Section 185 of the Companies Act, 2013 - Loans to Directors

Restriction on providing loan to a director or to a person connected with a director

Section 185(1) provides that save as otherwise provided in the Companies Act, 2013 no company directly or indirectly shall:

(a). advance any loan or

(b). any loan represented by a book debts or

(c). give any guarantee or

(d). provide any security in connection with any loan taken,

to any director of the company or such other person in whom the director is interested.

Meaning of other person in whom director is interested means

(a)   Any director of lending company, or

(b)  Director of company which is its holding company, or

(c)   Any partner of such director, or

(d)  Any relative of such director, or

(e)   Any firm in which such director is partner, or

(f)    Any firm in which any relative of such director is a partner, or

(g)   Any private company in which such director is a director or member or

(h)  Anybody corporate in which not less than 25% of total voting power controlled or exercised by such director or by two or more such director together, or

(i)  Any body corporate in which Board of directors, managing director or manager act accordance with the direction or instructions of the board, or of any director or directors of the lending company.

Applicability

Section 185 is applicable to a public company as well as private company. This section applies to loan etc. given by a company directly or indirectly. Indirectly means company cannot give loan through the agency of one or more intermediaries. This section does not attract in respect of loan given to an employee, who does not fall within the ambit (range) of specified person.

Loan not covered/Exempted U/s 185

The proviso of section185 (1) provide that 185(1) shall not apply in following cases;

(1) giving any loan to a Managing or Whole time Director as part of conditions of service extended by the company to all its employees, (same condition on which company gives loan to all its employees) or according to scheme approved by the members by passing special resolution.

(2) a company which in the ordinary course of its business provides loans or gives guarantees or security for the due repayment of loan & in respect of such loan an interest is charged at a rate not less than bank rate declared by the RBI.

Section 185 not applicable in following some cases

1. any loan made to an employee of the company, who is not a relative of the any director,

2. any loan or advance made to a trust in which directors are trustees ,

3. any advance or deposit made in connection with leasing/ hire purchase transaction ,

4. any advance payment of salary given to an employee who is relative of a director as per the rules         of the company

5. advance given for services/goods to be rendered/supplied provided it is reasonable and                         commensurate with the services/goods to be rendered/supplied.

6. any investment made in acquiring residential accommodation for directors.

7. Central Govt. provide exemption in respect of house building loan to the managing and/or whole         time directors.

Above section should be read with Section 186 of the Companies Act, 2013

Section 186(2) provides that no company shall directly or indirectly-

(a)  Give any loan to any person or body corporate,

(b)  Give any guarantee or provide security in connection with a loan to any other body corporate or person and

(c)  Acquire by way of subscription, purchase or otherwise, the security of any other body corporate,

Exceeding:-

(a)  60% of it’s paid up share capital, free reserves and security premium a/c

(b)  100% of its free reserves and security premium a/c.

whichever is more.

Power of Board

Board can make above specified transactions if these are fall within the limit as discussed  above provided that resolution have passed in board with the consent of all the directors present in the meeting.

Exemptions for applicability of section 186(1)

Section 186(11) provide that provision of section 186(1) shall not apply-

(a)  On banking company, insurance company or a housing finance company in the ordinary course of its business or a company engaged in the business of the financing of companies or of providing infrastructure facilities.

(b)  To any acquisition –

I. made by a non-banking financial company registered under chapter IIIB of the Reserve Bank of India Act, 1934 and whose business is acquisition of securities in respect of its investment and lending activities,

II. made by companies whose main business is the acquisition of securities,

III. of the shares allotted in pursuance of section 62(1)(a).

Important Notes U/s 186/185

1. Approval of Shareholders through special resolution is necessary where the Board of Directors need to make investment, loan, guarantee, securities, in excess of prescribed limit.

2. To pass a resolution in Board consent of all the directors present in the meeting is required.

3. Prior approval of Public financial Institution is required if term loan is subsisting.

4. Proviso of section 186(5) provide that prior approval of Public Financial Institution is not required if specified transaction [U/s 186(1)] is made within limit as stated above and there is no default in repayment of loan or payment of interest  thereon as per term and conditions of such loan.

5.  Sec-186(7) states that no loan shall be given at a rate of interest lower than the prevailing yield of Govt .Securities closest to the tenure of the term loan.

6.  Flat sold to director on credit basis shall not be treated as loan, (Judgment given by Bombay High Court in F.A Mehta Case)

Thanks & Regards

CS Nikhil Kalra

csnikhilkalra@gmail.com