X

Section 185 re modified by Companies Amendment Act, 2017

This article tries to give brief understanding of the provisions of section 185 as modified by the Companies Amendment Act, 2017

Here we have used the term loans for the term “any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken” just for ease of understanding.

Till now Section 185 as amended by Companies (Amendment) Act, 2017 has not notified by the Central Government, but we have prepared this article with the hope that the reader will get ready for the changes.

Sub Section (1) of Section 185 of the Companies Act, 2013 says that a company cannot advance loans to

(*) any director of the company,

(*) any director of the holding company,

(*) any partner or relative of any such above mentioned director; or

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

But

(2) A company may advance any loans to :-

(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 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

(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.

Subject to these 2 conditions only:-

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

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

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 utilised by the recipient of the loan or guarantee or security and any other relevant fact.

Comparison of old provision with new one:- A company can advance any loan

S.No. Condition    As per old provision    As per new provision
1. To any of its directors x x
2. To relative of directors x x
3. To the directors of the holding company x x
4. To the partner of director x x
5. To the partnership firm in which its director or directors of its holding company is partner x x
6. To any other private company having common directors or members x
7. 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 x
8. 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 x

For Example:-

♦ ABC Private Limited has two directors A & B.

As per section 185 of the Companies Act, 2013, ABC Pvt Ltd cannot advance any loan to Mr. A or Mr. B.

♦ A is partner in XYZ & Company, a partnership firm.

As per section 185 of the Companies Act, 2013, ABC Pvt Ltd cannot advance any loan to XYZ & Company, since Mr. A is partner in XYZ & Company.

♦ C is relative of Mr. A.

Section 185 of the Companies Act, 2013 does not allow a company to advance any loan to any relative

  • of the directors of the company or
  • of the directors of the holding company.

♦ ABC Pvt Ltd is subsidiary company of JKL Ltd. JKL Ltd has 3 directors, Mr. P, Q & R.

Section 185 is not allowed a company to give any loan to any of the director of its holding company i.e, ABC Pvt Ltd can’t advance any loan to Mr. P, Q & R.

♦ B is also director in D Ltd..

ABC Pvt Ltd can not give loan to D Ltd. Section 185 not allowed a company to provide loans to another public company having common directors.

♦ A is also director in E Pvt Ltd.

ABC Pvt Ltd can give loan to E Pvt Ltd. Section 185 now allowed a company to provide loans to another private company having common directors.

ABC Pvt Ltd can also advance loan to any body corporate as mentioned in point no 2 and 3 above by passing special resolution for principal business of the borrower.

*Here we have assumed that ABC Pvt Ltd has attracted section 185 of the Companies Act, 2013 and not fulfilled all 3 conditions of exemption available to private companies.

Exemption:

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 years, five years or ten years 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.

Section 185 of the Companies Act, 2013 is also not applicable on

1. private company

  • In whose share capital no other body corporate has invested any money;
  • If the borrowings of such a company from banks or financial institutions or any body corporate is less than the twice of its paid up share capital or rupees fifty crore, whichever is lower; and
  • Such a company has no default in repayment of such borrowings subsisting at the time of making transactions under this section.
  • Provided that the company has not defaulted in filing its financial statement and annual return with the Registrar.

If a private company does not fulfill all of these 3 conditions then section 185 will become applicable on that company.

2. Government Company

  • which has taken approval of the Ministry or Department of the concerned Government which is administratively in charge of that Government Company before advancing any loan.
  • Provided that the company has not defaulted in filing its financial statement and annual return with the Registrar.

3. Nidhi Company

  • which has given loans to its directors or his relative in their member capacity and such transaction is disclosed in the notes to accounts of the financial statement.

4. Specified IFSC Private Companies can grant loans to

  • Any private companies of which any such director is a director or member in which director of the lending company do not have direct or indirect shareholding through themselves or through their relatives and a special resolution is passed to this effect.

5. Specified IFSC unlisted Public Companies can provide loans to

  • Any private companies of which any such director is a director or member in which director of the lending company do not have direct or indirect shareholding through themselves or through their relatives and a special resolution is passed to this effect.

Penalty:

(4) If any loan is advanced or utilised in contravention of the provisions of this section,—

(i) 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;

(ii) every officer of the company who is in default shall be punishable with imprisonment for a term 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; and -newly added

(iii) 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.

Categories: Corporate Law

View Comments (3)

  • Whether the loans by one company to another company having a common director will be treated as deemed dividend in the hands of the company taking the loan if the loan amount is exceeding the paid up capital of the company giving the loan?

  • B is also director in D Ltd..
    ABC Pvt Ltd can not give loan to D Ltd. Section 185 not allowed a company to provide loans to another public company having common directors.
    Kindly clarify with regards to this point.
    I think following points need to be notice only in this case
    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

X

Headline

Privacy Settings