3 years must not exceeds 60 Lakhs. So, if turnover exceeds 60 Lakhs than such conversion will be subject to income tax.
Any capital gain arising in transfer of capital asset would be taxable in hands of company.
Any Gain arising to shareholder on surrendering of shares would be taxable in hands of shareholders.
SECTION 186
Specified transactions are covered under the Section
a) Loans to any person or other body corporate;
b) Guarantee or security given in connection with a loan to any other body corporate or person; and
c) Acquisition by way of subscription, purchase or otherwise, the securities of any other body corporate.
LIMITS UPTO WHICH LOAN CAN BE GIVEN
Higher of
A) 60 % of ( Share Capital + Free Reserves + Security Premium); or
B) 100% of (Free Reserves + Security Premium)
However, if company wishes to invest or give loan to a amount higher than the above then a prior approval of Shareholders is required.
Also shareholders cannot give blanket permission.
KEY POINT
If as on 1.4.2014 the company has given loan or guarantee in Excess of limits specified then it has to file a Special resolution for this by 31st March 2015.
Q. Whether various Advances would also be considered under this section?
Loan is lending of money with absolute promise to repay whereas advances is to be adjusted against supply of goods and services. Genuine trade advances given to suppliers against orders for supply of goods will not be considered as loans and hence will be out of purview of Section 186. Similarly, advances given to employees against current month’s salary will also not be in the nature of loans.
LOANS AND INVESTMENT BETWEEN HOLDING & SUBSIDIARY COMPANY
Section 185:- Section 185 Exempts loan between Holding Company and Subsidiary Company.
(1) Any loan made by a holding company to its wholly owned subsidiary company 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 loans made under sub-rule (1) and (2) are utilized by the subsidiary company for its principle business activities.
SECTION 186:-
Loan or guarantee given and security provided to its wholly owned subsidiary company or a JV, exempted from calculating the limits prescribed under section 186.
(Author may be contacted at [email protected])
Dear Sir,
In Example 3 i think Company B can avail loan from Company A as directors of Company A is still carrying 25% voting rights in company B. Therefore, Company by passing special resolution can provide loan/gurantee and security to company B. (i might be wrong, your valuable feedback will be appreciable.)
Thanks
You have done some little mistakes sir😕
Bank wants to give loan based on the comapny’s performance. Since the CIBIL of company is low, bank is willing to give loan in the name of a director. Can this loan be recorded in the books of the private limited company?
Can a public limited company take a loan from its holding company (This is also public limited which is having a 56% stake) if the borrowing is at Arm’s length?
Company A & Comapny B are related party, and director of company A also interested in Company B.
Company A given advance for supply of material Company B.
the advance still not adjusted even after the considerable time.
Is that advance given to company B will not be treated as Loan under section 185 of companies Act, 2013.
Can a Private Limited company take funds as security deposit from its upcoming dealers and distributors?
Can a Indian private limited company invest in the shares of Joint venture company(1% share subscribe). Whether the provisions of section 186 applicable or not, please clarify
Clarification: I am funding to a proprietorship firm. property offered is a of Pvt Ltd co. where proprietor and his wife are equal directors and share holder. Whether sec185 attracted? what is a resolution. PVt Ltd co is a shell co.
Our Client is Company B.
A intends to transfer Rs. 240 vide an investment agreement subject to condition B would invest Rs. 100 in C in which director of A is an interested person.
The surplus available with A is reserved under Trade Fund. According to the info from A’s representative the trade fund surplus is as good as FDI, and they shall complete all legal compliances for the investing the Trade Fund in Company B.
Our Role is to brief the client about the legality of transaction proposed by A.
1. M/s PQR Investment LTD has given guarantee for the loan taken by M/s. XYZ Chemicals Private limited from ICICI Bank where Mr. A is common director. Further PQR also wants to extend loan to XYZ.
a. Examine the transaction and advice client.
b. If Mr. A is director of M/s PQR Investment LTD and Mr. Y – Son in law of Mr. A is director in M/s XYZ Chemicals Private Limited
c. Whether your answer will change if M/s XYZ Chemical is LLP?
possibility of taking partnership firm as co borrower to pvt ltd company (going for NBFC LAP funding )
can the md of sri ramakrishna mills (coimbatore) limited BSE 521178 be prosecuted =equity is just 7 cr rs. he has taken a loan of 19 cr (wife 5 cr rs)
What if a private company gives interest free loan to a person other than body corporate ? is this the contravention of section 186 ?
Dear Sir/Madam,
There are partnership firm in which the directors and their relatives are partners. The partnership firm is in the same line of business of the partners where they are directors. But till date the partnership firm has not started any transaction with any one. So as on date as per section 185 and 188 of CA’13, is there any disclosure or approval required from members or other directors?
advance given to directors of Rs. 50000 for expenses purpose of company.
is it disqualified
A company which is a partner in partnership firm and it gives guarantee to the firm in which directors of the Pvt Ltd company are also partner. Sincepvt Ltd company is giving guarantee as a partner of the firm so section 185 is not applicable. I need your comment on my opinion.
can the advance against shares, yet to be subscribed, be taken in the ceiling of section 186 or not?
can a managing partner to a company can apply loan as an employee??
if so please tell what consequences happens
A is a parent company ..B is a subsidiary company and A need a loan from finance comapny ..whether subsidiary comapny B can give corporate gurantee to finance company on behalf of A parent company ???
Request you to give practical examples for section 185 & 186
can pvt. ltd company mortgaged companies property to bank to avail loan by another company as colletaral security. Both the company has same directors.
I have a query:
Can a LLP give loan to a private company in which its designated partner is director cum shareholder holding 20% stake
can pvt. ltd company mortgaged companies property to bank to avail loan by another company as colletaral security.
Sir your planning of question 2 may be wrong in sec 185
I have a question.
ABC Pvt Ltd is presently availing loans from XYZ Bank.
DEF Enterprises is a proprietorship firm where Mr. M is the proprietor. Mr. M is also a director of ABC Pvt Ltd.
Now DEF Enterprises wants to avail bank loan from XYZ Bank. XYZ bank is asking for providing of guarantee of ABC Pvt Ltd. Can it be possible.
Is Advance for expenses and travel advance considered as loan if yes can u give me the basis under which it will come as advance along with relevant literature?
dear sir
agr bank amp ho gya hai to Director ka son kya koi new company open kar sakta hai new rule and act se pls halp me
need your advice. I have a Pvt. Ltd company called A. & My friend has also a pvt ltd called B. Now, I am a new company & want some investment from B. Company B also agree to invest on my company A. But both of us are unaware of rules. we need a simple rule or agreement where he can give money to me every month for 1 year & in return, I will give him some profit percent(eg. 20% of profit ) everymonth for 3 years. please guide us. regards, Subrat Dash
Sir,
Kindly guide on a situation where a subsidiary company is advancing loan to its holding company having common directors?
Can we result this transaction?
Seek your expertise on the following:
Facts: 2 listed companies A and B, of which Company A wants to extend a corporate guarantee to Company B. The MD of Company A is a director in Company B.
Query: If the Corporate Guarantee amount is within the limits specified under the Act, would it be sufficient if the Board of Company A approves the same?
Is there any further requirement to be complied with.
What was the last date of Settling the unsecured loans taken from the directors under section 185 of Companies Act, 2013?
Can i give a loan to the company in which director is my relative u/s 185
yes
yes provided a special scheme is approved by SR approval
can a private company give corporate guarantte to bank on behalf of other private company where directors of both the company are same
Loan is applied by a public limited company which holds 79% shareholding of a private limited company. This private limited company is property owner. Can this private limited co stand as guarantor/co-applicant to loan availed by its holding public limited company
Can a Holding Company give loan to its Wholly Owned Subsidiary Company at free rate of interest under section 186(7) of the Companies Act, 2013
Thanking You.
can subsidiary company give loan to its holding company
Can two Pvt Ltd company jointly purchase one property say shop/flat?
Can bank grant loan to one of the company out of the above with corporate guarantee from another?
Dear Sir
Please guide us on the same
MR A and M/s ABC Pvt Ltd (Wherein Mr A is whole time director)has jointly availed a loan of ` 100 lakhs Common immovable property is offered as a security wherein property is owned by Mr. A
Whether section 185 of companies Act will be applicable ?
plz calrify Manohar Motors Ltd. has a paid-up share capital of 10 crore and free reserves of
5 crore. The Board of directors want to borrow a sum of 20 crore for its longterm
capital requirements from the market. Discuss whether they can do so and if yes,
what are the requirements under the Companies Act, 2013 which they have to comply
with. under whic section it will come?
Manohar Motors Ltd. has a paid-up share capital of 10 crore and free reserves of
5 crore. The Board of directors want to borrow a sum of 20 crore for its longterm
capital requirements from the market. Discuss whether they can do so and if yes,
what are the requirements under the Companies Act, 2013 which they have to comply
with. under whic section it will come?
sir,
Kindly clarify the below scenario :
“A” company availed CC and LC facility(Rs 44 crore CC and 63 crore LC) from a bank during 2011, by providing prime security and corporate guarantee of associate companies “X” “Y” & “Z”, where the directors of “A” companies is also the directors.
During Oct 2013 bank enhanced the CC and LC limit of company “A” (ie Rs 51 crore CC and 76 crore LC). the bank demands for corporate guarantee of associate companies “X” “Y” & “Z” will this corporate guarantee be valid as per Companies Act 2013 ?