This article is about the concept of “Loan to Directors” as per section 185 of the Companies Act 2013.
APPLICABILITY
This section is applicable to ALL types of companies, except certain private companies and government companies, subject to certain conditions (means such companies can freely give loan to their directors).
Conditions applicable:
Private companies-
✓ In whose share capital no other body corporate has invested any money, and
✓ If the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or fifty crores, whichever is lower; and
✓ Such a company has no default in repayment of such borrowings subsisting at the time of making transactions.
Government companies-
✓ If such companies obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the company, or as the may be, the State Government before making any loan or giving any guarantee or providing any securities.
OBJECTIVE
To prevent the directors from using their undue influence in obtaining the loan from their own company either for themselves or for any other person in whom the director is interested.
RESTRICTION IN SECTION 185(1)
A company shall not advance any loan (including any loan represented by a book debt) whether directly or indirectly or give any guarantee or provide any security in connection with any loan to:
❖ Any director of the company, or
❖ Any director of its holding company, or
❖ Any partner or relative of any such director; or
❖ Any firm in which any such director or his relative is a partner.
.Whether a company can give the loan or any guarantee or provide any security to its own director or to a director of its holding company or to certain connected persons given in section 185(1)?
No.
.Whether a company can give loan to a director of its subsidiary company or to certain connected persons given in section 185(1)?
Yes, because such director and its connected persons are not covered in section 185(1).
.An exempted private company is giving the loan to its managing director for 5 years. Is section 185(1) applicable or not?
No
.If the above private company becomes a public company after 2 years while the loan is still subsisting, then whether section 185(1) will become applicable?
No, because applicability of section 185 is to be checked only at the time of giving the loan and not afterwards.
*A company can freely give guarantee or security in respect of a loan given to any person by its own director, or by any director of its holding company, or by certain connected persons, because there is no prohibition for providing such guarantee or security in the section.
RESTRICTION IN SECTION 185(2)
Subject to two conditions given under section 185(2) a company may advance loan (including any loan represented by a book debt) or give any guarantee or provide any security in respect of any loan taken by any person in whom any of the director of the company is interested.
The two conditions are:-
1)A special resolution is passed by the company in general meeting, and
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2) The loans are utilized by the borrowing company for its principle business activities.
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The expression “any person in whom any of the director of the company is interested” means:-
➢ Any private company of which any such director is a director or member;
➢ Any body corporate at a general meeting of which not less than 25% of the total voting power may be exersied or controlled by any such director, or by two or more such directors, together; or
➢ Any body corporate, the board of directors, managing director or instructions of the board, or of any director or directors, of the lending company.
.MR. A is director of PQR Limited, and wants to give loan to a person who is not covered in section 185(1) or (2).Whether PQR Limited can provide guarantee or security in such loan transaction?
Yes, PQR Limited can freely give guarantee or security in respect of a, or by any director of loan given to any other person by its own director its holding company, or by any person connected with such director under section 185(1), because there is no prohibition for providing such guarantee or security in the section.
.Whether a company can give loan in the following situations-
ABC Limited is a public company MR.A is director of ABC Limited.
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S.No
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Situation
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Yes/No
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1.
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ABC Limited gives loan to Mr. A(its own director)
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No
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2.
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ABC Limited gives loan to R (relative of MR.A)
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No
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3.
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ABC Limited gives loan to S (partnership firm in which R is a partner)
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No
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4.
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ABC Limited gives loan to P (another partner in such partnership firm in which R is partner)
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Yes
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.H Ltd holds 51% shares in S Ltd, S Ltd advances loan to ABC Ltd, whose board of directors are accustomed to act in accordance with the directions and instructions of the S Ltd.
Is the loan advanced by S Ltd to ABC Ltd, covered under section 185(2) or not?
Yes.
EXEMPTIONS IN SECTION 185(3)
The exceptions to
sub-section 1 and 2 includes-
a) the giving of any
loan to a managing or whole-time director-
i. as a part of the
conditions of service extended by the company to all its employees; or
ii. pursuant to any
scheme approved by the members by a special resolution; or
b) 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 rate of prevailing yield of one year, three years,
five years or ten years Government security closest to the tenor of the loan;
or
c)
any loan made by a holding company to its wholly
owned subsidiary company or any guarantee given or security provided by a
holding company in respect of any loan made to its wholly owned subsidiary
company; or
d)
any guarantee given or security provided by a holding company in respect of
loan made by any bank or financial institution
to its subsidiary company.
Provided
that the loans made under clauses (c) and (d) are utilised by the subsidiary
company for its principal business activities.
Analysis of section 185(3)
§ Under
clause (a), the exemption is granted only to managing director or whole time
director and not to part time directors or not to other persons in section
185; whereas under clause (b), exemption is granted to all, that is, to
managing director, whole time director and part time directors and to all
other persons in section 185(1) and (2).
§ Under
clause (b),(c) and (d), the lending company is not required to pass special
resolution under section 185(2)(a).
§ Under
clause (d), only a loan advanced by the bank or financial institution to the
subsidiary company, is applicable for exemption, if a loan is provided by any
other person, no exemption will be applicable.
.A
director of the public company is giving the loan to such public company.
What is the legal requirement under section 185?
Its only when the company gives the loan to
the director, section 185 is applicable, here the company is receiving the
loan from the director, therefore section 185 is not applicable here.
CONTRAVENTION
AND CONSEQUENCES-185(4)
If any
loan is advanced or a guarantee or security is given or provided or utilised in
contravention of the provisions of this section
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RAVNIT BHATIA
B.com (hons) graduate from University of Delhi, Pursuing M.com & Budding Company Secretary.
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