Section 185 of the Companies Amendment Act 2017

Section 185:  Loan to directors.

Summary:

• In this we are referring the provision of Section 185 of Companies Amendment Act 2017 (Loan to directors and entities in which directors are interested). This section restricts the company on giving loans, guarantee and provide security to directors or any other person in whom Director is interested.
• This primarily deals with the subject of restricting the companies on giving loans to certain persons
• Section 185 of Companies Act has been fully substituted vide Companies Amendment Act 2017 and same been made applicable vide notification no S.O. 1833 € dated 7^th May 2018.
• Since, 7^th May there is one confusion in mind of professionals, corporates etc. i.e. “Whether after notification of new Section 185 exemptions available to private limited companies by notification dated 05^th June 2015 in respect of Section 185 will be available or not?
• This Article focuses on Section 185 of Companies Act, 2013 as amended by Companies Amendment Act 2017 on the issue whether Exemptions are available to private companies under section 185 as per recent notification?

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Section 185:

• No company (private and public) shall (a) Directly or Indirectly (b) Advanced any loan, including book Debt to any of its directors or to any other person in whom director is interested. (c) or any guarantee or provide any security in connection with any loan taken by him or such other person.

Exceptions:

1. Whole Time Director/ Managing Director:

• As a part of service extended to all of its employee.
• Any scheme approved by members by Special Resolution.

2. Given in ordinary course of business

Here, ordinary course of business means:

• Is the company engaged in lending activity regularly?
• Lend not only to directors and related parties but also to Arm length parties or unrelated parties.

• Contravention of Section 185:

1. If any loan is advanced or guarantee or security is given or provided in contravention of provision of Section 185 then;

• Company shall be liable with:

Fine: 5 lacs which  may extend to 25 lacs.

• Director or other person to whom any loan is advanced or guarantee or security is given or provided in connection with loan taken by him or other person shall be liable with

Fine: 5 lacs which may extend to 25 lacs; or

Imprisonment: six months; or

Both.

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For the purpose of this Section,   any other person means:

Any other person means:

1. Any director of a Company which is its holding company, or
2. Any partner of Director of lender company, or
3. Any relative of Directors of Lender Company, or
4. Any firm in which any of Director of Lending company is director, or
5. Any firm in which any relative of Director of lending company is director.
6. Any private limited company in which such director is a director or member.
7. Body corporate in which such director or directors hold more than 25% shares.
8. Body corporate, MD, BOD or manager accustomed to act in accordance with the direction of board or director of lending company.

* Body corporate does not include a cooperative society but it includes a foreign company.

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Example:

Question: (PRIVATE LTD CO WITH COMMON DIRECTOR)

X and Y are Husband and wife. Z is their Son.

Company B wish to avail loan from Company A, Whether Possible?

SOLUTION : Company A cannot give loan to company B as it would be in contravention of Section 185 and would attract penalty.

Planning

1)    Mrs. Y should resign from the post of Director of Company A and gift her shares to Mr. X (gift of shares is tax free). They shall appoint another Director in the company.

As B resigns and transfer the shares then the provisions of section 185 won’t apply and company A would be able give loan to company B.

OR

2)    Converting Company A into a LLP.

OR

3)    Converting Company B into a Public Limited Company and Mr. B reducing his shareholding in Company B to less than 25%.

Compiled By:                                                                                                                                                    

CS Surbhi Khanna.

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