18 April 2015
[Entire discussion is in relation to the companies which are associate companies and not holding-subsidiary companies]
As per Section 185, the company cannot give guarantee or provide any security in connection with a loan to any other body corporate. However, Section 185 allows corporate guarantee if these companies are holding-subsidiary company.
Section 185 provides that “Save as otherwise provided in this Act, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person”. Section 185 provides exemption to holding company for giving loan or guarantee to its subsidiary companies.
Now i draw reference to Section 186, which reads as follow:
Section 186 (2):
No company shall directly or indirectly — a) give any loan to any person or other body corporate; b) give any guarantee or provide security in connection with a loan to any other body corporate or person; and c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate, exceeding sixty per cent of its paid-up share capital, free reserves and securities premium account or one hundred per cent of its free reserves and securities premium account, whichever is more.
Section 186 (5):
No investment shall be made or loan or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution concerned where any term loan is subsisting, is obtained:
Provided that prior approval of a public financial institution shall not be required where the aggregate of the loans and investments so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate, along with the investments, loans, guarantee or security proposed to be made or given does not exceed the limit as specified in sub-section (2), and there is no default in repayment of loan instalments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.
Hence, as per my opinion, reading of the Section 185 and 186 together provides as follow:
1. General Permission: Though giving of loans / guarantee is not possible as per Section 185, it is possible upto 60% of the networth of the company giving loan / guarantee.
2. Specific Permission: Giving loan / guarantee in excess of 60% is also possible, if board resolution is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution is obtained.
20 April 2015
Can you please elaborate your query in detail? I mean to say is that Section 185 specifically restricts the loan to be given to Director or its interested parties. If in your transaction, section 185 is not attracted, then you can give loan/guarantee to the borrower provided you comply with the limit mentioned in Section 186.
If you can give details about your transaction, then I think I will be able to help you properly. Thanks
20 April 2015
Thanks for details. But you need to first check, whether Section 185 is applicable or not. For which, you need to check all the conditions of Section 185.
Corporate guarantee can be given under Section 186 only if Section 185 is not attracted.
Section 185 specifically talks about giving Loans/guarantee to Directors and its related parties whereas Section 186 talks about loans/guarantee to all (other than Directors and its related party) because Section 185 does not allow to give loans/guarantee to Directors and its related parties.
Section 185 is attracted in my case. But in my view, Section 186 will override Section 185. Further, it is not clear that Section 186 is only about loans/guarantee to all (other than related party). I think Section 186 also covers related parties.
Section 186 mentions "ANY PERSON". Hence, my view is, "any person" also includes related party. And if it is so, then I can give corporate guarantee to related party provided I follow conditions of Section 186.
20 April 2015
No. I do not agree with your views. It can not override Section 185.
You are correct that Section 186 covers everyone. But it gives the limits for taking approval of Board or Members. Whereas Section 185 specifically restricts loan to be given to Directors and its related parties.
Understand, Section 186 allows the Company to provide loans to everyone but as per Section 185, if the Company is providing loan to Directors (and its related parties), then Company act is prohibiting the Company to do so. That mean Section 185 is overriding Section 186 to the extend that the Company is willing to provide loans to Directors/its related parties.
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