Loan to Group Companies under Sec 185(2)

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SHORT SUMMARY

In this Research editorial, the author begins by referring the provisions of Section 185 of sp chopra, 2017 (Loan to Directors and entities in which directors are interested).

The main focus of this research editorial on ‘Whether a Company can give loan to other Companies or Body Corporates in which their directors are interested’ If NO, why? If yes, then what are the Compliance a company required for the same’.

BACKGROUND

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

This refers that “Companies Act likely to jolt Corporate World”. Section 185 of the Companies Act, 2013, which puts restrictions on inter-corporate loans, jolted the corporate world.

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 has been made under this section since its notification.

WHAT IS TERM ‘LOAN’

Section 2 of Companies Act, 2013, does not define ‘loan’. A loan is defined by the Oxford English Dictionary as ” a thing lent; something the use of which is allowed for a time, on the understanding that it shall be returned or an equivalent given, a sum of money lent on these conditions and usually with interest.

The Supreme Court in the case of Shree Ram Mills Ltd v. Commissioner of Excess Profit Tax, MANU/SC/0054/1954 ;

PROVISION AS PER COMPANIES AMENDMENT ACT, 2017

Section 185 of Companies Act, 2013 has been completely substituted by New Section 185 under 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.

Language of Section 185

  1. No Company ( Private & Public)
  • Directly or Indirectly
  • Advanced any loan, including Blood Debt
  • Or any Guarantee or provide any security in connection with any loan taken by

Following Persons

  • Any director of Company, or
  • Any director of a Company which is its Holding Company, or
  • Any partner of Director of lender company, or
  • Any relative of Directors of Lender Company, or
  • Any firm in which any of Director of Lending Company is Director, or
  • 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

  1. This Subsection applicable on Public Limited as well as Private Limited Company (whether small, OPC, Start ups etc.)
  2. Guarantee or Security in respect of only ‘Loan’ is covered.
  3. Only individuals/ firms are covered in sub section 1.
  4. Companies / body corporates are not covered in above sub section

Following loan can be given by 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:

  • Any Private Company of which any such Director is a Director or member; I
  • Body Corporate in which 25% or more voting power rests with one or more directors;
  • Body Corporate whose Board accustomed to act on directions of BOD or Directors of lending company

Conditions:

  1. Special Resolution passed by the Company in General Meeting.
  2. 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

  • If borrower is Private Limited Company having common directors/ members then by using this sub section loan can be given.
  • 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 director of lender Company together].

Food for Thought:

  1. In case of Borrower if Public Limited Company and having common directors from Lender Company then whether Lender Company can give L/G/S ?
  2. Issue under Income Tax Act in case of loan given to a Company in which Director of Lender Company are members?
  3. What is meaning of ‘Principle Business Activity’ for the borrower?

PROCESS OF GIVEN OF LOAN UNDER SECTION 185

As per above mentioned provisions of Section 185 (1) & (2) a Lender Company can give loan to following below mentioned person / entities.

Situation I: In case of Lender Company giving loan to any entities (Group Private Limited Companies) as mentioned in Section 185(2)

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

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

3. Convening of General Meeting: Hold the EGM and pass the Special Resolution for granting loan, guarantee or security by mentioned following information in the Explanatory Statement:
Full Particular of the loans given; or

  • Guarantee 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
  1. 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.
  2. Declaration from Borrower: Take a declaration from the borrower Company that it will use this Loan for the Principle Business Activity only.
  3. Limits of L/G/S u/s 186(2): Check whether loan is in limit u/s 186(2) if not then whether Special Resolution for such has been passed or not.

Limits as mentioned below:

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

4. Approval of Public Financial Institution: If Loan is not covered in above mentioned Limit or there is any default in repayment of loan instalments or payment of interest by lender to public financial institution then before initiation loan to borrower take approval of public financial institution also.

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

6. Interest on Loan u/s 186 (7): Loan shall be given at a rate of interest not lower than the prevailing yield of one year, three year, five year or then year Government security closest to the tenor of the loan.

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