SECTION 185 &
186 OF COMPANIES ACT, 2013 SIMPLIFIED
PRACTICAL ASPECTS
WITH EXAMPLES
The section 185 of CA,2013 was notified
on 12th September 2013 and was applicable from that day itself. If
there is any deviation from the conditions laid under this section then the
Auditor is required to report the same in his Audit Report. A non qualified
report would hold auditor in default.
The lending company and the receiver
both would be liable for the penalty under the same section.
Now let us understand the basic of
section 185 and 186
Section 185:- This primarily deals with the subject of person to whom
company cannot give loan.
Section 186:- This section enlists the exceptions and specifies the
limits up to which a company can give loan.
The section 185 of
CA, 2013, restrict the company on giving loans, guarantee or provide security
to Directors or any other person in whom Director is interested.
The ways via which
a director can be interested has been covered via 5 inclusions:-
Point 1 & 2
The inclusion in
point 1 and 2 covers the Director and his relatives too.
It Says
1) Any Director of Lending Company.
2) Any Relative of Director.
3) Director of a Company which is its
holding company.
4) Any firm in which such director is
partner or relative is a partner.
5) Any partner of such Director.
Point 3,4 & 5
The inclusion in
point 3,4 & 5 only include Director but not his relatives.
It Says
1) Any PRIVATE Limited company in which
such director is a Director or member.
2) Body corporate in which such Director
or Directors hold more than 25% shares.
3) Body Corporate, MD, BOD or manager
accustomed to act in accordance with direction of board or Director of lending company.
·
A body corporate does not include a co-operative society. But it
includes a foreign company.
EXCEPTION TO
SECTION 185
1) WD/WTD
a) As a part of service extended to all of
its employee.
b) Any Scheme Approved by members by
special resolution.
2) Given in ordinary
Course of Business
How to check
ordinary Course
a) Is the company engaged in lending
activity regularly.
b) Lend not only to Directors and related
parties but also to Arm Length Parties or unrelated parties.
KEY TAKEAWAY :- All NBFC may not
be engaged in lending activities in ordinary course.
NOW LET US
UNDERSTAND THE SECTION WITH THE HELP OF PRACTICAL EXAMPLES
EXAMPLE 1
Company A has two
Directors Mr. X and Mr. Y. Both holds 50% share each of Company.
Company A wish to
give loan to following and have asked for your views on same.
A) Loan to Director X.
B) Loan to a relative of Director Y.
C) Director of company D which is the
holding company of A.
D) A partner of Director of Holding
Company.
E) A partner of Director of company A.
F) To a firm in which Mr. X is a partner.
G) To a firm in which relative of Mr. Y is
a Partner.
SOLUTION 1
S
No
|
Loan
To
|
Whether
Co Can
|
Reason
|
1
|
Loan to Director
X.
|
NO
|
Included
in definition
|
2
|
Loan to a
relative of Director Y.
|
NO
|
Do
|
3
|
Director of company
D which is the holding company of A.
|
NO
|
Do
|
4
|
A partner of
Director of Holding Company.
|
YES
|
A
partner of Director of Holding co is not included.
|
5
|
A partner of
Director of company A.
|
NO
|
Included
in definition
|
6
|
To a firm in
which Mr. X is a partner.
|
NO
|
Included
in definition
|
7
|
To a firm in
which relative of Mr. Y is a Partner.
|
NO
|
Included
in definition
|
EXAMPLE 2 (PRIVATE LTD CO WITH COMMON DIRECTOR)
Particulars
|
Company A (Pvt Ltd or Ltd)
|
Company B (Pvt Ltd)
|
Directors Cum share holder
|
A (shareholding 60.0%)
B (shareholding 40.0%)
|
B (Shareholding 75.% )
D (Shareholding 25% )
|
Only Share Holder
|
Nil
|
Nil
|
A and B are
Husband and wife. D is their Son.
Company B wish to
avail loan from Company A, Whether Possible?
SOLUTION 2
Company A cannot
give loan to company B as it would be in contravention of Section 185 and would
attract penalty.
Planning
1) Mr B should resign from the post of
Director of Company A and gift his shares to Mr A (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 wont 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%.
EXAMPLE 3 (Private Ltd Co To Public Ltd Co)
Particulars
|
Company A Pvt Ltd or Ltd
|
Company B (Ltd)
|
Directors Cum share holder
|
A (shareholding 60.0%)
B (shareholding 20.0%)
C (Shareholding 15.0%)
|
B (Shareholding 10.0% )
A (Shareholding 10.0% )
C (Shareholding 5.0%)
|
Only Share Holder
|
D (Shareholding 15.0%)
|
Others (75.0%)
|
Company B wish to
avail loan from Company A, Whether Possible?
SOLUTION 3
No it is not
possible to advance loan to company B as Director A, B and C collectively are
holding 25% of shares of Company B. And hence get covered under the clause 4 of
interested party to Director.
PLANNING
1) Either Mr A or Mr B or Mr C should
resign from the post of Director of Company A. This would bring down the
holding of shares to less than 25% and will enable the borrowing between two
Companies.
OR
2) Converting Company A into a LLP.
OR
3) Either Mr A or Mr B Or Mr C should give
up atleast 1% of their share held in Company B to bring down the holding under
25%.
AMOUNT ALREADY
EXISTING ON 12Th SEPTEMBER 2013
Q. In Case any amount is outstanding on 12th
September as a loan to Director or anyone in whom Director is interested.
A. The loan can
still continue to appear in the books of accounts of Company; however it can’t
be renewed and is to be repaid on the end of the term. If it’s a loan repayable on demand then still
it is suggested to make a formal agreement with tenure specified in it.
Q.
Company A holds more than 5 % share of company B and have common Director.
Company B has availed a loan from bank and because company A holds more than 5%
of share of company B it has to be give corporate guarantee for company B to
bank.
A. These types of
cases are common between related private limited companies. Banks usually takes
corporate Guarantee of the companies. In such a case again company cannot renew
the Guarantee given to Bank.
However, the CC limits of a company are
renewed each year and new Sanction ticket is issued. In such a case corporate
Guarantee also gets renewed. It is advised to approach bank and get the clause
of Corporate Guarantee removed.
KEY
POINT
The section is
applicable only at the time of granting the loan and
any change in
circumstances thereafter will not make the section applicable.
Thus, section
185 will not be attracted in respect of a loan given to an employee, who does not
fall within the ambit of specified persons as listed above, but who
subsequently becomes a member of the board, because at the time of the loan, no
contravention was involved.
KEY POINT IN CONVERSION
OF A COMPANY INTO A LLP
As per Sec 47(xiiib)
of Income tax Act, for tax neutrality of such conversion, turnover of Private
Limited Company in any of last 3 years must not exceeds 60 Lakhs. So, if
turnover exceeds 60 Lakhs than such conversion will be subject to income tax.
Any capital gain
arising in transfer of capital asset would be taxable in hands of company.
Any Gain arising
to shareholder on surrendering of shares would be taxable in hands of
shareholders.
SECTION 186
Specified transactions are covered
under the Section
a) Loans to
any person or other body corporate;
b) Guarantee
or security given in connection with a loan to any other body corporate or
person; and
c) Acquisition
by way of subscription, purchase or otherwise, the securities of any other body
corporate.
LIMITS
UPTO WHICH LOAN CAN BE GIVEN
Higher of
A) 60 % of ( Share Capital + Free Reserves
+ Security Premium); or
B) 100% of (Free Reserves + Security
Premium)
However, if
company wishes to invest or give loan to a amount higher than the above then a
prior approval of Shareholders is required.
Also shareholders
cannot give blanket permission.
KEY
POINT
If
as on 1.4.2014 the company has given loan or guarantee in Excess of limits
specified then it has to file a Special resolution for this by 31st
March 2015.
Q.
Whether various Advances would also be considered under this section?
A. Loan is lending of money with absolute promise to
repay whereas advances is to be adjusted against supply of goods and services.
Genuine trade advances given to suppliers against orders for supply of goods
will not be considered as loans and hence will be out of purview of Section
186. Similarly, advances given to employees against current month’s salary will
also not be in the nature of loans.
LOANS AND INVESTMENT BETWEEN HOLDING &
SUBSIDIARY COMPANY
Section 185:- Section 185 Exempts loan between Holding Company
and Subsidiary Company.
(1) Any
loan made by a holding company to its wholly owned subsidiary company
or any guarantee given or security provided by a holding co in respect of
any loan made to its wholly owned subsidiary co is exempted from the
requirements under this section; and
(2) 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 loans made under sub-rule (1) and (2) are utilized by the subsidiary
company for its principle business activities.
SECTION 186:-
Loan
or guarantee given and security provided to its wholly owned subsidiary company
or a JV, exempted from calculating the limits prescribed under section 186.
Disclaimer: The contents of this document are solely
for informational purpose. It does not constitute professional advice or recommendation
of firm. Neither the authors nor firm and its affiliates accepts any
liabilities for any loss or damage of any kind arising out of any information
in this document nor for any actions taken in reliance thereon.
Readers are advised to
consult the professional for understanding applicability of this newsletter in
the respective scenarios. While due care has been taken in preparing this
document, the existence of mistakes and omissions herein is not ruled out. No
part of this document should be distributed or copied (except for personal,
non-commercial use) without our written permission.
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