LOAN TO DIRECTORS AND SUBSIDIARIES

In accordance with section 185 of the Companies Act 2013, a company cannot, directly or indirectly, give any loan, including 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.

The Companies Act 2013 explains the expression to “any other person in whom director is interested” to include:-

  • Any director of leading company, or of a company which is its holding company; or
  • Any relative of the director; or
  • Any partner of such director; or
  • Any firm in which any such director or relative is partner; or
  • Any private company in which any such director is a director or member; or
  • Any body corporate at a general meeting of which not less than 25% of total voting power may be exercised or controlled by any such director, or two or more such directors, together, or
  • Any body corporate, the board of directors, Managing Director or managers, whereof is accustomed to act in accordance with the director or instructions of the board of directors or any director of the leading company.

 

Apparently, this explanation may cover subsidiary companies. Hence, one interpretation was that a holding company cannot give any loan/ guarantee/ security on behalf of its subsidiary. This view, along with the fact that section 185 is applicable from 12 September 2013, has created significant hardship for many companies.

 

 EXCEPTIONS:-

  • A company may advance loan to MANAGING DIRECTOR or WHOLE TIME DIRECTOR:

–     As part of condition of services extended by the company to all its employees; or

–    Pursuant to any scheme approved by the members by a special resolution;

 

  • These exemptions are subject to a condition that loans should be utilized by the subsidiaries  company for its principle business activities:-
  • 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 185.
  • 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 (includes subsidiaries that are not wholly owned) is exempted from the requirements under this section.

 

Company Mantra Team

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