Prohibitions, Relaxations, and exemption in case of Loan transactions entered into by the company.

The very routine transactions which almost all companies are willing to make for the rotation of money or whatsoever purpose it may be.

There are four subsections of section 185 of the companies act 2013.

Section 185 (1) :-

No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by,—

(a) any director of the company, or of a company which is its holding company or any partner or relative

of any such director; or

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

Analysis:- (Strict Restrictions)

The subsection (1) simply restrict the company from giving any loan or guarantee or providing its securities (i.e. shares, debentures, bonds etc.) in connection with loan taken by

1. Director of Company;

2. Director of holding company of the reporting company;

3. Partner or relative of (1) and (2);

4. Firm in which person of (1) and their relative is partner.

Section 185 (2) :-

A company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the director of the company is interested, subject to the condition that—

(a) a special resolution is passed by the company in general meeting:

Provided that the explanatory statement to the notice for the relevant general meeting shall disclose the full particulars 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 any other relevant fact; and

(b) the loans are utilized by the borrowing company for its principal business activities.

Explanation.—For the purposes of this subsection, the expression “any person in whom any of the director of the company is interested” means—

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

(b) any body corporate at a general meeting of which not less than twenty-five percent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or

(c) any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

Analysis (Relaxation in certain cases):-

Subsection (2) relaxes the company from entering into loan transactions to the above-mentioned parties in the explanation provided Special resolution has been passed and the loans will be utilized by the company for its principal business activities.

It means that the borrowing company can’t further advance the borrowed money as loan unless its principal business activity includes providing the loan.

Section 185 (3):-

Nothing contained in sub-sections (1) and (2) shall apply to—

(a) the giving of any loan to a managing or whole-time director—

(i) as a part of the conditions of service extended by the company to all its employees; or

(ii) pursuant to any scheme approved by the members by a special resolution; or

(b) a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the rate of prevailing yield of one year, three year, five year or ten year Government security closest to the tenor of the loan; or

(c) any loan made by a holding company to its wholly-owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or

(d) 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:

Provided that the loans made under clauses (c) and (d) are utilised by the subsidiary company for its principal business activities.

Analysis (Exemption from 185 ):-

1. The company can provide loan to WTD and MD under a scheme and such terms and conditions by which company provide loan to all its employees and the said scheme must be approved by way of Special resolution. There is no harm and loss for company in providing the loan to MD and WTDs in the terms and conditions which it applies when it grants loan to other employees and also the shareholders as already aware of that terms and conditions of granting loan as it require shareholder 75% majority approval.

2. The company can obviously grant loan, security and provide guarantee if minimum required rate of interest is charged and its principal business activity as per its Objective clause of Memorandum of association includes permits the company to enter into such transaction.

3. The wholly owned subsidiary company is a kind of another arm of the Parent company. So there can’t be any loss for the parent company to provide loan to its subsidiary company even interest free, provided the subsidiary will utilise the loan proceeds for its principal business activities.

4. The subsidiary company is the one where the parent company enjoys full control. Hence exemption from the restrictions under sub section (1) and (2) has been provided in case of guarantee given and security provided in connection with loan taken by the subsidiary company.

However, it must be ensured that the subsidiary will utilise the loan proceeds for its principal business activities.

Section 185(4) :-

If any loan is advanced or a guarantee or security is given or provided or utilised in contravention of the provisions of this section, the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, and the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.

Analysis (Penalty):-

The penalty is also extended to directors to whom the loan is advanced including the imprisonment.

Exemption to Private company

Section 185 will not apply to Private companies:-

1.  in whose share capital, no body corporate has invested any money (i.e. no body corporate is the shareholders of the company); and

2.  If the borrowings from any Banks, Financial Institutions or body corporate is less than twice of its paid up share capital or 50 Crore, whichever is lower; and

3.  Such company has not defaulted in repayments of such borrowings subsisting at the time of making transactions; and

4. such company has not defaulted in filing its financial statements required under section 137 or annual return required under 92 with the registrar.

*****

Disclaimer: The above discussion mentioned above cant be assumed as professional advice and I assume no responsibility for the above. The content is for knowledge purposes only.

Author Bio

Qualification: CA in Job / Business
Company: EY
Location: Kolkata, West Bengal, India
Member Since: 24 Jul 2021 | Total Posts: 3
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