Section 185 and section 185
This query is : Resolved
18 April 2015
[Entire discussion is in relation to the companies which are associate companies and not holding-subsidiary companies]
As per Section 185, the company cannot give guarantee or provide any security in connection with a loan to any other body corporate. However, Section 185 allows corporate guarantee if these companies are holding-subsidiary company.
Section 185 provides that “Save as otherwise provided in this Act, 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”. Section 185 provides exemption to holding company for giving loan or guarantee to its subsidiary companies.
Now i draw reference to Section 186, which reads as follow:
Section 186 (2):
No company shall directly or indirectly —
a) give any loan to any person or other body corporate;
b) give any guarantee or provide security in connection with a loan to any other body corporate or person; and
c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate, exceeding sixty per cent of its paid-up share capital, free reserves and securities premium account or one hundred per cent of its free reserves and securities premium account, whichever is more.
Section 186 (5):
No investment shall be made or loan or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution concerned where any term loan is subsisting, is obtained:
Provided that prior approval of a public financial institution shall not be required where the aggregate of the loans and investments so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate, along with the investments, loans, guarantee or security proposed to be made or given does not exceed the limit as specified in sub-section (2), and there is no default in repayment of loan instalments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.
Hence, as per my opinion, reading of the Section 185 and 186 together provides as follow:
1. General Permission: Though giving of loans / guarantee is not possible as per Section 185, it is possible upto 60% of the networth of the company giving loan / guarantee.
2. Specific Permission: Giving loan / guarantee in excess of 60% is also possible, if board resolution is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution is obtained.
Is my interpretation correct? Kindly advise me.
As per Section 185, the company cannot give guarantee or provide any security in connection with a loan to any other body corporate. However, Section 185 allows corporate guarantee if these companies are holding-subsidiary company.
Section 185 provides that “Save as otherwise provided in this Act, 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”. Section 185 provides exemption to holding company for giving loan or guarantee to its subsidiary companies.
Now i draw reference to Section 186, which reads as follow:
Section 186 (2):
No company shall directly or indirectly —
a) give any loan to any person or other body corporate;
b) give any guarantee or provide security in connection with a loan to any other body corporate or person; and
c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate, exceeding sixty per cent of its paid-up share capital, free reserves and securities premium account or one hundred per cent of its free reserves and securities premium account, whichever is more.
Section 186 (5):
No investment shall be made or loan or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution concerned where any term loan is subsisting, is obtained:
Provided that prior approval of a public financial institution shall not be required where the aggregate of the loans and investments so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate, along with the investments, loans, guarantee or security proposed to be made or given does not exceed the limit as specified in sub-section (2), and there is no default in repayment of loan instalments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.
Hence, as per my opinion, reading of the Section 185 and 186 together provides as follow:
1. General Permission: Though giving of loans / guarantee is not possible as per Section 185, it is possible upto 60% of the networth of the company giving loan / guarantee.
2. Specific Permission: Giving loan / guarantee in excess of 60% is also possible, if board resolution is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution is obtained.
Is my interpretation correct? Kindly advise me.
20 April 2015
Can you please elaborate your query in detail?
I mean to say is that Section 185 specifically restricts the loan to be given to Director or its interested parties. If in your transaction, section 185 is not attracted, then you can give loan/guarantee to the borrower provided you comply with the limit mentioned in Section 186.
If you can give details about your transaction, then I think I will be able to help you properly. Thanks
I mean to say is that Section 185 specifically restricts the loan to be given to Director or its interested parties. If in your transaction, section 185 is not attracted, then you can give loan/guarantee to the borrower provided you comply with the limit mentioned in Section 186.
If you can give details about your transaction, then I think I will be able to help you properly. Thanks
20 April 2015
Lets say ABC Pvt Ltd is banking with SBI bank. XYZ Pvt Ltd (associate company of ABC Pvt Ltd) has given its corporate guarantee.
As per section 185, its not possible to give corporate guarantee as these companies are not holding-subsidiary companies.
But in my opinion, as per 186, corporate guarantee can be given.
As per section 185, its not possible to give corporate guarantee as these companies are not holding-subsidiary companies.
But in my opinion, as per 186, corporate guarantee can be given.
20 April 2015
Thanks for details. But you need to first check, whether Section 185 is applicable or not. For which, you need to check all the conditions of Section 185.
Corporate guarantee can be given under Section 186 only if Section 185 is not attracted.
Section 185 specifically talks about giving Loans/guarantee to Directors and its related parties whereas Section 186 talks about loans/guarantee to all (other than Directors and its related party) because Section 185 does not allow to give loans/guarantee to Directors and its related parties.
Corporate guarantee can be given under Section 186 only if Section 185 is not attracted.
Section 185 specifically talks about giving Loans/guarantee to Directors and its related parties whereas Section 186 talks about loans/guarantee to all (other than Directors and its related party) because Section 185 does not allow to give loans/guarantee to Directors and its related parties.
20 April 2015
Exactly sir.
Section 185 is attracted in my case. But in my view, Section 186 will override Section 185. Further, it is not clear that Section 186 is only about loans/guarantee to all (other than related party). I think Section 186 also covers related parties.
Section 186 mentions "ANY PERSON". Hence, my view is, "any person" also includes related party. And if it is so, then I can give corporate guarantee to related party provided I follow conditions of Section 186.
Please give your opinion.
Section 185 is attracted in my case. But in my view, Section 186 will override Section 185. Further, it is not clear that Section 186 is only about loans/guarantee to all (other than related party). I think Section 186 also covers related parties.
Section 186 mentions "ANY PERSON". Hence, my view is, "any person" also includes related party. And if it is so, then I can give corporate guarantee to related party provided I follow conditions of Section 186.
Please give your opinion.
20 April 2015
No. I do not agree with your views. It can not override Section 185.
You are correct that Section 186 covers everyone. But it gives the limits for taking approval of Board or Members. Whereas Section 185 specifically restricts loan to be given to Directors and its related parties.
Understand, Section 186 allows the Company to provide loans to everyone but as per Section 185, if the Company is providing loan to Directors (and its related parties), then Company act is prohibiting the Company to do so. That mean Section 185 is overriding Section 186 to the extend that the Company is willing to provide loans to Directors/its related parties.
You are correct that Section 186 covers everyone. But it gives the limits for taking approval of Board or Members. Whereas Section 185 specifically restricts loan to be given to Directors and its related parties.
Understand, Section 186 allows the Company to provide loans to everyone but as per Section 185, if the Company is providing loan to Directors (and its related parties), then Company act is prohibiting the Company to do so. That mean Section 185 is overriding Section 186 to the extend that the Company is willing to provide loans to Directors/its related parties.
21 April 2015
I agree with you views sir. But section 185 starts with "Save as otherwise provided in the act"
So I think section 186 may override section 185
So I think section 186 may override section 185
23 July 2025
Interpretation of Section 185 and Section 186 of the Companies Act, 2013
Your interpretation of Section 185 and Section 186 is largely correct with a few clarifications. Let's go through the provisions in detail and discuss the points you've raised.
1. Section 185: Loans, Guarantees, and Securities to Directors or Related Parties
Section 185 of the Companies Act, 2013 primarily restricts companies from giving loans or advancing any loan to:
Directors of the company, or
Persons in whom the directors are interested (e.g., relatives of the director, entities where the director has a significant interest).
Guarantees and securities: This section also prohibits giving guarantees or securities in connection with any loan taken by these individuals.
However, there are exceptions where a company can give loans, guarantees, or provide security, particularly:
A holding company can give loans or guarantees to its wholly owned subsidiary.
In addition, Section 185(2) specifically provides an exemption for the loan/guarantee/security between holding and subsidiary companies, joint venture companies, and associate companies, subject to specific conditions.
In summary:
Section 185(1) prohibits loans/guarantees/security to directors and related parties.
Section 185(2) provides an exception for holding-subsidiary relationships and certain inter-corporate relationships like joint ventures and associate companies.
2. Section 186: Restrictions on Loans and Investments by Companies
Section 186 lays down the rules and restrictions regarding loans, guarantees, securities, and investments made by a company to others.
Specifically:
Section 186(2) prohibits the company from:
(a) Giving loans to any person or body corporate.
(b) Giving guarantees or providing security in connection with loans to any person or body corporate.
(c) Acquiring securities of any other body corporate in an amount exceeding 60% of its paid-up share capital, free reserves, and securities premium, or 100% of its free reserves and securities premium, whichever is higher.
Section 186(5) specifies that for loans, guarantees, and investments exceeding these limits, the following conditions must be met:
The board resolution must be passed with the consent of all directors present at the meeting.
Prior approval of public financial institutions must be obtained if there is any outstanding term loan from such institutions.
In simple terms:
Section 186(2) lays a cap on the extent to which a company can make loans, provide guarantees, or acquire securities.
The limits are 60% of the company's net worth or 100% of its free reserves and securities premium, whichever is higher.
If the company exceeds these limits, it requires the prior approval of all directors and approval from a public financial institution if a loan is involved.
3. Your Interpretation: General and Specific Permission
General Permission (60% Limit)
You correctly identified that under Section 186(2), a company is allowed to give loans, provide guarantees, or make investments up to 60% of its net worth or 100% of its free reserves (whichever is higher). This is the general permission that allows the company to act without needing additional approvals, as long as it stays within these limits.
Specific Permission (Exceeding 60% Limit)
Your understanding is also accurate that if the company wishes to exceed these limits, it requires specific permission:
Board resolution must be passed with the consent of all the directors present at the meeting.
Additionally, prior approval of public financial institutions (if the company has any existing term loans) is required before the company can exceed these limits.
So, if a company wants to give loans, guarantees, or make investments exceeding the 60% limit, it needs to ensure:
All directors consent at the board meeting.
Approval from public financial institutions (if any term loans are outstanding).
4. Section 185 vs Section 186: Key Differences
Section 185 restricts loans and guarantees to directors and related parties (e.g., relatives or entities where directors have an interest). The provision allows some exceptions for holding-subsidiary companies and certain inter-corporate relationships.
Section 186, on the other hand, governs loans, guarantees, and investments made by the company to third parties (including body corporates) and has specific limits on how much a company can lend, guarantee, or invest (60% of its net worth or 100% of free reserves and securities premium).
5. Conclusion:
Yes, your interpretation is largely correct. Here's the simplified summary:
General Permission: A company can give loans, guarantees, and investments up to 60% of its net worth or 100% of its free reserves and securities premium, whichever is higher.
Specific Permission: If the company wants to exceed the 60% limit, it needs:
Board resolution with the consent of all directors present at the meeting.
Prior approval from public financial institutions (if the company has any outstanding term loans from such institutions).
The two sections (185 and 186) regulate loans, guarantees, and securities but in different contexts — Section 185 governs transactions involving directors and related parties, while Section 186 governs loans, guarantees, and investments made to other bodies corporate or persons.
Your interpretation of Section 185 and Section 186 is largely correct with a few clarifications. Let's go through the provisions in detail and discuss the points you've raised.
1. Section 185: Loans, Guarantees, and Securities to Directors or Related Parties
Section 185 of the Companies Act, 2013 primarily restricts companies from giving loans or advancing any loan to:
Directors of the company, or
Persons in whom the directors are interested (e.g., relatives of the director, entities where the director has a significant interest).
Guarantees and securities: This section also prohibits giving guarantees or securities in connection with any loan taken by these individuals.
However, there are exceptions where a company can give loans, guarantees, or provide security, particularly:
A holding company can give loans or guarantees to its wholly owned subsidiary.
In addition, Section 185(2) specifically provides an exemption for the loan/guarantee/security between holding and subsidiary companies, joint venture companies, and associate companies, subject to specific conditions.
In summary:
Section 185(1) prohibits loans/guarantees/security to directors and related parties.
Section 185(2) provides an exception for holding-subsidiary relationships and certain inter-corporate relationships like joint ventures and associate companies.
2. Section 186: Restrictions on Loans and Investments by Companies
Section 186 lays down the rules and restrictions regarding loans, guarantees, securities, and investments made by a company to others.
Specifically:
Section 186(2) prohibits the company from:
(a) Giving loans to any person or body corporate.
(b) Giving guarantees or providing security in connection with loans to any person or body corporate.
(c) Acquiring securities of any other body corporate in an amount exceeding 60% of its paid-up share capital, free reserves, and securities premium, or 100% of its free reserves and securities premium, whichever is higher.
Section 186(5) specifies that for loans, guarantees, and investments exceeding these limits, the following conditions must be met:
The board resolution must be passed with the consent of all directors present at the meeting.
Prior approval of public financial institutions must be obtained if there is any outstanding term loan from such institutions.
In simple terms:
Section 186(2) lays a cap on the extent to which a company can make loans, provide guarantees, or acquire securities.
The limits are 60% of the company's net worth or 100% of its free reserves and securities premium, whichever is higher.
If the company exceeds these limits, it requires the prior approval of all directors and approval from a public financial institution if a loan is involved.
3. Your Interpretation: General and Specific Permission
General Permission (60% Limit)
You correctly identified that under Section 186(2), a company is allowed to give loans, provide guarantees, or make investments up to 60% of its net worth or 100% of its free reserves (whichever is higher). This is the general permission that allows the company to act without needing additional approvals, as long as it stays within these limits.
Specific Permission (Exceeding 60% Limit)
Your understanding is also accurate that if the company wishes to exceed these limits, it requires specific permission:
Board resolution must be passed with the consent of all the directors present at the meeting.
Additionally, prior approval of public financial institutions (if the company has any existing term loans) is required before the company can exceed these limits.
So, if a company wants to give loans, guarantees, or make investments exceeding the 60% limit, it needs to ensure:
All directors consent at the board meeting.
Approval from public financial institutions (if any term loans are outstanding).
4. Section 185 vs Section 186: Key Differences
Section 185 restricts loans and guarantees to directors and related parties (e.g., relatives or entities where directors have an interest). The provision allows some exceptions for holding-subsidiary companies and certain inter-corporate relationships.
Section 186, on the other hand, governs loans, guarantees, and investments made by the company to third parties (including body corporates) and has specific limits on how much a company can lend, guarantee, or invest (60% of its net worth or 100% of free reserves and securities premium).
5. Conclusion:
Yes, your interpretation is largely correct. Here's the simplified summary:
General Permission: A company can give loans, guarantees, and investments up to 60% of its net worth or 100% of its free reserves and securities premium, whichever is higher.
Specific Permission: If the company wants to exceed the 60% limit, it needs:
Board resolution with the consent of all directors present at the meeting.
Prior approval from public financial institutions (if the company has any outstanding term loans from such institutions).
The two sections (185 and 186) regulate loans, guarantees, and securities but in different contexts — Section 185 governs transactions involving directors and related parties, while Section 186 governs loans, guarantees, and investments made to other bodies corporate or persons.
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