critical analysis of section 185 and 186 of companies act, 2013

7/24/2019 Critical analysis of section 185 and 186 of Companies Act, 2013

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Critical analysis of Section 185 and Section 186 of the Companies Act, 2013

Section 185 of the Companies Act, 2013 ( herein after referred as the Act ) deals with giving of loans

to directors and others and section 18 of the Act deals with giving of loans and investments !" the

companies #

Section 185 of the Act speciall" imposes a blanket ban on companies on providing loans to

directors and persons in whom the director is interested as defined $nder this section

( interested persons) s$!%ect to certain e&ceptions mentioned $nder the section #

Further this section saves everything which is otherwise laid down under any section of the Act.

'he framers of the Act might have the o!%ective in their mind while framing this section to protect

the assets of the compan" and to ens$re that propert" which !elongs to the p$!lic sho$ld not !e taen

awa" !" someone else*#

+&planation to s$!section (1) of section 185 of the Act defines -nterested persons as follows.

(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 rm 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) any body corporateat a general meeting of which not less than twentyfve per

cent. 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 o directors, managing director or manager,

whereof is accustomed to actin accordance with the directions or instructions o

the Board, or o any director or directors, of the lending company.

Altho$gh the o!%ective of the section was good and to prohi!it the companies to provide loan to

directors etc , !$t the interpretation of this section !ecomes so a!s$rd that while o!%ective of this

section is to prohi!it to give loan to directors and interested persons , !$t it also interpreted to

prohibit the promoters companies to provide loan / guarantees to other companies # 'his

interpretation is giving m$ch pro!lems to the financial instit$tions which demands g$arantees from

promoter companies #

Let me explain the section with an example.

'here are two companies one is listed one , / td in which r A is anaging irector and

promoter of the compan" and holding more than 25 shareholding in this compan" #

Another compan" is a closel" held compan" , 4 td which is controlled !" r A , in which he holds

more than 50 of holding and also director in that compan"#

/ td has taen a loan from !ans and !ans ased for g$arantee from 4 td !eing promoter

compan" #

'he section 185 of the Act deals with all the companies private , closing held p$!lic companies ,

listed p$!lic companies etc#

ow as per interpretation of cla$se (d) of +&planation of section 185 (1) of the Act , for r A directorof 4 imited , / imited !ecomes a interested person, as its director r A also holds more than 25


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holding in / imited # 'h$s 4 imited cannot provide g$arantee in favo$r of 6ans on !ehalf of /

imited#

-n this case , 4 imited is nothing !$t a closed held p$!lic compan" controlled !" promoters and

p$!lic have not m$ch interest in it # -n this case if 4 imited is giving the g$arantee then indirectl"

the promoters are providing g$arantee thro$gh their compan" in the interest of listed compan", andgiving of g$arantee !" promoters is not prohi!ited !" the aw#

From this it comes out that section 1! of the Act be amended in such a way that it should not be

applicable to the private and closing held public companies " which are not listed # that is

companies in which ma$ority of shareholding is held by directors or promoters for giving of

loans etc to other companies . %his will protect the interest of the public at large.

So the question arises , ,but should be done and ho the promoter company can pro!ide "uarantee

on behalf of listed company to the ban#s, hile section 185 of the Act prohibits it to pro!ide the

same as e$plained abo!e%

-ntentionall" or $nintentionall" section 185 of the Act read with s$!section (2) of section 18 of the

Act provides the sol$tion for that#

S$!section (1) of section 185 of the Act commences with &'ave as otherwise provided under this

Act( . )ere it is to be noted that it saves as otherwise provided under & this Act( in place of

under &this section( as provided under section *+! of ,ompanies Act - 1+!. 'h$s it saves

whatever is written not onl" $nder this section !$t also $nder an" provisions of other sections of the

&Act(. -t is there!" meant that ever" section of the act overrides this section# -t ma" !e agreed that

the framers ma" not have intended for that # 6$t whatever the intention of framers ma" !e, $nlessthere is amendment of section 185, till that date , ever"thing whatever provided $nder an" provisions

of other sections of the Act , will remained saved#

'ubsection "1#of section 1 of the Actcommences with &0ithout pre$udice to the provisions

contained in this Act(#So the provisions other sections of the Act have overriding effect to whatever

mentioned $nder an" provision of this s$! section of section 18 #

6$t sub section "*# of section 1 of the Act does not commence with the aforesaid words , th$s

this s$!section of section 18 of the Act has effect independentl" # So s$! section (2) of section 18

of the Ac t read with s$! section (1) of section 185 of the Act , means that whatever is provided

$nder this section , it has !een saved and have overriding effect#

S$! section (2) of section 18 of the Act provides that

No company shall directly or indirectly

(a) give any loan to any person or other body corporate;

(b) give any guarantee or provide security in connection with a loan to any other body

corporate or person; and

(c) acuire by way of subscription, purchase or otherwise, the securities of any other

body corporate,

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.


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S$! section (3) of section 18 provides that

"here the giving of any loan or guarantee or providing any security or the acuisition

under sub!section (#) exceeds the limits specied in that sub!section, prior approval bymeans of a special resolution passed at a general meeting shall be necessary.

'h$s the provisions of s$! section (2) and (3) of 18 of the Act , a$thorises a compan" to give loan

or g$arantee etc to an" person in compliance with the provisions of this section #

'o even if - section 1! of the Act prohibits a company to give any loan / guarantee to any person

- even then a company can legally provide loan / guarantee by complying the provisions of sub

section "*# and "# of 1 of the Act.

S$!mitted for ind comments please#

critical analysis of section 185 and 186 of companies act, 2013

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