Facts of the Transaction:
Company shall provide loan to a company in whom few directors on Board of the Borrowing Company will be same.
Applicable Sections:
Section 179, 180, 185, 186 of the Company Act 2013.
Law(s) Governing the Transaction:
Section 185 of the 2013 Act, prohibited companies from advancing any loan (including loan represented by a book debt) or giving any guarantee or any security in connection with a loan taken by the directors of such company or any other person in whom the directors are interested. Section 185 (1) provided certain exceptions to the applicability of this section on certain persons; however the restrictions continued to be stringent for group companies with common directors. Similarly, Section 186 of the 2013 Act dealing with limits on loans and investments by companies restricted the ability of companies to advance loans or make investments beyond the certain limits specified therein and such restrictions extended to loans given to employees of the company.
Section 179
As per section 179 (3) (d) and (e), if a company wants to borrow money and invest the funds of company, it should be authorised by way of board resolution passed in duly convened board meeting.
Section 180
As per section 180 (1) (C), If a company wants to borrow money (Including existing Borrowing), which will exceeds the sum of paid-up share capital, free reserves and securities premium, Than Such transaction must have the approval of Members of the Company by way of Special Resolution.
“However private companies are exempted from this section.
Section 185
Transactions Exempted from Provisions of Section 185
185 (2) A company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the director of the company is interested, subject to the condition that—
(a) a special resolution is passed by the company in general meeting:
Provided that the explanatory statement to the notice for the relevant general meeting shall disclose the full particulars of the loans given, 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 and any other relevant fact; and
(b) the loans are utilised by the borrowing company for its principal business activities
Consclusion: As per Section 185 (2) (a) of Companies Act, Any Loan made by a Company to another company in whom directors will be same, shall not attract the prohibitions of Section 185 of Companies Act, 2013 subject to approval of Loan by the Shareholders of Lender Company by way special resolution passed at duly convened general meeting.
Section 186
Section 186 provides that where a loan or guarantee is given or where a security has been provided by a company to another company not 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, it must be approved by board of Directors through Board Resolution and:
As per Section 186 (3)
Where the aggregate of the loans and investment so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate along with the investment, loan, guarantee or security proposed to be made or given by the Board, exceed the limits specified above, than such investment requires the prior approval of Lender Company by way of Special Resolution.
Compliance for the Transaction under section 185 2) (a) “Loan by One Company to Another Company in Whom Director will be same”:
For Borrowing Company:
- Amount of Loan to be taken by the borrowing company shall be as per the Compliance of Section 179* and Section 180(1) (C)* of Companies Act 2013.
*As per section 179 (3) (d), if a company wants to borrow money, it should be authorised by way of board resolution passed in duly convened board meeting.
*As per section 180 (1) (C), If a company wants to borrow money (Including existing Borrowing), which will exceeds the sum of paid-up share capital, free reserves and securities premium, Than Such transaction must have the approval of Members of the Company by way of Special Resolution.
Exempted for Private Companies
- An Undertaking shall be furnished to Lender Company that Loan amount shall be utilised only for the objects for which loan will be taken (Purpose shall be disclosed in EGM Notice of Lender Company and the loans are utilised by the borrowing company for its principal business activities.
- Such outstanding Borrowing amount shall be reported annually to the ROC in E-form DPT-3.
- Proper Loan Agreement shall be executed.
- Disclosure shall be available under the Borrowing Head of Balance Sheet of the Company.
For Lender Company:
- Amount of Loan to be sanctioned to the Company in whom director will be same, shall be as per the Compliance of Section 179*, 185 and Section 186 of Companies Act 2013.
*As per section 179 (3) (e), if a company wants to invest funds of the company, it should be authorised by way of board resolution passed in duly convened board meeting.
* As per section 185, In case of common directors on the Board of Lending and Borrowing Company such transaction must be approved by shareholders by way of special resolution and E-form MGT-14 shall be filled for the same.
*Section 186 (3) provide that where a loan or guarantee to be provided exceed the 60% 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, Such Investment amount must be, approved by the shareholder of Company by way of Special resolution and E-form MGT-14 shall be filled for the same, otherwise Board Resolution will be sufficient to give the loan to amount to the another company subject to the provisions of Section 185 of Companies Act, 2013.
- An Undertaking shall be obtained from Borrowing Company that Loan amount solely will be used for objects for which loan is taken by borrowing company and the loans are utilised by the borrowing company for its principal business activities
- Proper Loan Agreement shall be executed.
- Complete Details shall be given in the Balance Sheet under the Head of “Loans and Advances”.