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 mittalgaurav05@gmail.com)
nice explanation sir
good clarification to understand the nity grity of the concept.
Very well explained… it clears all the doubts… thanks a lot
It was really very well explained.thank you so much for the article.Request to keep updating us through such wonderful presentation.Regards
Company A where there are 3 directors with equal shares wants to take a loan . Can we take Company B with same stakeholding as gaurantor for sanctioning the loan
Dear Sir
Whether loan/ advance can be given to a partner of firm in which relative of director is partner? and if yes then which form needs to be filed at the end of the year at roc for outstanding loan/advance.
nice explanations ,we would like to have these contributions
Dear Sir,
please also guide me on this also
In your example 2 (Loan between Pvt companies), As per planning explain in point 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.
In this case Mr. A will be holding 75% share in company B.
Than how section 185 will not apply???????????????
Dear Sir,
as per your opinion in example 2 we can covert a private company i .e. A into LLP then we can easily give loan to Company B but is this not attract the provision of deposit as per section 73 (as this is a body corporate and accepting of loan or any other amount consider as deposit) please guide me further?
can a private company give loan to private company where directors of both the company are same//
can a private company give loan to another private company where the directors of both the company are same..
A- limited company is availing finance from a co-op bank
B- is a pvt limited company is offering its corporate guarantee to the bank on behalf of A
Out of directors of A and B two directors are common in both companies and have majority stake in both Companies.
If bank considers this whether it is in order or not
Can a private company give corporate guarantee to another company, if the director of the recipient company has more than 75% shares either in his personal name or through another company where he is majority share holder?. Pl be note that directors of lending company has neither shares nor are directors of recipient company and recipient company directors are not directors of lending company. The member who hold majority stake in lending company is a director in recipient company. Whether this violates sec 185 explanations “c” or “d”
really very good sir
Sir,
Please guide on situation wherein
Company B and C are wholly owned subsidiaries of company A. Mr. X and Y are the directors in all three companies. Can Company B and C together provide guarantee to a loan being availed by holding company A?
Excellant clarification.
whether loan given by subsidiary to it’s holding company would be covered u/s
185.
I need 1 clarification.
PVT Ltd. Company has 40 Employees, apart from relative can company lend loan to all its employees.
Please suggest.
Dear Sir
Can you provide your valuable suggestion on the following issue –
In case A wholly owned Subsidiary Company provide security to the Lenders for extending financial assistance to its Holding Company.
Please provide your views in light the provision of Co. Act 2013, Whether it can be possible and what are the ways ??
Company A is availing a loan from Bank. property belongs to company B is to be offered as security. Company A and Company B has got two common directors.
Both the directors are resigning from company B.
in this case can the bank accept the property of company B as security for a loan given to company A. Whether provisions of sec. 186 will hit.
How and where do we report for violation of Sec 185 & 186 in the Auditor’s Report?
How and where do we report for the contravention of Sec 185 & 186 in the Auditor’s Report?
Dear Sir,
In your example 2 (Loan between Pvt companies), As per planning explain in point 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.
In this case Mr. A will be holding 75% share in company B.
Than how section 185 will not apply
Pls clarify.
Thanks
Director of the company Aviling a loan form bank based on the eligibility of the company financial, company and other directors are coming as a co applicant in the loan deal , company is the repayer , need clarfication in the Sec 186 companies act
If a ltd company is 50% partner in a partnership firm X and X is availing loan from a Financial Institution.
Can the Ltd company give guarantee to the credit facility granted to partnership firm X by the FI?
In section 185 of the companies act of 2013 the proviso b says “ordinary course of business” which does not mean the primary business for which the company was incorporated. So is there any case law substantiating the argument?
“A” Holding company of “B”. (subsidiary)
A is availing loan from bank.
“B” is owning piece of land..
Question : can “B” gives its piece of land as a security for availing loan to its holding company i.e “A”..
Sir,
One of my client has two companies A Pvt. Ltd. and B Pvt. Ltd. with common directors. Company A Pvt. Ltd. is availing loan from bank and B Pvt. Ltd. is giving guarantee (by giving security) to bank for A Pvt. Ltd.
Is it permissible ? If yes what forms are required to submit in ROC?
Any Special resolution is to be passed at board meeting ?
thanks for your detailed presentation
If there any contravention of Sec 185 if advance for property/goods/services is given to specified person u/s 185 on or before 12th Sep, 2013?
It’s a situation of my query-
There are two companies-
1. Co. “A”, a listed co
2. Co. “B”, a pvt. co.
Both the co’s have different directors.
Co. “B” has shares of Co. “A”
Now as per new act, Can Co. “B” is eligible to give loan to Co., “A”.?
What are the mandatory conditions that has to be satisfied by a Company before giving guarantee for a loan taken by one of its sister concern?
@ Jyosthna
Sorry but above transaction would fall under the perview of Section 185
A- limited company is availing with a bank
B-pvt limited company is offering its property towards security and its guarantee to the bank on behalf of A
out of directors of A and B two directors are common in both companies
If bank considers this whether it is in order or not
A Ltd and B Ltd are partner in XYZ partnership firm. In addition to this relatives of Mr. Q and MR. R which are DIRECTORS in B ltd. are also partners in XYZ. Now both the companies are deciding to give guarantee to XYZ which is exceeding 60% of paid up capital and free reserves. Now my question is since the company A ltd and B ltd are giving guarantee being partner in XYZ whether they need to file special resolution u/s 186. Whether provision of section 185 will be applicable? Whether guarantee given in the mentioned case will convene any provision of companies act 2013?
I do not understand where does the question of duty of auditor to qualify the report arises. Because loan given in violation of Co. Act 2013 does not affect the true and fair view of the BS. Subject to above, in BS such loans are specifically disclosed as per Schedule VI. Any violation of law does not require the auditor to qualify his report until and unless it is specifically asked by the statute or rules or in reporting format. The compulsory qualification arises if it affects the true and fair view of the accounts. Will the author substantiate his view in light of what has been discussed.
Dear Gaurav Sir & Roshan Sir,
Greetings !!!
Thank you so much for clarifying the doubt.
Regards;
Roshni Shah.
Dear Roshni
Looking the prima facie of fact of your case
Company A can’t give the loan/guarantee/security to company B as there is not existence of holding and subsidiary company relationship.
Apart from the above as Guarav stated in above article
Option 1
Mr A, B & C should resign from the post of Director of Company A and appoint another Director in the company. Mr A, B & C can gift his shares to other directors to tax liability.
As Mr A B & c 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%.
Moreover, if you don’t want to convert Company B into Public ltd. co. then after resigns of Mr. A & B, you can also became company B a subsidiary of Company A then results are as follows:
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.
With Regards
CA Roshan
9913313039
@ Shailesh Singh
No company cannot give loans at rate of interest lower than the prevailing yield of one year, three
year, five year or ten year Government Security closest to the tenor of the loan.
@ K Bala Ji
Sir if there are no common director or interested Directors then provisions of section 185 wont be applicable.
However Limit U/s 186 has to be adhered to
@ Roshni Shah
I Fear but section 185 doesnt give exemption in case of Joint Venture Companies. You have to alter the The common directors and then i guess u can.
@ All
Thank you for a word of praise 🙂
It keeps me motivated
Very Informative article. Good job Gaurav.
Do keep sharing other provisions of Companies Act 2013 with examples.
Will really benefit to a lot of professionals.
Co A (Closely held public co.) Co B (Pvt co- J.V.)
Name Director Share holder Name Director
Mr A Yes 39% Mr A Yes
Mr B Yes 38% Mr B Yes
Mr C Yes 19% Mr C Yes
Mr D Yes 4% Mr X Yes
– Share holders of B Co. are Company A and XYZ ltd – a foreign company (this is a J.V. – 50%/ 50% share holding ratio)
Can Company A give loan/ guarantee/ security to Company B ? How ? If can’t, then what alternatives are available ?
Thank you so much sir..
sir, it is very good. Kindly let me know that the provisions of section 185 are applicable to inter corporate loans/investments in which there are no common directors/shareholders.
Sir, it is very good. Kindly let me know whether provisions of Sec 185 are applicable to the inter corporate loans/investments where there are no common directors.
Very nice contribution
Dear sir, can you please elaborate clause (e) of section 185 as there is some ambiguity about the definition of term “accustomed to act”
There are many corporate providing loan to employees at lower rate. Does this ammendment in 186 also required companies to ammmend their loan policy to bring the interest rate as mentioned in 186
Really very nice