Till now Section 185 as amended by Companies (Amendment) Act, 2017 has not notified by the Central Government, this article with the hope that the reader will get ready reference for changes.
Note
: 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.
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) anybody 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) anybody 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.
|
Anybody
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.
|
Anybody
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
(1) of the directors of the
company or
(2) 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 anybody 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.
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