Sec 185

 

Section 185 of Companies Act, 2013 has ben completely substituted by New Section 185 under Companies Amendment Act, 2017 (CA, 2017 got president assent on 3rd January, 2018 and was notified on 07th May 18.  Due to Complete substitution there are many changes under this section as mentioned below.

 

Crux of new amendment

Who can avail the Loan/ guarantee/ Security from a Company Old Provision New Provision
Any Private Company in which such Director is a Director or Member NO YES

(subject to condition)

Any Body Corporate at the general meeting of which at least 25% of voting capital is exercisable by any such Director or 2 or more of such Director NO YES

(subject to conditions)

Any Body Corporate the Director, MD, Manager are accustomed to act in accordance with the directions of the Board or any Director or Directors of the lending Company NO YES

(subject to conditions)

 

Section 2 of Companies Act, 2013, does not define “loan”.

 

Section 185(1): This sub-section restrict only for Loan/ Guarantee/ Securities to Individuals not Companies or Body Corporates.

 

Section 185(2): This Sub section allows by passing of Special Resoluion to give loan to (Private Company, Body Corporate in which directors of lender Company are Directors or Shareholders) (inserted via CA,2017)

 

Section 185(3): This sub section permits loans by Holding to wholly owned subsidary without complying with conditions given u/s 185(2).

 

Language of Section 185:

 

(1)  No Company ( Private & Public)

 

  • Directly or Indirectly
  • Advanced any loan, including Book Debt
  • Or any Guarantee or provide any security in connection with any loan taken by

 

Following Persons

 

  1. Any director of Company, or
  2. Any director of a Company which is its Holding Company, or

iii.            Any partner of Director of lender company, or

  1. Any relative of Directors of Lender Company, or
  2. Any firm in which any of Director of Lending Company is Director, or
  3. Any firm in which any relative of Director of lending Company is Director.

Points to be Kept in Mind while Complying according to this Section

  1. a)      This Subsection applicable on Public Limited as well as Private Limited Company (whether small, OPC, Start ups etc.)
  2. b)      Guarantee or Security in respect of only ‘Loan’ is covered.
  3. c)      Only individuals/ firms are covered in sub section 1. Companies / body corporates are not covered in above sub section

 

 

(2)  Following loan can be given by company to Any Person in whom directors are interested after fulfilling the Conditions mentioned below:

  • Advance any loan, including loan represented by a book debt
  • Give any guarantee in connection with any loan taken
  • Provide any security in connection with any loan taken

 

Any Person:

 

  1. Any Private Company of which any such Director is a Director or member;
  2. Body Corporate in which 25% or more voting power rests with one or more directors;

iii.            Body Corporate whose Board accustomed to act on directions of BOD or Directors of lending company

Conditions:

  1. Special Resolution passed by the Company in General Meeting.
  2. The loans are utilized by the borrowing company for its principal business activities.

 

(3)  Restrictions of Sub Section (1) and (2) shall not be applicable on following transactions:

  1. Any loan made by a Holding Company to its Wholly own Subsidiary Company or any guarantee given or security provided by a Holding Company in respect of any loan made to its wholly own subsidiary Company Give any guarantee in connection with any loan taken
  2. 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.

 

 

Check whether loan is in limit u/s 186(2) if not then whether Special Resolution for such has been passed or not. Limites as mentioned below:

  • 60% of Paid up share capital + Free Reserve + Securities Premium Account OR
  • 100% of Free Reserve + Securities Premium Account

 

As per Section 186(4) Company shall disclose in the Financial statement full particular of Loan/ G/ S and purpose for which such L/G/S is proposed to be utilised by borrower

 

Interest on Loan u/s 186 (7): Loan shall be given at a rate of interest not lower than the prevailing yield of one year, three year, five year or then year Government security closest to the tenor of the laon.

 

Other sections

Section 177 (4) (v): Every Audit Committee shall scrutiny of inter-corporate loans and investments.

Section 179(3) (e): The Board of Directors of a company shall exercise the power to invest the funds of the company by means of resolutions passed at meetings of the Board,

 

(Credits: This article was originally published by CS Divesh Goyal)



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