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Here is a way out for GROUP COMPANIES for proper compliance under section 185 of the Companies Act 2013 for loan to companies in which directors are interested. Section 185 of the Companies Act, 2013 states that: “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. 

Now the question is definition of "Person" and "body corporate" as indicated in section 185 of the Act, so as to link the loan given to director, directly or indirectly;


1. The Term "person" is not defined in the Act. But in such a case the definition in the General Clauses Act 1887 should be the guide. In Section 3 of the said Act, the word "person" includes a company or other association or body of individuals.

The word does not include a firm.

2. The term "Body corporate" is defined in the Act in section 2(11) as including a company incorporated outside India but does not include:-

(i) a co-operative society; and (ii) Any other body corporate which the central Government may specify in this behalf by notification.

3. Section 186 intended to govern the transaction by a company to "any person or body corporate ".

As stated above the word "person" includes individuals also. As section 185 seeks to regulate loans by a company to directors, MD and WTD, the word "person" presumably been included in the section along with "body corporate". UNQUOTE My idea is to incorporate a "Co-Operative society" and route inter corporate financial transaction which will be outside the purview of section 185 and 186.

Society under the societies act is not too complicated like NBFC. However, it is also important to understand certain basics and definitions under co-op societies Act. Hence I am furnishing relevant provisos to justify my idea as the CO-OP Societies Act is not applicable to companies under the companies Act 1956.

Important definitions under Co-operative Societies and companies act.

S. 4 - Societies which may be registered. 

Subject to the provisions of this Act, a co-operative society which has its objects, the promotion of the economic interests or general welfare of its members or of the public, in accordance with co-operative principles, or a co-operative society established with the object of facilitating the operations of such a society, may be registered under this Act,

Provided that - No co-operative society shall be registered, if it is likely to be, economically unsound, or the registration of which may have an adverse effect on development of the co-operative movement

S. 5 - Registration with limited or unlimited liability

(1) A co-operative society may be registered with or without limited liability; Provided that - the liability of a co-operative society, of which any member is a co-operative society shall be limited

(2) The word "limited" or its equivalent in any Indian language shall be the last word in the name of a co-operative society registered under this Act with limited liability.

S. 9 - Co-operative societies to be body corporate.

The registration of a co-operative society shall render it a body corporate by the name under which it is registered having perpetual succession and a common seal and with power to hold property, enter in to contracts, institute and defend suits and other legal proceedings and to do all things necessary for the purposes for which it was constituted

S. 128 - Companies Act, 1956, not to apply

The provisions of the Companies Act, 1956 shall not apply to co-operative societies. Section 16 - Persons who may become members

(1) Subject to the provisions of Section 17, no person shall be admitted as a member of a cooperative society except the following namely, (a-1) an individual who needs the services of such co-operative society and is competent to enter into contract under the Contract Act 1872 (Central Act IX of 1872)

(a) a depositor

(b) any other co-operative society,

(c) the State Government or the Central Government,

(d) the LIC of India, State Warehousing Corporation and such other institutions as may be approved by the State Government,

(e) a firm, a company or any other body corporate constituted under any law for the time being in force including a society registered under the Karnataka Societies Registration Act, 1960,

(f) a Market Committee established under the Karnataka Agricultural Produce Marketing(Regulation) Act, 1966,

(g) a local authority.


Published by

GOpal Rathnam
Category Corporate Law   Report

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