Section 185 of the companies act, 2013
This query is : Resolved
11 December 2013
I want to know the meaning of this line "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 bank rate declared by the Reserve Bank of India." in Section 185 of the Companies Act, 2013.
Secondly, I want to know that a Private company is giving a corporate guarantee and collateral security to other Private company in which the Directors are common then what is the procedure to be followed in this regard, whether we have to pass special resolution or take Central Government in this regard.
Please reply early, it is urgent.
Secondly, I want to know that a Private company is giving a corporate guarantee and collateral security to other Private company in which the Directors are common then what is the procedure to be followed in this regard, whether we have to pass special resolution or take Central Government in this regard.
Please reply early, it is urgent.
11 December 2013
As per my view, it is talking about Bank Base Rate as defined by RBI for banking sector.
11 December 2013
Thanks a lot sir for your early reply, but can you give me reply regarding whom permission to be taken regarding one private company giving corporate guarantee and collateral security to another private company in which directors are common in both the companies and what is the procedure to be followed in this regard.
11 December 2013
As on date the provision of Section 185 is not applicable so no need to follow the procedure.
Read Circular 18/2013 dated 19.11.2013.
Read Circular 18/2013 dated 19.11.2013.
11 December 2013
But sir in this Circular it is talking about inapplicability of section 186 of the Companies Act, 2013 (earlier Section 372A of the Companies Act, 1956) will be inapplicable so whether it will also cover Section 185 of the Companies Act, 2013, I am little confused regarding this.
11 December 2013
Yes, loan to director covered under section 185 is not applicable and section 295 of CA, 1956 will be applicable.
11 December 2013
Thanks a lot sir.
11 December 2013
My Pleasure..........
11 December 2013
Sir, I have read an article in "newsletter@vaishlaw.com" under heading of "CONFUSION CONTINUES DESPITE MCA CIRCULAR" which says that "Section 372A of the Old Act and Section 186 of the New Act (as and when notified), in our view provides for procedural requirements to be followed and are general in nature and cannot, in our view, exempt the transactions restricted under Section 185 of the New Act. Section 185 of the New Act is a specific provision restricting certain classes of transactions and thus should override Section 372A of the Old Act and Section 186 of the New Act (as and when notified). This view can be further fortified in light of the legal maxim Generalia specialibus non derogant, which means universal things do not detract from specific things. This well-known proposition of law says that when a matter falls under any specific provision, then it must be governed by that provision and not by the general provision. The general provisions must admit to the specific provisions of law. It is a basic principle of statutory interpretation."
So what to do in this regard.
So what to do in this regard.
23 July 2025
Understanding Section 185 of the Companies Act, 2013
The Specific Provision:
The line you're referring to in Section 185 of the Companies Act, 2013 states:
"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 bank rate declared by the Reserve Bank of India."
This clause allows certain exemptions under Section 185 for companies that are in the business of lending or providing guarantees in the ordinary course of their business, provided the following conditions are met:
Ordinary Course of Business: The company is engaged in the business of providing loans, guarantees, or securities as part of its regular business operations (for example, a finance company). This means that if the company's main business is not lending or providing guarantees, then the exemptions in Section 185 will not apply.
Interest Rate Condition: The company must charge interest on the loan (if applicable) at a rate that is not less than the bank rate declared by the Reserve Bank of India (RBI). The idea here is that the company should not provide loans or guarantees at rates that are too low (i.e., below the market rate), as this could be seen as a method of providing financial benefits to directors or related parties at a lower cost than commercially feasible.
This exemption ensures that if a company provides loans or guarantees in its normal course of business and charges reasonable interest, it can continue doing so without violating Section 185. The focus is on ensuring commerciality and fairness in transactions involving related parties.
Procedure for Corporate Guarantee by a Private Company:
When a Private Company provides a corporate guarantee or collateral security to another Private Company (in which the directors are common), here's the general procedure:
Section 185 Provisions: Section 185 generally prohibits a company from providing loans or guarantees to its directors or any other persons in whom the directors are interested, unless certain conditions are met. Since both companies involved are private companies and the directors are common, the transaction could fall under Section 185 (restrictions for directors).
Approval Requirement:
Special Resolution: As per Section 185(2), when a company gives loans or guarantees, special resolution is generally required to be passed by the shareholders, especially when such transactions involve directors or related parties.
Board Resolution: In addition to passing a special resolution, a board resolution must also be passed for the guarantee or security. The board should justify that it is in the interest of the company and complies with the provisions of the Act.
Central Government Approval: If a company is engaged in a transaction that violates Section 185 (i.e., provides loans or guarantees to its directors or related parties), Central Government approval may be required. However, the approval will typically be needed when the transaction does not meet the exemption conditions of Section 185.
For a corporate guarantee or collateral security, the company must ensure that it meets the necessary conditions of Section 185 (e.g., charging commercial rates of interest). If the transaction does not qualify for an exemption, then the company must apply to the Central Government for approval.
Notice & Explanatory Statement:
The notice for the special resolution must explain the details of the transaction, including the nature of the guarantee, the related party, and the amount.
The explanatory statement should provide information about the interest rate (whether it's at or above the bank rate as prescribed by the RBI), and why the company is giving the guarantee.
The statement should also clarify that the transaction complies with the relevant provisions of the Companies Act and disclose whether the transaction is exempt under Section 185.
Confusion Regarding Section 185 vs. Section 186
Now, regarding the legal opinion in the newsletter you mentioned about Section 372A (Old Act) vs. Section 185 and Section 186 (New Act):
Section 185 is a specific provision that applies to loans, guarantees, or security involving directors or related parties. It restricts certain transactions, but provides exemptions (e.g., transactions between holding and subsidiary companies).
Section 186, on the other hand, is a general provision that applies to loans and investments made by companies to other bodies corporate (i.e., not limited to directors or related parties).
Section 372A of the Companies Act, 1956 (which was similar to Section 186 of the new Act) also regulated the same type of transactions but did not specifically address related-party transactions like Section 185 does.
Legal Maxim: Generalia Specialibus Non Derogant
The legal maxim "Generalibus specialia non derogant" means that when specific provisions exist, they should govern over general provisions.
This means that Section 185 (specific restriction for related-party transactions) overrides the general provisions of Section 186 (which covers loans and guarantees in general, including those involving body corporates).
So, Section 185 should be the primary consideration for transactions involving directors or related parties, even if Section 186 provides general guidelines for loans and guarantees.
Conclusion:
For Private Companies providing Corporate Guarantees:
You need to pass a special resolution and obtain the approval of the Board of Directors.
You may need Central Government approval if the transaction doesn't meet the conditions for exemption under Section 185.
Ensure compliance with Section 185, especially regarding the interest rate and the nature of the transaction.
Regarding Section 185 and Section 186:
Section 185 (specific provision for directors and related parties) takes precedence over the general provisions of Section 186 (dealing with loans to body corporates).
Therefore, transactions involving directors (like guarantees to a company with common directors) should primarily be evaluated under Section 185. Section 186 would be secondary for body corporate loans and investments but won't override Section 185 in related-party transactions.
The Specific Provision:
The line you're referring to in Section 185 of the Companies Act, 2013 states:
"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 bank rate declared by the Reserve Bank of India."
This clause allows certain exemptions under Section 185 for companies that are in the business of lending or providing guarantees in the ordinary course of their business, provided the following conditions are met:
Ordinary Course of Business: The company is engaged in the business of providing loans, guarantees, or securities as part of its regular business operations (for example, a finance company). This means that if the company's main business is not lending or providing guarantees, then the exemptions in Section 185 will not apply.
Interest Rate Condition: The company must charge interest on the loan (if applicable) at a rate that is not less than the bank rate declared by the Reserve Bank of India (RBI). The idea here is that the company should not provide loans or guarantees at rates that are too low (i.e., below the market rate), as this could be seen as a method of providing financial benefits to directors or related parties at a lower cost than commercially feasible.
This exemption ensures that if a company provides loans or guarantees in its normal course of business and charges reasonable interest, it can continue doing so without violating Section 185. The focus is on ensuring commerciality and fairness in transactions involving related parties.
Procedure for Corporate Guarantee by a Private Company:
When a Private Company provides a corporate guarantee or collateral security to another Private Company (in which the directors are common), here's the general procedure:
Section 185 Provisions: Section 185 generally prohibits a company from providing loans or guarantees to its directors or any other persons in whom the directors are interested, unless certain conditions are met. Since both companies involved are private companies and the directors are common, the transaction could fall under Section 185 (restrictions for directors).
Approval Requirement:
Special Resolution: As per Section 185(2), when a company gives loans or guarantees, special resolution is generally required to be passed by the shareholders, especially when such transactions involve directors or related parties.
Board Resolution: In addition to passing a special resolution, a board resolution must also be passed for the guarantee or security. The board should justify that it is in the interest of the company and complies with the provisions of the Act.
Central Government Approval: If a company is engaged in a transaction that violates Section 185 (i.e., provides loans or guarantees to its directors or related parties), Central Government approval may be required. However, the approval will typically be needed when the transaction does not meet the exemption conditions of Section 185.
For a corporate guarantee or collateral security, the company must ensure that it meets the necessary conditions of Section 185 (e.g., charging commercial rates of interest). If the transaction does not qualify for an exemption, then the company must apply to the Central Government for approval.
Notice & Explanatory Statement:
The notice for the special resolution must explain the details of the transaction, including the nature of the guarantee, the related party, and the amount.
The explanatory statement should provide information about the interest rate (whether it's at or above the bank rate as prescribed by the RBI), and why the company is giving the guarantee.
The statement should also clarify that the transaction complies with the relevant provisions of the Companies Act and disclose whether the transaction is exempt under Section 185.
Confusion Regarding Section 185 vs. Section 186
Now, regarding the legal opinion in the newsletter you mentioned about Section 372A (Old Act) vs. Section 185 and Section 186 (New Act):
Section 185 is a specific provision that applies to loans, guarantees, or security involving directors or related parties. It restricts certain transactions, but provides exemptions (e.g., transactions between holding and subsidiary companies).
Section 186, on the other hand, is a general provision that applies to loans and investments made by companies to other bodies corporate (i.e., not limited to directors or related parties).
Section 372A of the Companies Act, 1956 (which was similar to Section 186 of the new Act) also regulated the same type of transactions but did not specifically address related-party transactions like Section 185 does.
Legal Maxim: Generalia Specialibus Non Derogant
The legal maxim "Generalibus specialia non derogant" means that when specific provisions exist, they should govern over general provisions.
This means that Section 185 (specific restriction for related-party transactions) overrides the general provisions of Section 186 (which covers loans and guarantees in general, including those involving body corporates).
So, Section 185 should be the primary consideration for transactions involving directors or related parties, even if Section 186 provides general guidelines for loans and guarantees.
Conclusion:
For Private Companies providing Corporate Guarantees:
You need to pass a special resolution and obtain the approval of the Board of Directors.
You may need Central Government approval if the transaction doesn't meet the conditions for exemption under Section 185.
Ensure compliance with Section 185, especially regarding the interest rate and the nature of the transaction.
Regarding Section 185 and Section 186:
Section 185 (specific provision for directors and related parties) takes precedence over the general provisions of Section 186 (dealing with loans to body corporates).
Therefore, transactions involving directors (like guarantees to a company with common directors) should primarily be evaluated under Section 185. Section 186 would be secondary for body corporate loans and investments but won't override Section 185 in related-party transactions.
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