Sec. 185 , 186 of the companies act 2013
This query is : Resolved
30 November 2016
How to check the compliances of sec. 185 & 186 of companies act 2013-Loan to directors, related & body corporate?
Whether it is sufficient if u check any loans given during the current financial year or we have to take into account of the loans already existing ?
Also please tell me how to understand the point in CARO 2016 i.e is it sufficient if no new loans are given during the current year?
Thanks in advance
Whether it is sufficient if u check any loans given during the current financial year or we have to take into account of the loans already existing ?
Also please tell me how to understand the point in CARO 2016 i.e is it sufficient if no new loans are given during the current year?
Thanks in advance
30 November 2016
check weather special resolution is passed while giving Loan to managing Director as per section 185 of companies act
check weather form mgt 14 is passed in case of granting of loan by company to any other person or body corporate or employee as per section 186 of companies act
check that wether register of loan has been maintained by the Company in form MBP 2
And as per section 186 of the Companies Act, in addition to the Board approval, prior approval of Public Financial institution is required if any term loan is subsisting.
further , the company shall not give any further loan if there is default of loan installments or payment of intrest thereon to the public financial institutions
check weather form mgt 14 is passed in case of granting of loan by company to any other person or body corporate or employee as per section 186 of companies act
check that wether register of loan has been maintained by the Company in form MBP 2
And as per section 186 of the Companies Act, in addition to the Board approval, prior approval of Public Financial institution is required if any term loan is subsisting.
further , the company shall not give any further loan if there is default of loan installments or payment of intrest thereon to the public financial institutions
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30 November 2016
Thank you
and what if there is a loan given to directors already in the previous year before companies Act 2013 and small amount have been given additional to it. Is Special resolution required for that ?
Do the Auditor have to disqualify that in CARO 2016. for the small amount being added to that as normally we will check the compliance at the time of giving the loan?
Thanks in advance
and what if there is a loan given to directors already in the previous year before companies Act 2013 and small amount have been given additional to it. Is Special resolution required for that ?
Do the Auditor have to disqualify that in CARO 2016. for the small amount being added to that as normally we will check the compliance at the time of giving the loan?
Thanks in advance
23 July 2025
### **Section 185 & 186 of the Companies Act, 2013 — Loan to Directors, Related Parties, and Body Corporate**
Here’s how you can check compliance with **Section 185** (Loan to Directors) and **Section 186** (Loan to Body Corporate, etc.) of the **Companies Act, 2013**:
---
### **Section 185 - Loan to Directors and Related Parties**
**Key points to check:**
1. **Special Resolution for Loan to Directors**:
* **Section 185** restricts loans to directors or any other person in whom a director is interested.
* **Special resolution** must be passed in the **general meeting** to grant loans to directors or persons in whom directors are interested (including entities like private limited companies).
* **Exceptions**:
* Loans provided in the ordinary course of business with the approval of the **Board of Directors**.
* Loans provided to a managing director or whole-time director, subject to conditions, including approval by shareholders via **special resolution**.
2. **Form MGT-14**:
* Ensure that **Form MGT-14** (filing of special resolutions) is filed with the **Registrar of Companies (RoC)**.
* The special resolution should be passed prior to granting the loan.
3. **Compliance for Existing Loans**:
* **Existing loans to directors**: If the loan was given **prior to the enactment of the Companies Act, 2013**, and **no new loan** or **additional amount** is provided to the director during the current year, no new special resolution is required.
* However, if **additional loans** are provided, a **special resolution** should be passed to comply with **Section 185**.
---
### **Section 186 - Loan to Body Corporate and Others**
**Key points to check:**
1. **Board and Shareholder Approval**:
* **Board approval** is necessary for any loan, guarantee, or security provided to:
* **Body corporates** (other companies).
* **Any individual** (other than directors, related parties).
* **Shareholder approval via special resolution** is required when the aggregate of all loans, guarantees, and securities exceeds **60% of the paid-up share capital and free reserves** or **100% of free reserves** (whichever is higher).
2. **Form MGT-14**:
* Ensure that **Form MGT-14** is filed with RoC for special resolutions passed by the shareholders.
3. **Register of Loans**:
* Ensure that the **Register of Loans** is maintained by the company as required under **Section 186** in **Form MBP-2**. This includes details about the loans and securities granted.
4. **PFI Consent (Public Financial Institutions)**:
* If the company has any **subsisting term loan** from a **Public Financial Institution (PFI)**, prior consent from the PFI is required before granting additional loans, guarantees, or securities.
* This is especially relevant if the loan crosses the prescribed limits.
---
### **Handling Existing Loans (from Previous Years)**
* **For loans already given** in the **previous year**, the compliance checks mainly focus on:
1. **Whether the loan was granted in compliance with Section 185 and 186** at the time of issuance (i.e., prior approval, special resolution, etc.).
2. **For small additional loans**: If a loan was given to a director or related entity in the **previous year** and only a small amount was added during the current year, the same compliance rules apply:
* If the small addition results in exceeding the limits for loans under **Section 185**, **special resolution** may be required.
* If the loan is still within the limits, no new resolution is required for the small amount.
3. **CARO 2016 Impact**: If the company has violated **Section 185** or **186** (e.g., additional loans were granted without special resolution or required approvals), the auditor **should qualify** their report under CARO 2016 regarding **non-compliance**.
---
### **CARO 2016 — Auditor's Role**
1. **Compliance Check**:
* In the auditor's report, they are required to check if the company has complied with the provisions of **Section 185** and **186** regarding loans to directors and body corporates.
* If any non-compliance exists (e.g., loans granted without special resolutions, board approval, or proper filing), the auditor must disclose this in their CARO report, and the company may be subject to penalties or corrective actions.
2. **Small Loans**:
* If the small amount of additional loan is given but doesn't cross the thresholds set by the Act, there might not be a need for a special resolution.
* However, if the auditor notices non-compliance in the earlier years (e.g., previous loans were granted without compliance), the auditor must disqualify the company in CARO 2016.
---
### **Summary of Compliance Checklist**:
1. **For Section 185**:
* **Special resolution** required for loan to directors or persons in whom directors are interested.
* Ensure **MGT-14** is filed.
* **Existing loans**: Check if the loans were granted with necessary approvals and if any new loans or additions require special resolution.
2. **For Section 186**:
* Check for **board approval** for loans, guarantees, and securities.
* **Special resolution** required if the loan exceeds specified limits.
* **MGT-14** for shareholder resolutions.
* Ensure the **Register of Loans** (MBP-2) is maintained.
3. **CARO 2016 Compliance**:
* The auditor needs to review the compliance and mention any violations related to loan provisions under **Sections 185 and 186** in their report.
---
Let me know if you need further clarification!
Here’s how you can check compliance with **Section 185** (Loan to Directors) and **Section 186** (Loan to Body Corporate, etc.) of the **Companies Act, 2013**:
---
### **Section 185 - Loan to Directors and Related Parties**
**Key points to check:**
1. **Special Resolution for Loan to Directors**:
* **Section 185** restricts loans to directors or any other person in whom a director is interested.
* **Special resolution** must be passed in the **general meeting** to grant loans to directors or persons in whom directors are interested (including entities like private limited companies).
* **Exceptions**:
* Loans provided in the ordinary course of business with the approval of the **Board of Directors**.
* Loans provided to a managing director or whole-time director, subject to conditions, including approval by shareholders via **special resolution**.
2. **Form MGT-14**:
* Ensure that **Form MGT-14** (filing of special resolutions) is filed with the **Registrar of Companies (RoC)**.
* The special resolution should be passed prior to granting the loan.
3. **Compliance for Existing Loans**:
* **Existing loans to directors**: If the loan was given **prior to the enactment of the Companies Act, 2013**, and **no new loan** or **additional amount** is provided to the director during the current year, no new special resolution is required.
* However, if **additional loans** are provided, a **special resolution** should be passed to comply with **Section 185**.
---
### **Section 186 - Loan to Body Corporate and Others**
**Key points to check:**
1. **Board and Shareholder Approval**:
* **Board approval** is necessary for any loan, guarantee, or security provided to:
* **Body corporates** (other companies).
* **Any individual** (other than directors, related parties).
* **Shareholder approval via special resolution** is required when the aggregate of all loans, guarantees, and securities exceeds **60% of the paid-up share capital and free reserves** or **100% of free reserves** (whichever is higher).
2. **Form MGT-14**:
* Ensure that **Form MGT-14** is filed with RoC for special resolutions passed by the shareholders.
3. **Register of Loans**:
* Ensure that the **Register of Loans** is maintained by the company as required under **Section 186** in **Form MBP-2**. This includes details about the loans and securities granted.
4. **PFI Consent (Public Financial Institutions)**:
* If the company has any **subsisting term loan** from a **Public Financial Institution (PFI)**, prior consent from the PFI is required before granting additional loans, guarantees, or securities.
* This is especially relevant if the loan crosses the prescribed limits.
---
### **Handling Existing Loans (from Previous Years)**
* **For loans already given** in the **previous year**, the compliance checks mainly focus on:
1. **Whether the loan was granted in compliance with Section 185 and 186** at the time of issuance (i.e., prior approval, special resolution, etc.).
2. **For small additional loans**: If a loan was given to a director or related entity in the **previous year** and only a small amount was added during the current year, the same compliance rules apply:
* If the small addition results in exceeding the limits for loans under **Section 185**, **special resolution** may be required.
* If the loan is still within the limits, no new resolution is required for the small amount.
3. **CARO 2016 Impact**: If the company has violated **Section 185** or **186** (e.g., additional loans were granted without special resolution or required approvals), the auditor **should qualify** their report under CARO 2016 regarding **non-compliance**.
---
### **CARO 2016 — Auditor's Role**
1. **Compliance Check**:
* In the auditor's report, they are required to check if the company has complied with the provisions of **Section 185** and **186** regarding loans to directors and body corporates.
* If any non-compliance exists (e.g., loans granted without special resolutions, board approval, or proper filing), the auditor must disclose this in their CARO report, and the company may be subject to penalties or corrective actions.
2. **Small Loans**:
* If the small amount of additional loan is given but doesn't cross the thresholds set by the Act, there might not be a need for a special resolution.
* However, if the auditor notices non-compliance in the earlier years (e.g., previous loans were granted without compliance), the auditor must disqualify the company in CARO 2016.
---
### **Summary of Compliance Checklist**:
1. **For Section 185**:
* **Special resolution** required for loan to directors or persons in whom directors are interested.
* Ensure **MGT-14** is filed.
* **Existing loans**: Check if the loans were granted with necessary approvals and if any new loans or additions require special resolution.
2. **For Section 186**:
* Check for **board approval** for loans, guarantees, and securities.
* **Special resolution** required if the loan exceeds specified limits.
* **MGT-14** for shareholder resolutions.
* Ensure the **Register of Loans** (MBP-2) is maintained.
3. **CARO 2016 Compliance**:
* The auditor needs to review the compliance and mention any violations related to loan provisions under **Sections 185 and 186** in their report.
---
Let me know if you need further clarification!
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