A
BRIEF ANALYSIS OF SECTION 185 OF COMPANIES ACT, 2013 – LOAN TO DIRECTORS ETC;
BY CS K VINOTH AND CS D HEM SENTHIL RAJ
OVERVIEW:
Section
185 of the Companies Act, 2013 was notified on 12th September, 2013
followed by the Companies (Meetings of Board and its Powers) Rules, 2014.
Section
185 of the CA, 2013 is applicable from the day when it got notified and the
rules become applicable from the 01st day of April, 2014 which gives
the mandate to every auditor to report the same in their audit report about any
contravention or non compliance committed under this section.
As
per Section 185 of the Companies Act, 2013 no
company shall, directly or indirectly,
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advance
any loan,
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including
any loan represented by a book debt,
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to
any of its directors or to any other
person in whom the director is interested or
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give
any guarantees or provide any security in connection with any loan taken by
him or such other person
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Explanation
to “to any other person in whom the
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;
(d) anybody
corporate at a general meeting of which not less than twenty-five percent 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.
EXEMPTED
TRANSACTIONS UNDER CA, 2013
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
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
(RBI).
APPLICABILITY:
Applicable to both Private
and Public Limited Company.
Key Points to Note:
(1) Relative
of Director is included in the expression “to any other person in whom director
is interested”, which prohibits the company to give loans to his/her relative
directly or indirectly.
Relative
Meaning shall be as per Section 2(77) of the CA, 2013.
(2) The
term “any other body corporate” includes Public Limited Company.
(3) This
section is not applicable in case of any grant of loan to a public limited
company where the director/directors together holds less than 25% of total
voting powers.
(4) 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 is exempted from the
requirements under this section, provided that such loans are utilized by the wholly-owned
subsidiary for its principle business activities.
(5) 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 is exempted
from the requirements under this section, provided that such loans are utilized
by the subsidiary company for its principle business activities.
Examples:
Mr. A – Director of Company X,
Mr. B – Director of Company Y
Loan/Security/Guarantee provided
by Company X to Company Y
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When Company X & Y is a
Private Limited Company
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In case of Common Directors
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Section 185 is applicable.
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In case of no Common Directors
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Section 185 is not applicable.
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In case of Director A of
Company X is a member of Company Y
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Section 185 is applicable.
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In case of Director
A is a relative of Director B
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Section 185 is not applicable.
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When X is a Private Limited
Company and Y is a Public Limited Company
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In case of Common Directors
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Section 185 is not applicable;
However any Director/Managing Director of Company X exercises
control/substantial powers (including decision making powers) in the Board of
Company Y, in such a case Section 185 is applicable.
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In case of no Common Directors
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Section 185 is not applicable.
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In case of Director A of
Company X is a member of Company Y
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Section 185 is
applicable only when his shareholding is not less than 25% of the total
voting powers exercised or controlled by one or more such directors of
Company X.
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In case of
Director A is a relative of Director B
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Section 185 is not applicable.
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When
both X and Y is a Public Limited Company
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In case of Common Directors
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Section 185 is not applicable;
However any Director/Managing Director of Company X exercises
control/substantial powers (including decision making powers) in the Board of
Company Y, in such a case Section 185 is applicable.
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In case of no Common Directors
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Section 185 is not applicable.
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In case of Director A of
Company X is a member of Company Y
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Section 185 is
applicable only when his shareholding is not less than 25% of the total
voting powers exercised or controlled by one or more such directors of
Company X.
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In case of
Director A is a relative of Director B
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Section 185 is not applicable.
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In case of Individuals/Firms
In case of Director B is a
relative of Director A
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When Company X lends money to
Director B of Company Y
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Section 185 is applicable.
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In
case of Director B is not a relative of Director A
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When Company X lends money to
Director B of Company Y
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Section 185 is not applicable
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In
case Company X lends money to Partner B (who is relative of Director A) of
Firm Y
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Section 185 is applicable
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In
case Company X lends money to Firm Y ( in which Director A is also a partner)
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Section 185 is
applicable.
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IN CASE OF NON-COMPLIANCE OF
SECTION 185 – PENAL PROVISIONS UNDER CA, 2013
Any
Contravention of the provisions of Section 185, the Company shall be punishable
as under:
The
Company shall be punishable:
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Fine
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Which shall not be less than 5
Lakh Rupees but which may extend to twenty five Lakh Rupees
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Director or the other person:
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Imprisonment
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Which may extend to six months
or with fine which shall not be less than five Lakh Rupees or which may
extend to twenty five Lakh Rupees or with both.
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By
CS D HEM SENTHIL RAJ
CS K VINOTH
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