Section 185 and Companies (Amendment) Act, 2017

Section 185 of the Companies Act, 2013

Loans to Directors

Companies (Amendment) Act, 2017 

Introduction:- The Companies (Amendment) Act, 2017 attempts to make major changes in the Companies Act, 2013 so as to bring harmony and synchronization among the Act, rules and SEBI guidelines. The Bill was passed by the Lok Sabha on 27^th July 2017 and by the Rajya Sabha on 19^th December 2017 and received the assent of the president on 3^rd January 2018.

Where we have seen the deletion of Section 194 and 195 of the Act relating to insider trading owing to repetition in the Act and SEBI guidelines, one more major change that we can see is the complete replacement with the existing provisions of Section 185 of the Companies Act, 2013 relating the Loans to Directors.

This article attempts to bring light upon the pre and post effect of Companies (Amendment) Act, 2017 on Section 185.

Background: (Section 185):- 

Section 185 was aimed at curbing the malpractice of Directors in providing Loans, guarantee or security to themselves or people associated with themselves, but this section was quite harsh when it comes to implementation because even the deserving and genuine cases were debarred from raising Loans from the Companies they have put their effort and hard work in.  Moreover Section 185 always aimed at ranking pari–passu the Directors and any other person in which the directors are interested with any other employee working in the Company. Conditions such as “giving any loans to managing or whole-time director as a part of the conditions of service extended by the Company to all its employees” signifies that.

Then came Companies (Amendment) Act, 2015 vide notification S.O. 1440 (E) dated 29/05/2015 w.e.f. 29/05/2015 which further relaxed this section w.r.t. Holding-subsidiary relationship allowing holding companies to give loans or provide guarantee or provide security to or in connection with its wholly owned subsidiary provided that the loan is utilized by the subsidiary company for its principle business activities.

Lets have a look at the comparison between the old Section 185 and new Section 185 of the Companies Act, 2013. 

 CRUX OF THE ARTICLE:- 

Who are the parties that are exempted from the provisions of Section 185 and what are the applicable conditions for the same, if any. 

1. Managing Director or Whole-time Director provided that providing loan by the company is a facility provided by the Company to all its employees OR it is approved pursuant to any scheme approved by the members of the Company by way of Special Resolution.

2. Holding Company providing Loan, giving guarantee or providing security to its wholly owned subsidiary [inserted via Companies (Amendment) Act, 2015] provided that the loans are utilized by the Subsidiary Company for its principle business activity.

3. Private Company/ Body Corporate* (inserted in Companies Amendment Act, 2017)

A Company may advance any loan including any loan represented by book debts or give 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 passing a special resolution by the members in general meeting. Also the explanatory statement shall disclose full particulars of the loan given or guarantee given or security provided and also the purpose for which the loan, security or guarantee is proposed to be utilized by the recipient.

Secondly the loans are utilized by the borrowing company for the principle business activity.

4. A Company which in the ordinary course of Business provide Loans or give guarantees or provide security provided that the rate of interest is charged at a rate not less than rate of prevailing yield of 1 year, 3 year, 5 year or 10 year government security closest to the tenure of the Loan.