Sections 185 and 186 of the companies act,2013

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SHINOD K P (Querist)
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12 July 2014 Dear Friends,

I ve read some discussions on the above topic which concluded that section 185 overrides section 186 of the Act,2013, since Section 185 is a saving provision when Section 186 starts with a phrase " without prejudice to ................ ".

As far as my knowledge goes, this phrase applies only to sub section (1) of Section 186 which speaks about investment through investment companies.

Can we say that Section 186 prevails over Section 185?

One of my client companies is a partner in a firm and one of its directors is also a partner. Before the Act,2013, this Company has been providing security to a Bank which has granted loan to the firm.

Can you throw some light on this?

Shashikant Sharma

Shashikant Sharma (Expert)
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12 July 2014 Section 185 of the Companies Act, 2013 starts with the word “Save as otherwise provided in this Act” that means any other section or provisions of the Act relating to loans to directors and other related parties will override the Section 185. However, Section 185 is specific and 186 is general section. The specif will prevail over general provisions.

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SHINOD K P

SHINOD K P (Querist)
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15 July 2014
Thank You. Let me share my perspective with you. Please share your views too.

Section 185 prohibits generally loan etc to certain categories when Section 186 provides the limits up to which and the approval required to give any loan etc to that category which are not exempted under Section 185 of the Act.

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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23 July 2025 You're absolutely on the right track — **Sections 185 and 186 of the Companies Act, 2013** deal with **loans and investments** by companies but serve **different legal purposes**, and **they operate concurrently**, not exclusively. Here’s a breakdown with clarity on how **Section 185 and 186 interact**, and how your client’s case would be treated.

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## 🔍 **Key Differences Between Section 185 and Section 186**

### **Section 185 – Loans to Directors, etc.**

* This **restricts or prohibits** giving loans (including guarantees/security) to:

* Directors
* Relatives of directors
* Any person in whom a director is interested (like partnership firms, companies, etc. where the director holds interest)

➡️ It is a **prohibitive** section with specific **exemptions**.
➡️ Penalties are **severe** for violation.

> ❗ **Before the amendment in 2017**, the section imposed a **blanket prohibition**. Post-amendment, **conditional exemptions** were introduced (e.g., for loans to wholly owned subsidiaries, companies in ordinary course of business, etc.).

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### **Section 186 – Loans and Investments (General Limits)**

* This provides for **limits** on:

* Loans
* Guarantees
* Securities
* Acquisitions of shares

➡️ If aggregate exceeds **60% of paid-up share capital + free reserves + securities premium**, or **100% of free reserves + securities premium**, **special resolution** is required.

➡️ **Disclosure and approval** requirements apply.

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## ⚖️ **Which Prevails? 185 or 186?**

* **Section 185 overrides Section 186** when it comes to **prohibited categories**.
* Even if a loan/security/guarantee falls **within limits under Section 186**, it **cannot be granted** if it’s **prohibited under Section 185**.
* **Section 186(1)** starts with “*without prejudice to Section 185*”, confirming **Section 185’s supremacy** where applicable.

> 🧠 **Think of Section 185 as “Who” can be given the loan/security**, and **Section 186 as “How much and how to approve it”**.

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## 🧾 **Your Client’s Case:**

> *A company is a partner in a firm; a director of the company is also a partner in the same firm. The company provides security for a loan taken by the firm.*

### 🔍 Analysis:

1. The firm is a **concern in which a director is interested** (as he is a partner).
2. Hence, the firm falls under the **prohibited category** under **Section 185(1)**.
3. Providing **security to a bank loan for the firm** amounts to **indirectly giving a guarantee**, which is **prohibited** under Section 185 (unless covered under exemptions post-2017).

### ✅ **If This Happened Before 2013:**

* The transaction was permitted under the **Companies Act, 1956** with certain disclosures.
* However, under **Companies Act, 2013 (before amendment)**, this would be **strictly prohibited**.

### ✅ **Post-Amendment (2017 onwards)**:

* If the firm is **not a wholly owned subsidiary** or **ordinary course of business lending**, this **remains prohibited**.
* Otherwise, it may be allowed **with special resolution and conditions** under amended **Section 185(2)**.

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## ✅ Conclusion:

* **Section 185 is specific and overrides** Section 186 where both apply.
* If the **loan/security/guarantee is prohibited under Section 185**, it **cannot be granted**, even if it satisfies the **limits or approvals under Section 186**.
* In your case, the **company giving security to a firm where its director is a partner is restricted under Section 185**, unless it qualifies for exemption post-2017 amendment.

Let me know if you’d like a quick compliance checklist or a draft board resolution format based on this.

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