Analysis | Legitimate Entities to Loan under Section 185

SHORT SUMMARY

In this Research editorial, the author begins by referring to the provisions of Section 185 of the Companies Amendment Act, 2017 (Loan to Directors and entities in which directors are interested). The main focus of this research editorial is to analyse which are the entities to whom a Company can give Loan/ Guarantee/ Security etc' under Section 185 of Companies Act, 2013 after amendment by Companies Amendment Act, 2017.

BACKGROUND

Section 185 of Companies Act, 2013 corresponds to section 295 of the Companies Act, 1956, section 86D of the Indian Companies Act, 1913 and section 190 of the English Companies Act, 1948. It has been made effective from 12-9-2013

PROVISION AS PER COMPANIES AMENDMENT ACT, 2017

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. Due to Complete substitution there are many changes occurs in practical use of this Section.

A. WHAT IS TERM 'LOAN'

Section 2 of Companies Act, 2013, does not define 'loan'. A loan is defined by the Oxford English Dictionary as " a thing lent; something the use of which is allowed for a time, on the understanding that it shall be returned or an equivalent given, a sum of money lent on these conditions and usually with interest.

The Supreme Court in the case of Shree Ram Mills Ltd v. Commissioner of Excess Profit Tax, MANU/SC/0054/1954 ;

B. PROVISION OF SECTION 185 AS PER COMPANIES ACT, 2013

C. PROVISION AS PER COMPANIES AMENDMENT ACT, 2017

Section 185 of Companies Amendment Act, 185 Divided into 3 (three) Parts:

• Subsection 1: This Subsection states about 'Restricted Entities' to give Loan, provide Security or Guarantee under Companies Act, 2013. This Subsection includes only 'Individuals' and 'Firms'.
• Subsection 2: This Subsection states about 'loan to Private Company / Body Corporate' by following compliances.
• Subsection 3: This Subsection states about 'entities Loan/ Guarantee/ Securities to whom allowed' without complying with the conditions of Subsection 2.

NOTE: It can be opine that entities which are not covered under above 3 situations are free to Give Loan/ Guarantee / Securities without any default / compliance of Section 185.

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

• Any director of Company, or
• Any director of a Company which is its Holding Company, or
• Any partner of Director of lender company, or
• Any relative of Directors of Lender Company, or
•  Any firm in which any of Director of Lending Company is Director, or
• 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

a) This Subsection applicable on Public Limited as well as Private Limited Company (whether small, OPC, Start ups etc.)
b) Guarantee or Security in respect of only 'Loan' is covered.
c) Only individuals/ firms are covered in sub section 1.
d) 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

i. Any Private Company of which any such Director is a Director or member;
ii. 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

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

a) If borrower is Private Limited Company having common directors/ members then by using this sub section loan can be given.

b) Body Corporate includes LLPs, therefore as per, point (ii) of any person L/G/S can be given to LLP also. [Condition 25% or more voting power vested with one or more director of lender Company together].

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

i. Clause (a): Loan to Managing Director & Whole Time Director:

There are two ways to give Loan to Managing and Whole Time Director only.

a) Loan can be given to a Managing or Whole-Time Director as a part of the condition of their service.

Conditions: Conditions should be available for all the employees of the Company.

b) Loan can be given to a Managing or Whole-Time Director pursuant to any Scheme.

Conditions: Scheme should be approved by Shareholders by passing of Special Resolution.

ii. Ordinary Course of Business: 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 year, five year or ten year Government security closest to the tenor of the loan; or

iii. Wholly owned Subsidiary: 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

iv. Subsidiary: 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.

Conditions: In case of Guarantee on behalf of Subsidiary loan made under this clause utilized by the subsidiary company for its principal business activity only.

Food for Thought:

i. Clause (a): Whether loan to 'Manager' whether condition to its services or scheme shall be exempt from the restriction / compliances u/s 185.
ii. Clause (b): Whether all the Loan/ Guarantee /Security given under ordinary course of business are exempted u/s 185.

LIST OF PERMISSIBLE LOAN/ GUARANTEE/SECURITIES UNDER SECTION 185

As per provisions of Section 185 a Company can give Loan / Guarantee / Security to following below mentioned Persons/ Entities after complying with provisions of Section 186.

Note: All Companies have to keep in mind i.e. 'No Company can give Loan/ Guarantee / Security without complying with the provision of Section 186 of CA, 2013'. In other words 'It is mandatory for each and every company to comply with the provision of Section 186 while giving any L/G/S.

A. List of Restricted Person

A Company can't give Loan/ Guarantee/ Security to following below mentioned person:

I. Not Allowed

i. Any director of Company, or
ii. Any director of a Company which is its Holding Company, or
iii. Any partner of Director of lender company, or
iv. Any relative of Directors of Lender Company, or
v. Any firm in which any of Director of Lending Company is Director, or
vi. Any firm in which any relative of Director of lending Company is Director

II. Not Allowed if fails to pass special resolution

i. Any Private Company of which any such Director is a Director or member;
ii. 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

B. List of Permissible Person

III. Allowed if, Special Resolution Passed

i. Any Private Company of which any such Director is a Director or member;
ii. 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

Note: Loan to above mentioned entities are allowed after fulfilling below mentioned both conditions:

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

IV. Allowed without falling u/s 185(1) and (2)

i. Loan to Managing Director or Whole Time Director.
ii. L/G/S under ordinary course of business.
iii. L/G/ S to wholly owned subsidiary Company
iv. Loan to Subsidiary Company.

Note: Loan to above mentioned entities are allowed after fulfilling condition mentioned above.

V. Allowed without falling u/s 185

i. Loan to any Public Company (having common Director/ Shareholder or not).
ii. Private Company fulfilling all 3 conditions mentioned in Exemption Notification dated: 05th June, 2015.
iii. Guarantee / Security provided for the purpose other than loan taken by other entity.
iv. Loan to Holding Company (subject to condition that holding Company doesn't have common directors)
v. Loan to Subsidiary Companies (subject to condition that subsidiary Company doesn't have common directors)

Note: Above mentioned entities are not fall u/s 185, therefore Company can give Loan/ Guarantee/ Securities to above mentioned entities freely without any restriction / compliance of Section 185.