Analysis of section 185 of companies act 2013
a) section 185 of companies act 2013 applies to both private and public companies,
b) No company can directly or “indirectly” advance loan to its “directors” or to “other persons in whom directors are interested”
Indirect lending means that the company does not give a loan to director through the agency of one or more intermediaries. But, this word of ‘indirect’ cannot be read by converting what is not a loan into a loan as was discussed in Dr Fredie Ardeshir Mehta Vs Union of India (1991) 70 Comp Cas 210,
c) Definition of loan is not mentioned in the companies act. Therefore in layman language, it can be said that all transactions where sum of money is given to a person to be returned with or without interest can be termed as loan,
d) But advance is not covered in the definition of loan as it is a kind of prepayment. For e.g, if the company gives advance to a person against purchase of materials, this will not be treated as loan,
e) Share Application money received is also not covered in the definition of Loans,
f) Company cannot give any guarantee or provide any security in connection with any loan taken by him or such other person,
Now, this is restrict a very common situation of holding company that used to give guarantee of its subsidiary company, so that the later could avail bank funding and loans (if holding company and subsidiary company have common directors),
But, it is to be taken into consideration that here guarantee or security is covered but not letter of comfort. The basic difference between guarantee and letter of comfort is that in case of guarantee, guarantor undertakes the liability of principal debtor, whereas in letter of comfort, guarantor does not undertake any liability of principal debtor but instead introduces him to the third party.
g) Also, company cannot give loan which is represented under the head ‘book debts’ to directors or persons in whom directors are interested, i.e. if a company advances a loan/ sum of money to directors and shows the same under the head of ‘book debts’, i.e. director is debtor from whom company has to receive money is also prohibited.
It is to be noted that Section 296 of Companies Act, 1956 considered a book debt as loan for the purpose of Section 295. Time for repayment & other terms & conditions should be considered to consider any debt as a loan.
h) Loan given before 12.08.2013 is not covered under section 185 of companies act 2013 as the act says “no company shall ‘advance’ any loan or ‘give’ any guarantee or ‘provide’ any security…….” which is in future tense and therefore section 185 of companies act 2013 applies prospectively. But, the same loan should not be renewed or altered.
i) Company shall maintain a register in Form MBP 2 and enter therein separately, the particulars of loans and guarantees given, securities provided and acquisitions made as aforesaid in chronological order in respect of each such transaction within seven days of making such loan or giving guarantee or providing security or making acquisition. The entries in register is to be signed and authenticated by the company secretary employed in the company or by any other person authorised by the Board for the purpose.
j) Penalty:
i. Lender Company – Fine Rs. 5 lakhs to Rs. 25 lakhs &
ii. Receiver: Director or other person to whom any loan is advanced or guarantee or security is given -Imprisonment upto 6 months or fine Rs. 5 lakhs to Rs. 25 Lakhs, or both.
i.e. both receiver and lending company is covered here.
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