SECTION 185 of Companies Act, 2013 – Loan to Directors- Section 185 & its reference with Section 186 of Companies Act, 2013

Section 185 of the Companies Act, 2013 which has been notified on 12th September 2013 corresponds to section 295 of the Companies Act, 1956 which deals in loan to directors. This section is more restrictive than that of old Companies Act, 1956.

Section 185 of Companies Act, 2013 prohibits any company from giving loans, guarantees and securities in favor of its directors or to any other person in whom the director is interested in.

Bare – Act:

Notified Date of Section: 12/09/2013

Section 185 of Companies Act, 2013

Loan to Directors, etc.

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:

Provided that nothing contained in this sub-section 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 bank rate declared by the Reserve Bank of India.

Explanation.—For the purposes 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 per cent of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together, or

e) 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 of section 185 of companies act 2013

a) section 185 of companies act 2013  applies to both private and public companies,

b) No company can directly or “indirectly” advance loan to its “directors” or to “other persons in whom directors are interested”

Indirect lending means that the company does not give a loan to director through the agency of one or more intermediaries. But, this word of ‘indirect’ cannot be read by converting what is not a loan into a loan as was discussed in Dr Fredie Ardeshir Mehta Vs Union of India (1991) 70 Comp Cas 210,

c) Definition of loan is not mentioned in the companies act. Therefore in layman language, it can be said that all transactions where sum of money is given to a person to be returned with or without interest can be termed as loan,

d) But advance is not covered in the definition of loan as it is a kind of prepayment. For e.g, if the company gives advance to a person against purchase of materials, this will not be treated as loan,

e) Share Application money received is also not covered in the definition of Loans,

f) Company cannot give any guarantee or provide any security in connection with any loan taken by him or such other person,

Now, this is restrict a very common situation of holding company that used to give guarantee of its subsidiary company, so that the later could avail bank funding and loans (if holding company and subsidiary company have common directors),

But, it is to be taken into consideration that here guarantee or security is covered but not letter of comfort. The basic difference between guarantee and letter of comfort is that in case of guarantee, guarantor undertakes the liability of principal debtor, whereas in letter of comfort, guarantor does not undertake any liability of principal debtor but instead introduces him to the third party.

g) Also, company cannot give loan which is represented under the head ‘book debts’ to directors or persons in whom directors are interested, i.e. if a company advances a loan/ sum of money to directors and shows the same under the head of ‘book debts’, i.e. director is debtor from whom company has to receive money is also prohibited.

It is to be noted that Section 296 of Companies Act, 1956 considered a book debt as loan for the purpose of Section 295. Time for repayment & other terms & conditions should be considered to consider any debt as a loan.

h) Loan given before 12.08.2013 is not covered under section 185 of companies act 2013 as the act says “no company shall ‘advance’ any loan or ‘give’ any guarantee or ‘provide’ any security…….” which is in future tense and therefore section 185 of companies act 2013 applies prospectively. But, the same loan should not be renewed or altered.

i) Company shall maintain a register in Form MBP 2 and enter therein separately, the particulars of loans and guarantees given, securities provided and acquisitions made as aforesaid in chronological order in respect of each such transaction within seven days of making such loan or giving guarantee or providing security or making acquisition. The entries in register is to be signed and authenticated by the company secretary employed in the company or by any other person authorised by the Board for the purpose.

j) Penalty:

i. Lender Company – Fine Rs. 5 lakhs to Rs. 25 lakhs &

ii. Receiver: Director or other person to whom any loan is advanced or guarantee or security is given -Imprisonment upto 6 months or fine Rs. 5 lakhs to Rs. 25 Lakhs, or both.

i.e. both receiver and lending company is covered here.

Now lets us discuss the term, “to any other person in whom director is interested

a) INDIVIDUAL: Director of lending co., or holding co. or any partner or relative of any “such director”;

b) FIRM: in which any such director or relative is a partner;

c) Private Limited Company: of which such director is a director or member;

(it is to be seen that in case of companies, relative of director is not covered),

d) BODY CORPORATE at a general meeting of which at least 25 % of voting power may be exercised or “controlled” by such director, or by two or more such directors, together;

(it is to be seen that in case of companies, relative of director is not covered),

Meaning of word “control”: “Control” has been defined u/s 2(g) of Companies Act, 2013 as to include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

e) BODY CORPORATE Board, Managing Director or manager, whereof is accustomed to act in accordance with the directions or instructions of Board, or of any director or directors, of lending company.

Exceptions to Section 185 of Companies Act, 2013:

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 bank rate declared by the Reserve Bank of India.

Ordinary Course means that its usual business is to lend & accept loans & deposits from people. It has 2 tests:

i. If the company is engaged in lending activities regularity &

ii. Lend not only to directors/directors’ entities but also to “arms’ length parties/unrelated parties”. Arms length means to give loan to reasonable parties or at reasonable interest rate at which two or more rational people will give their consent.

It is to be noted here that a company is said to be engaged in ordinary course of lending even if its 10% networth has been advanced as loan or even 10% revenue comes from lending activities and principal business of lending when its 50% networth has been advanced as loan or its more than 50% revenue comes from lending activities. Section 185 of Companies Act, 2013 exempts even those company who are engaged in ordinary course of action.

Section 186: of Companies Act, 2013

186(2) No company shall directly or indirectly —

a) give any loan to any person or other body corporate;

b) give any guarantee or provide security in connection with a loan to any other body corporate or person; and

c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate,

exceeding sixty per cent. of its paid-up share capital, free reserves and securities premium account or one hundred per cent. of its free reserves and securities premium account, whichever is more.

Now, to see that whether Section 185 of companies act 2013 renders Section 186 inoperative or allows loans to directors and to persons in whom directors are interested, following points is to be considered:

i. Section 185 of companies act 2013 uses the word, “Save as otherwise provided in this Act”,

ii. Rule of Harmonious Construction is to be used, i.e. law should be interpreted in the manner taking into consideration all other relevant provisions. Relevant provisions cannot be read in isolation. Therefore, section 185 or section 186 is to be operative here but since, section 185 uses the word “Save as otherwise provided in this Act”, this section gets superior position to section 186 and thereby, section 186 gets inoperative in conditions where section 185 prevails.

Planning:

If one company has to advance loan to other company:

i. If that company is a Private Company: then if there are common directors or director of lending company is member of receiving company, just gift the shares to some one else and resign from the post of directorship (if held),

ii. If that company is a Public Company and directors are holding less than 25% of total voting powers: Section 185 of Companies Act, 2013 is exempt, and

iii. If that company is a Public Company and directors are holding equal to or more than 25% of total voting powers, then liquidate those powers.

iv. Holding company can give loan/guarantee to subsidy company by removing common directors and gift their shares to some one else.

(Author ‘Sagar Gupta’ is an innovative leader in delivering corporate advisory & solutions and can be reached at sgr@sgrgupta.com)

Click here Read Other Articles of ‘Sagar Gupta’

More Under Company Law

Posted Under

Category : Company Law (3710)
Type : Articles (16292) Featured (4127)
Tags : Companies Act (2176) Companies Act 2013 (1949) Sagar Gupta (22)

28 responses to “Section 185 of Companies Act, 2013 – Loan to Directors”

  1. vamshi mohan says:

    X Pvt Ltd has 4 directors and Y Pvt Ltd has 4 directors (No common directors in X & Y company)

    X pvt Ltd owns a property which is to be used as collateral Security for Y Pvt Ltd. X pvt ltd share capital is 2.00 Crores; Reserves 1 crores and Long term loans 78 crores. There are no advances given by X pvt Ltd and is not in the business of lending.

    What are the implications of sec 185.

  2. akash says:

    can i buy a resident house with my name by using of money from my pvt comp. in which i m also directer?

  3. Chintan Gosar says:

    Does section 185 attract and is not complied with if a company pays tax or any other dues of director or director’s relative and then receives the said amount back from the director within some days ?

  4. sanket jain says:

    dear sir
    X ltd (company) directors of A & B
    Y ltd (company) directors of A & C
    Z Pvt Ltd (company) Director of A & Z
    X Ltd can be given guaranty for loan taken by Y ltd.
    mean X Ltd have a Property base on given guaranty to bank for given loan to Y ltd.
    (both company are not holding and subsidiary company)
    and X ltd and Y ltd 90% shareholder are same.

    so can X ltd given guaranty or not.

  5. sia pareek says:

    no section 185 will be applicable.
    bt also subjct to exmption vide notification no. GSR 464(E ) dated 5 june 2015.

  6. nikki says:

    What are the conditions to be fulfilled if comapany wants to give loans to its directors

  7. mahendra rustagi says:

    can a 100 % subsidiary company provide security in connection with loans raised by its holding company

  8. mahendra rustagi says:

    can a 100 % subsidiary give loans to its holding company
    a . when the directors are common
    b when there are no common directors

  9. jaichand parakh says:

    can a pvt ltd company give gurantee to bank behalif another pvt .ltd. comany if directior are same

  10. Aishwarya says:

    Does Section 185 apply to loans given by foreign companies?

  11. Aishwarya says:

    Is this provision applicable to foreign companies?

  12. varsha jain says:

    situation 1-Sir one pvt. ltd.company having share capital and reserve .& surplus 22.50 lac and he is taking loan rs .10 crore and he want to give the loan to director can he give.
    situation 2 Sir one pvt. ltd.company having share capital and reserve .& surplus 22.50 lac and he is taking loan rs .10 crore and he want to give the loan to other pvt. ltd. company in which common director.can he give the loan.
    and give the solution how ine private limited company give the amount to other company in which same director.how can they take money from private limited co. for use.

  13. Kausar.K says:

    Sir,
    Your Above explanation with examples is truely great . I have a query perating to following situation .

    Situation 1:
    X Ltd Co (Closely held Public Co – Mr A (Wholetime director & Shareholder) – 3.37 % Mr B (Director & Shareholder) ,Mr C (Director& Shareholder)
    Y Pvt Ltd – P (director) & Q (directpr) ,A (huf) -3.42 % (shareholder) ,Mrs A – 3.42 % ((shareholder),Mr E (son of A) – 3.42% (shareholder)
    Y Pvt Ltd wish to avail loan from X ltd .
    Is there any violation of Section 185 of CA 2013

    Situation 2 :-
    X Ltd Co (Closely held Public Co ) – Mr A (Independent Director ) Mr B (Director & Shareholder)Mr C (Director& Shareholder)
    Y Pvt Ltd – P (director) & Q (directpr) ,A (huf) -3.42 % (shareholder) ,Mrs A – 3.42 % ((shareholder)Mr E (son of A) – 3.42% (shareholder)

    Y Pvt Ltd wish to avail loan from X lTd .
    Is there any violation of Section 185 of CA 2013

    Thanking You in advance

  14. puja says:

    Hi all,

    Wish to know if a private ltd co has incurred an expense on behalf of a group company (which is a foreign co and has a common director)and the money is receivable from the group company. Would this constitute to ‘book debt’ u/s 185

    • Ravi Popli says:

      Dear Professional Colleauge,

      As per my understanding Book-debts is arising due to sale or purchase of or provison of services.

      In your case the debt is arising due to making the payment on behalf of group company.So it shall not be treated as Book-Debts.

    • ChaitanyA says:

      As per my view those comes under reimbursements book debt is different concept

  15. CS BHAWNA AGRAWAL says:

    respected Sir,

    I would like to know whether amount given as advance by the company to one of its director for purchase of land within 2 years be covered under section 185 as loan to director.

    regards

    • Ravi Popli says:

      Dear Professional Colleague,

      As per decided case law usually loan is the advance of money (or some article) upon the understanding that it shall be return.

      So, it shall not be treated as Loan.

  16. Statutory auditor says:

    is donation paid in behalf of director is treated as loan ….
    should it be prohibited….
    reply fast

  17. neetesh says:

    can guarantee be given by a group company to another group company’s NCD subscriber..both the group companies have common directors.. does NCD fall under loan category?

    • ChaitanyA says:

      As per my view concerned loan or guarantee or security as the case may be can provide to any body corporate if at any general meeting not more than 25% of voting power or control u/s 2(g) has been held by one or more directors

  18. harish says:

    if i am a director of company which is engaged in some trading activities but its major income is as interest from other person/firm whom my company have given loan. Now i want some amount to build house. Can i borrow money from my co ??

  19. Aadarsh says:

    Please answer me:

    Can a private company give a loan to another private company, where promoter director of both companies are relative and do not have any holding in each other’s private company?

    • Ravi Popli says:

      Dear Aadarsh,

      A private company can give the loan to another private Company if, Directors are not common.

      In your case, Directors are not common, so it may give the loan.

  20. Shankar says:

    You are so great sir
    The greatest expert in companies act 2013 alive at present.

  21. PRATIK LAMBE says:

    For the purpose of ‘persons in whom the director is interested’ what does ‘such director’ mean ?

    Does it include –
    1. a partner or relative of the director of holding co. of the lending co. ?
    2. a firm in which the director of holding co. of the lending co. or his relative is a partner ?
    3. a private co. in which the director of holding co. of the lending co. is a director or member ?
    4. a BODY CORPORATE of which at least 25% voting power is held by the director of holding co. of the lending co. ?

    Please reply !!!

  22. Siddharam says:

    Its wonderfully decteted.. than u sir.. its very essential for students as well as professionists.

  23. c.Ramachandran says:

    1) In para (f) of analysis of 185, it is said that it is basically affects holdingcCo giving loan to sub Co with common directors. I would like to submit that the related rule exempts any loan or guarantee by holding to subsidiary.

    2) Under the planning suggessted for 186 , the author has suggessted for gifting of shares to some one. But gifting, unless to relatives, has wider implications u/s 56 (2) of income tax act and transferee may b taxable in respect of the value as per rule 11 u a of income tax act. So caution is required in this connection

Leave a Reply

Your email address will not be published. Required fields are marked *