FAQs based analysis of the Section 185 and Section 186 of Companies Act, 2013 The article explains the Section 185 and 186 of Companies Act, 2013 in the form of Q&A with practical approach.
Companies Act, Companies Act 2013, FAQs, section 185, Section 186
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Loans, Investment, Guarantee or Security by Company-FAQs.pptx
2. Loans, Investment, Guarantee or Security by Company:
FAQs based analysis of the Section 185 and Section 186 of Companies
Act, 2013 The article explains the Section 185 and 186 of Companies
Act, 2013 in the form of Q&A with practical approach.
“Section 185: “Loan to directors, etc.—
(1) Save as otherwise provided in this Act, no company shall, directly or
indirectly, advance any loan, including any loan represented by a book
debt, to any of its directors or to any other person in whom the director
is interested or give any guarantee or provide any security in connection
with any loan taken by him or such other person:
Provided that nothing contained in this sub-section shall apply to—
(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
3. (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 bank rate declared by the Reserve Bank of India;
(c) (w.e.f. 29-05-2015) 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.
Explanation
For the purposes of this section, the expression ―to any other person in whom director is
interested means—
(a) any director of the lending company, or of a company which is its holding company or
any partner or relative of any such director;
(b) any firm in which any such director or relative is a partner;
(c) any private company of which any such director is a director or member;
4. (d) any body corporate at a general meeting of which not less than twenty-five per
cent. of the total voting power may be exercised or controlled by any such
director, or by two or more such directors, together; or
(e) any body corporate, the Board of directors, managing director or manager,
whereof is accustomed to act in accordance with the directions or instructions of
the Board, or of any director or directors, of the lending company. (2) If any loan is
advanced or a guarantee or security is given or provided in contravention of the
provisions of sub-section (1), the company shall be punishable with fine which
shall not be less than five lakh rupees but which may extend to twenty-five lakh
rupees, and the director or the other person to whom any loan is advanced or
guarantee or security is given or provided in connection with any loan taken by
him or the other person, shall be punishable with imprisonment which may extend
to six months or with fine which shall not be less than five lakh rupees but which
may extend to twenty-five lakh rupees, or with both.”
5. Q&A:
1. Applicability of Section 185?
Section 185 is applicable to a public company as well as a private company. There is
exemption to a Nidhi Company [Notification No. GSR465 (E), dated 05.06.2015]
and Govt. Company [Notification No. GSR463 (E), dated 05.06.2015].
2. Exemption from Section 185 to a private company?
Notification No. GSR 464 (E), dated 05.06.2015, has specified that the Section 185
shall not apply to a private Company-
i. In whose share capital no other body corporate has invested any money;
ii. If the borrowings of such a company from banks or FI s or any body corporate is
less than twice of its paid-up share capital or Rs. 50 crore, whichever is lower; and
iii. Such a company has no default in repayment of such borrowings subsisting at the
time of making transactions under this section.
6. Q&A:
3. A loan represented by Book Debt actually means?
Dictionary meaning: Any money that a company has not yet received from a person, who owe it money, as
recorded in the company’s accounts. Any credit sales or facility / service of the Company used and pay
later, and that credit period is more than the usual credit period given to other customers and that
credit extended period is in the nature of Loan. It has been held that Flat sold to director, part amount
in cash, balance amount in credit. Credit sale not to be treated as loan. Bombay HC held, that this will
not attract provisions of Section 295 (Now section 185 of the Companies Act, 2013). Credit sales
cannot be described as an indirect loan but, disclosure at and approval of Board meeting is necessary.
[Fredie Ardeshir Mehta (Dr.) v Union of India (1989) 2 CLA244 (Bom): (1991) 70 Comp Cas 210(Bom):
(1991) 1 CompLJ437(Bom)]. The debt can properly be called a book-debt, whether it is in fact entered
in the books of the business or not. [Paul & Frank Ltd. v Discount Bank Overseas Ltd. (1967) 37 Comp
Cas 76(Ch.D) : (1966) 2 All ER922: (1967)1CompLJ56].
Author view for Section 185: The book debt first must be qualified as LOAN, to be covered under this
section. Merely credit sales or other receivable is not book debt for this section.
7. Q&A:
4. Indirect Loan means?
Loans given to the ultimate benefit of the Directors through one or more intermediaries. Any
amount, which is not in the nature of loan cannot be said to be the indirect loan.
5. ABC Pvt. Ltd. give loans of Rs. 25 lakhs to Mr. X a renowned person in the same industry on 8th
December 2022, subsequently on 11th December 2022 Mr. X become the Director of ABC Pvt.
Ltd. whether violation of Section 185?
No, there is no violation of Section 185, the Section applicable at the time of granting loan and
any change in circumstances thereafter will not make the section applicable. Any Loan/
guarantee given, or security provided was earlier exempted from the provision of the section
185, it will continue to be exempted.
6. Imprest amount given to Directors is loan u/s 185?
Any advance or imprest given to Directors, employee (relative of directors) for expenses incurred
on behalf of the Company, to the extend of unadjusted quite a long time, would be considered
as loan for the purpose of section 185.
8. Q&A:
7. RE Pvt ltd having 2 shareholder and Directors Mr. M and Ms. D and AI Pvt. ltd where Mr. M and
Ms. D are the only shareholder and Directors also. The Companies not having any loans from
the banks. RE Pvt Ltd incurred Rs. 50 lakh for salary expenses of AI Pvt Ltd, which is not paid
by AI Pvt Ltd for last 2 years, whether Section 185 attract?
No, Section 185 is not attracted, in view of Notification No. GSR 464 (E), dated 05.06.2015.
8. Whether the offence committed under the section 185 is compoundable?
Yes, Where the offence u/s 295 of CA-1956 (Corresponding to section185) has been committed
but there is no wilful default and no malafide intention petitioner is entitled for compounding
of offence. [KPR Agrochemicals Ltd. 2016 (135) CLA 226 NCLT.]
9. Any disclosure requirement under Schedule III of Companies Act, 2013
Yes, Loans and advances due by directors or other officers of the company or any of them either
severally or jointly with any other persons or amounts due by firms or private companies
respectively in which any director is partner of a director, or a member should be stated
separately.
9. 10. Whether MGT-14 is required to file with ROC?
Yes, for any scheme of loan approved by special resolution in General meeting, form MGT-14 is required
to file with ROC.
“186. Loan and investment by company.—
(1) Without prejudice to the provisions contained in this Act, a company shall unless otherwise prescribed,
make investment through not more than two layers of investment companies: Provided that the
provisions of this sub-section shall not affect,—
(i) a company from acquiring any other company incorporated in a country outside India if such other
company has investment subsidiaries beyond two layers as per the laws of such country;
(ii) a subsidiary company from having any investment subsidiary for the purposes of meeting the
requirements under any law or under any rule or regulation framed under any law for the time being in
force.
(2) No company shall directly or indirectly — (a) give any loan to any person or other 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 securities of any other body
corporate, exceeding sixty per cent. of its paid-up share capital, free reserves and securities premium
account or one hundred per cent. of its free reserves and securities premium account, whichever is
more.