Clarity under Section 185 of Companies Act 2013

CS Jatin Bajaj

Clarity under Section 185 of Companies Act 2013 (Loan to Directors), Read with (Rule 10 of Companies (Meeting of Board and its Power) Rules, 2014

According to Section 185 (1), No Company shall directly or indirectly advance any loan, including the loan represented by the book debt, or any other person in whom the director is interested or provide any guarantee or securities in connection with the loan taken by him or any such person.

To Understand in detail, First of all we need to know the term “Any other person in whom the Director is Interested:

• Any Director of the lending Company, or a Company which is its holding Company or a partner or a relative of such Director.
• Any firm in which any such Director is a relative or a partner
• Any Private Company in which such Director is the Director or a Member
• Any body Corporate in a general meeting in which atleast 25% or more of such power is exercised by the Board of Directors, or by two or more such Director together

Proviso to section 185(1) states that nothing in sub section shall apply to:

(a) Giving of loan to managing Director or a Whole Time Director

But Company can provide the loan to Managing Director and a Whole Time Director by passing Special Resolution in a general meeting subject to the approval of Members.

(b)  A Company in the ordinary Course of business provides loans or give guarantees or provide securities for due payment of Loan and in respect of such a loan an interest is charged at the rate not less than the bank rate declared by RBI.

Now after Companies Amendment Act 2015, w.e.f 29^th May 2015, a new clause has been inserted.(c) & (d).  Refer Rule 10 of Companies (Meeting of Board and its Power) Rules, 2014.

(c) Any Loan provided by the Holding Company to its wholly owned Subsidiary Company or any guarantee or securities provided by the Holding Company in respect of loan made to wholly owned subsidiary Company

(d) Any guarantee given or security provided by the holding Company in respect of loan made  by any bank or financial institutions to its subsidiary Company

Provided that such a loan under clause (c) & (d) shall be utilized by Subsidiary Company for the principal business activities.

Important Note:

In Short, we can say that Section 185 will not be attracted if Loan is provided by Holding Company to wholly owned subsidiary Company because section 185 talks about Loan to a Director. But if Director of a Holding Company provides loan to a Director of a wholly owned subsidiary Company, then section 185 will be attracted which prohibits any Loan to a Director.

Some Exemptions to Private Limited Company after introduction of Companies Amendment Act 2015

Section 185 will not be applicable to a Private Limited Company

♠ In whose share capital no other body Corporate has invested the money.

Explanation: This section will be applicable to Private Limited Company if  body Corporate has invested the money in the share capital.

♠ If the borrowing of such a Company from Banks or Public financial institutions or any body Corporate is less than twice the paid up share capital or fifty Crores whichever is lower.

For Example:  if the Borrowing of a Company from Bank is 20 crores. Paid up share capital is 7 crores.

As per law twice the paid up capital is 14 crore. And borrowing is 20 crore which is more than twice the paid up share capital.

In  the case mentioned above, section 185 would be applicable.

♠ Such a Company has not made default in repayment of such borrowings subsisting at the time of making Transaction under this section.