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BACKGROUND

As we are already aware, Government of India enacted Companies (Amendment) Act, 2017 (“Amendment Act”) on the suggestions made by Company Law Committee (CLC) and notified the same in the official gazette on May 7, 2018 to streamline the existing practices followed by Companies in India and to add more clarity to the provisions of the Companies Act, 2013. One of such amendments is section 61 of the Amendment Act which deals with Loans to Directors to encourage genuine transactions and ease of doing Business. It substituted the existing section 185 of the Companies Act, 2013.

Sec 185 was originally brought into effect from September 12, 2013 which corresponds to section 295 of Companies Act,1956. This section doesn’t apply to Govt. Companies, Private Companies and Nidhi Companies subject to conditions specified in respective exemption notifications issued by the Ministry of Corporate Affairs (MCA).

PROVISIONS OF AMENDED SECTION 185 OF THE COMPANIES ACT, 2013:

Subsection 1 of section 185 prohibits providing loan or guarantee or security to the below listed individuals and firms.

It says that – a Company shall not directly or indirectly advance any loan(including loan represented by book debt) or give any guarantee or provide any security in connection with any loan taken by –

  • Any Director of the company or
  • Any Director of its holding company or
  • Any partner of any such Director or
  • Relative of any such Director
  • Any firm in which any such Director is a partner or
  • Any firm in which the relative of any such Director is a partner

Subsection 2 of section 185 states that a Company can advance any loan (including book debt) or give any guarantee or provide any security in connection with any loan taken by any person in whom any of Director is interested subject to the following conditions:

  • A special resolution is passed by the company in general meeting and
  • The loans are utilised by the borrowing company for its principal business activities only.

“Any such person in whom Director is interested” mean the following list of persons:

  • 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 exercised 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 manager whereof is accustomed to act in accordance with Directors or instructions of the Board or any Director or Directors of the lending company.

Subsection 3 of section 185 provides exemptions for the following entities and individuals from complying with subsection 1 and 2 explained above subject to the conditions:

  1. Giving any loan to managing or whole time Director as a part of the conditions of service extended by the company to all its employees or pursuant to any scheme approved by way of special resolution.
  2. Company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and interest charged on such loan (at a rate not less than the rate of prevailing yield of 1 year, 3 years, 5 years or 10 years Government security closest to the tenor of the loan)
  3. 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 and loans are utilised for its principal business activities.
  4. Any guarantee or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company and such loans are utilised by the subsidiary company for its principal business activities.

To avoid diversion and siphoning of funds by the companies, the Act provides that such borrowed amount should be utilised for its principal business activities and not for investment or giving loan.

 Subsection 4 of section 185 lists down the punishments and penal provisions for the contravention of provisions of this section.

Defaulter Punishment
Lending Company Punishable with Fine which shall not be less than Rs. 5 lakh but which may extend to Rs.25 lakhs
Officer in default Punishable with imprisonment for a term which may extend to 6 months or fine which shall not be less than Rs.5 lakh but which may extend to Rs.25 lakh.
Recipient of the loan/guarantee/security Punishable with imprisonment which may extend to 6 months or with fine which shall not be less than Rs.5 lakhs but which may extend to Rs.25 lakhs or with both


COMPARATIVE ANALYSIS: SECTION 185 UNDER 2013 ACT BEFORE THE AMENDMENT V/S SECTION 185 AS SUBSTITUTED BY THE COMPANIES (AMENDMENT) ACT, 2017:

S. No SECTION 185 UNDER 2013 ACT BEFORE THE AMENDMENT SECTION 185 AS SUBSTITUTED BY THE COMPANIES (AMENDMENT) ACT, 2017
1. Prohibited companies from advancing any loan (including loan represented by book debt) or giving any guarantee or any security in connection with loan taken by the Directors of such company or any other person in whom Director is interested.       However exception to this was given u/s 185(1) to certain persons subject to certain conditions.

Limits the prohibition on loans, advances etc to Directors of the company or its holding company or any partner of such Director or any partner of such Director or any firm in which such Director or relative is a partner.          

It also allows company to give loan or guarantee or provide security to any person in whom any of the Directors is interested subject to passing of special resolution by the company and utilization of loans by the borrowing company for its principal business activities.

2. Penalties for non-compliance were leviable only to Companies or any recipient to whom such loan, guarantee or security is provided   Penal provisions has been extended to an “officer in default of the company” (which includes any Director, Manager or KMP or any person in accordance with whose directions BODs are accustomed to act)

Summary

Sec 185(1)Prohibits for providing loan/guarantee/security to certain individuals (Director of lending & holding company) and firms in which such Director/relative is partner.

Sec 185(2)Companies are allowed to provide loan/guarantee/security in connection with any loan taken by any person in whom any of the Directors of the company is interested subject to 2 conditions i.e approval by passing special resolution and utilisation of borrowed amount.

Sec 185(3) – Entities and individuals which are exempted from section 185(1) and section 185(2) such as holding and subsidiary companies, banking companies etc.

Sec 185 (4)Punishment for contravention of provisions of section 185.

Post Author: Ranjitha Jain Dhanakeerthi

Ranjtha.D.Jain is currently working as Associate CS at Nadig and Associates, Shimoga. Since her graduation in BBM she was fascinated towards the Corporate Laws. Her current work assignments help her understand the Company Law better and her insights are targeted at the students who find it difficult to understand complex issues in the Companies Act, 2013.
The Author can be reached at ranjitha.jain.d@gmail.com.

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