Impact on Loan to Director under Companies (Amendment) Act 2017

Inter corporate loan is a common activity in corporate sectors mainly where  group  company concept  does exist.

In normal circumstances there is no such problem to do so, provided one has to comply the provisions as per section 186 of the Act.

However problem will arise only if there is common Director(s )or the Director(s) of the lending company has any interest in the  company to whom such loan shall be given. Under Indian scenario it is common practice that the promoters of the Flagship company incorporate various subsidiaries / associate company in which they become either Director or share holder. The fund requirements of those small subsidiaries / associates are normally met by the major flagship companies  by way of long term loan.

Now see what will be the impact on it due the change in provisions of section 185 under  the Companies (Amendment) Act 2017.

If we see the earlier Section 185(1) then we will find that it started as  'Save as otherwise provided in the Act no company shall directly or indirectly advance any loan represented by a book debt to any of it’s 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'.

If we carefully read the above provision then we will find that the sub section is starting with save as otherwise provided in the act…that means unless  there is any safeguard is provided in any  where in the act no company can enter those transactions. Now the question arise, where such save guard was provided? Those safe guard was provided in section 186 of the companies act 2013. According to the provision of the said section  any company  can make inter corporate  loan and advances after complying the various provision as stated in that section.

The Companies (Amendment) Act 2017 has made an important change in the sub section 1 of section 185. Now the said section starts as 'No Company shall directly or indirectly advance any loan represented by a book debt to or give any guarantee or provide any security in connection with ....'

The important point to be noted in the new sub section that the word 'save as otherwise provided in the act' has been omitted. Therefore we can not take any more the safeguard of section 186 to give any loan or advances to any concern where any director(s) of the company is interested.

Now the question will arise that whether loan to any concern / person , where the director is interested can not be given any more?

Subsection 2 of section 185 stated certain criteria and purpose for giving such types of loan ,those are as follows:

1. A special resolution need to be passed in the general meeting and a proper explanation about details of such loan shall be given in the explanatory statement of the notice.

2. The loan can be utilized only for the principal business of the borrowed company.

Therefore under the regime of the Amended section 185 loan to any person / concern where any director in interested became more stringent and can be given only for the purpose of the principal business of the borrowed company and not for any other purpose and the approval of the members of the lender company need to be taken by way of special resolution and after giving full disclosure in the notice of the general meeting.

The author is a Kolkata Based Practicing Company Secretary and having more than 15 years of experience in this field.