Section 185 of Companies Act, 2013 corresponds to section 295 of the Companies Act, 1956, section 86D of the Indian Companies Act, 1913, and section 190 of the English Companies Act, 1948. It has been made effective from 12-9-2013

Section 185 of the Companies Act, 2013,  shake the corporate world by putting restrictions on inter-corporate loans. Until now, Companies were in the habit of borrowing funds from banks and passing them on to subsidiaries and associate companies through inter-corporate loans. The holding companies never bothered to comply with the terms of the loan agreement when it concerned the deployment of the borrowed funds. The banks never monitored such fund deployment. Many amendments have been made under this section since its notification. Many amendments have been made under this section since its notification.

 What Is Term ‘Loan’:

In finance, a loan is the lending of money by one or more individuals, organizations, and/or other entities to other individuals, organizations, etc. The recipient (i.e. the borrower) incurs a debt, and is usually liable to pay interest on that debt until it is repaid, and also to repay the principal amount borrowed.

Provision As Per Companies Amendment Act, 2017:

Section 185 of the Companies Act, 2013 has been completely substituted by New Section 185 under the Companies Amendment Act, 2017 (CA, 2017 got president assent on 3rd January 2018. Due to Complete substitution, there are many changes under this section as mentioned below.

The language of Section 185:

(1)  No Company ( Private & Public)

  • Directly or Indirectly
  • Advanced any loan, including Bood Debt
  • Or any Guarantee or provide any security in connection with any loan taken by

Following Persons

i. Any director of Company, or

ii. Any director of a Company which is its Holding Company, or

iii. Any partner of Director of lender company, or

iv. Any relative of Directors of Lender Company, or

v. Any firm in which any of Director of Lending Company is Director, or

vi. Any firm in which any relative of Director of lending Company is Director.

Points to be Kept in Mind while Complying according to this Section

a) This Subsection applicable to Public Limited as well as Private Limited Company (whether small, OPC, Startups, etc.)

b) Guarantee or Security in respect of only ‘Loan’ is covered.

c) Only individuals/ firms are covered in subsection 1.

d) Companies/body corporates are not covered in the above subsection

(2)  The following loan can be given by the company to Any Person in whom directors are interested after fulfilling the Conditions mentioned below:

  • Advance any loan, including loan represented by a book debt
  • Give any guarantee in connection with any loan taken
  • Provide any security in connection with any loan taken

Any Person:

i. Any Private Company of which any such Director is a Director or member;

ii. Body Corporate in which 25% or more voting power rests with one or more directors;

iii. Body Corporate whose Board accustomed to act on directions of BOD or Directors of the lending company

Conditions:

i. Special Resolution passed by the Company in General Meeting.

ii. The loans are utilized by the borrowing company for its principal business activities.

Points to be Kept in Mind while Complying according to this Section

a) If the borrower is a Private Limited Company having common directors/ members then by using this subsection loan can be given.

b) Body Corporate includes LLPs, therefore as per, point (ii) of any person L/G/S can be given to LLP also. [Condition 25% or more voting power vested with one or more directors of lender Company together].

 Process Of Given Of Loan Under Section 185:

i. The holding of Board Meeting:

Lender Company has to hold a Board Meeting.

  • Pass Board resolution [u/s 179 (3)(f)] (Passed Unanimous Board Resolution as per Section 186(5))
  • Pass a resolution to call Extraordinary General Meeting
  • Issue Notice of EGM
  • Check Limit of Loan/ G/ S as per Section 186(2) whether it is in limit or not.

ii. If Lender Company is a Public Company then file the Board Resolution in e-form MGT-14 with Roc within 30 days from the date of the Board Meeting.

Apply for Private Limited Company Registration with Company Registration Online.

iii. Convening of General Meeting:

Hold the EGM and pass the Special Resolution for granting a loan, guarantee, or security by mentioned the following pieces of information in the Explanatory Statement:

  • Full Particulars of the loans given; or
  • A guarantee is given or security provided and
  • The purpose for which the loan or guarantee or
  • security is proposed to be utilized by the recipient of the loan or guarantee or security and other relevant facts

iv. File MGT-14 with ROC:

 File copy of Special Resolution along with explanatory statement with ROC in e-form MGT-14 within 30 days of EGM:

Other Conditions to be fulfilled:

v. Declarations from Borrower:

 Take a declaration from the borrower Company that it will use this Loan for the Principle Business Activity only.

vi. Limits of L/G/S u/s 186(2):

Check whether a loan is in limit u/s 186(2) if not then whether Special Resolution for such has been passed or not.

Limites as mentioned below:

  • 60% of Paid-up share capital + Free Reserve + Securities Premium Account OR
  • 100% of Free Reserve + Securities Premium Account

vii. Approval of Public Financial Institution:

If the Loan is not covered in the above-mentioned Limit or there is any default in repayment of loan installments or payment of interest by a lender to the public financial institution then before initiation loan to borrower take the approval of the public financial institution also.

viii. Disclosure by Lender:

As per Section 186(4) Company shall disclose in the Financial statement full particular of Loan/ G/ S and the purpose for which such L/G/S is proposed to be utilized by the borrower.

ix. Interest on Loan u/s 186 (7):

The loan shall be given at a rate of interest not lower than the prevailing yield of one year, three years, five years, or then year Government security closest to the tenor of the loan.

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