Loans, Investment, Guarantee or Security by Company-FAQs

1
Loans, Investment, Guarantee or Security by
Company FAQs
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 QA 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

• QA
• 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

• QA
• 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 companys 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

• QA
• 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

• QA
• 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.

10

• (3) Where the giving of any loan or guarantee or
  providing any security or the acquisition under
  sub-section (2) exceeds the limits specified in
  that sub-section, prior approval by means of a
  special resolution passed at a general meeting
  shall be necessary.
• (4) The company shall disclose to the members in
  the financial statement the full particulars of
  the loans given, investment made or guarantee
  given or security provided and the purpose for
  which the loan or guarantee or security is
  proposed to be utilised by the recipient of the
  loan or guarantee or security.
• (5) No investment shall be made or loan or
  guarantee or security given by the company unless
  the resolution sanctioning it is passed at a
  meeting of the Board with the consent of all the
  directors present at the meeting and the prior
  approval of the public financial institution
  concerned where any term loan is subsisting, is
  obtained Provided that prior approval of a
  public financial institution shall not be
  required where the aggregate of the loans and
  investments so far made, the amount for which
  guarantee or security so far provided to or in
  all other bodies corporate, along with the
  investments, loans, guarantee or security
  proposed to be made or given does not exceed the
  limit as specified in sub-section (2), and there
  is no default in repayment of loan instalments or
  payment of interest thereon as per the terms and
  conditions of such loan to the public financial
  institution.
• Tags Companies Act, Companies Act 2013, FAQs,
  section 185, Section 186 Read more
  at https//taxguru.in/company-law/loans-investmen
  t-guarantee-security-company-faqs.htmlCopyright
  Taxguru.in