Guarantee by Pvt. Ltd. Company to Bankers of one of Director

Pvt ltd 2668 views 2 replies

CA.SKR

CA; CS-Final (One Group); DISA (ICAI); I

442 Points Joined August 2009

Dear Experts,

A Private Limited Company (XYZ Pvt. Ltd.) having paid up share capital of Rs.300 lacs and Reserve & Surplus of Rs.75 Lacs is willing to give guarantee of Rs.200 lacs to the Bankers of Sole Proprietary Firm of one of the promoter director (Mr. X) holding 100% shareholding in the company jointly with his wife (Mrs. X), another director in the company. XYZ Pvt. Ltd. is having only 2 shareholders, who are also directors in the company. The company in question is neither a subsidiary nor holding company of any other private or public limited company.

XYZ Pvt. Ltd. does not own any immovable property but having fixed deposits in company’s name with the same bank to the tune of Rs.200 lacs, which are now proposed to be pledged with the bank for OD Limits sanctioned to the Sole Proprietary Firm of the promoter director Mr. X. As far as I understand, Section 295 of the Companies Act, 1956 is not applicable to XYZ Pvt. Ltd., since the company is not a subsidiary of any public limited company. In my opinion, there is no restriction under Companies Act, 1956 for this type of guarantee.

Please advise what procedure is to be followed for giving of Guarantee as stated above and what resolutions are to be passed in Board meeting and / or Shareholders meeting?

Thanks in advance,

Replies (2)

udit sharma

Company Secretary

2303 Points Joined October 2010

Hi...

Rightly said that the provisions of section 295 of the Companies Act, 1956 will not be applicable in your case as the same are not applicable to an Independent Private Company. Hence,no need to obtain the previous approval of the Central Government in Form 24AB.

However, section 295 covers giving guarantee or security i connection with a loan made by a third party to a firm in which any Director of the Company or his relative is a partner - hence, in my opinion the wordings include only a partnership firm and is silent on Proprietorship firm??????

In my opinion your Company can give corporate guarantee to the bankers of the Proprietorship firm only by passing a Board Resolution and this will be suffice in my opinion....

God Bless

Udit Sharma

CA.SKR

CA; CS-Final (One Group); DISA (ICAI); I

442 Points Joined August 2009

Dear Udit,

Thanks for your prompt reply. You have rightly said that the provisions of section 295 of the Companies Act, 1956 will not be applicable in my case as the same are not applicable to an Independent Private Company as per Sec-295 (2) (a). Hence, no need to obtain the previous approval of the Central Government.

However, section 295 covers giving guarantee or security in connection with a loan made by a third party to a firm in which any Director of the Company or his relative is a partner - hence, in your opinion the wordings include only a partnership firm and is silent on Proprietorship firm. Had this company not been an independent pvt. company, in my opinion, guarantee to proprietary firm should have been covered u/s-295. In Income Tax Act, there is no difference between an individual and his sole proprietary firm - they are one and the same. I am not sure about Companies Act provisions reg. proprietary firm of director i.e. whether they are one or different ?

Let us wait for more clarifications from other experts.

Thanks