Section 185 of the companies act,2013

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Querist : Anonymous

Querist : Anonymous (Querist)

22 January 2014 Section 185 0f the Companies Act,2013 replaces Sections 295 and 296 0f the earlier Act has been notifued.However,Section 186 of tyhe CompaniesAct,2013 which replaces Section 372A of the earlier Act is yet to be nofied.
In viewv of the above,what is the position regarding aPublic Limited Company giving a Corporate Guarantee or Security for a Bank Loan to another JV Company in which certain Directors are common and majority shareholding is of a wholly owned subsidairy of the Public Limited Company?

Querist : Anonymous

Querist : Anonymous (Querist)

23 January 2014 The question is regarding an ovelap of Section 185 of CA,2013 and Section 372A of CA,1956.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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23 July 2025 Position on Corporate Guarantee and Security under Section 185 of the Companies Act, 2013
Overview of Section 185:
Section 185 of the Companies Act, 2013 specifically deals with loans, guarantees, and securities provided by a company to its directors or related parties. It aims to restrict certain financial transactions between companies and their directors or entities in which directors have a vested interest.

The key provisions of Section 185 are:

Prohibition: A company cannot, directly or indirectly, advance loans or provide guarantees/securities to its directors or to any person in whom the director is interested.

Exceptions: Some exemptions are allowed, particularly in cases involving holding and subsidiary companies, where loans, guarantees, and securities can be provided under certain conditions.

Key Exemptions under Section 185:
Loans and guarantees between holding and subsidiary companies are generally allowed. This includes loans and guarantees made by a public company to its subsidiary, as long as it follows the proper procedure.

Loans and guarantees to joint ventures (JV) could be permissible, but the applicability depends on whether the JV is treated as a subsidiary or related entity (i.e., if the company providing the guarantee has control or significant influence over the JV).

Your Situation: Public Limited Company Providing Corporate Guarantee to JV
The question involves a public limited company providing a corporate guarantee or security to a JV company, in which:

Certain directors of the public company are common.

The majority shareholding of the JV company is held by a wholly-owned subsidiary of the public company.

Key considerations:

Related Party Transactions: If the JV company is controlled by the public company (via its subsidiary), it could be considered a related party transaction, as the directors of the public company are common and the majority shares are held by the public company’s wholly-owned subsidiary.

Section 185 Applicability: Section 185 does not allow a company to give a corporate guarantee or security to any entity in which its directors are interested, except for transactions that involve holding and subsidiary companies.

Since the majority shares are held by a wholly-owned subsidiary, the transaction could be exempt from the restrictions of Section 185. This is because holding-subsidiary relationships are generally exempt from Section 185.

Section 186 vs. Section 185: As you mentioned, Section 186 of the Companies Act, 2013 (which replaces Section 372A of the Companies Act, 1956) is not yet notified. Section 186 generally deals with the power of companies to make loans, give guarantees, and provide security for loans made to others.

Section 186 allows such transactions with related parties but also imposes conditions like board resolution, shareholder resolution (special resolution), and the need to follow limits (up to 60% of the company's net worth, etc.).

While Section 186 will apply to corporate guarantees and security for loans, it is important to note that Section 185 (which is currently in effect) remains the primary provision when the transaction involves directors or related parties.

Your Specific Case:
Corporate Guarantee for JV: Since the JV company is effectively controlled by the public company (via the wholly-owned subsidiary), the transaction could fall under Section 185’s exception for holding-subsidiary relationships. However, care must be taken that this is not seen as a related party transaction outside of the holding-subsidiary structure.

Directors’ Interests: The involvement of common directors in both the public limited company and the JV might trigger related-party transaction rules. However, Section 185 allows such transactions when they occur between holding and subsidiary companies. Therefore, if the JV is part of the holding-subsidiary structure (or is treated similarly), the transaction should be permitted under Section 185.

Approval Requirements: You must ensure that the company follows the required approval process:

A Board Resolution must be passed to approve the transaction.

Depending on the nature of the transaction, a special resolution might be required if the amount exceeds the prescribed limits.

Given that Section 186 (still not notified) would typically require shareholder approval and other procedural compliance, it's important to verify whether the provisions of Section 186 can still be applicable even in the absence of the full enactment of the section.

Conclusion:
Given that Section 185 applies to holding and subsidiary companies, the public limited company providing a corporate guarantee or security to the JV company (controlled by its wholly-owned subsidiary) is likely exempt from the restrictions of Section 185, assuming the JV is treated as part of the group of companies.

However, the following steps are crucial:

Ensure the transaction is structured as a holding-subsidiary relationship for the guarantee or security to be permissible under Section 185.

Pass Board Resolution and, if necessary, special resolution to ensure compliance.

As Section 186 (relating to loans, guarantees, etc.) is yet to be notified, Section 185 will govern, and you should follow its rules, particularly regarding director interests.

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