- INTRODUCTION
When it comes to granting loans or providing guarantees or security to directors or parties in whom the directors are interested, there is always a lingering suspicion of nepotism and favoritism bred in all the persons, and if such transaction is easily carried out, it encourages undue advantage and malpractices among the persons who have a fiduciary obligation to the company and all the persons interested in it. Section 185 of the Companies Act has been incorporated to prevent higher management in the company from abusing their authority. This Section categorizes such transactions as prohibitive, conditional, and exempted, with the dual goal of keeping a check on such transactions while also making it easier to conduct business.
The article discusses the various amendments made in the Companies Act, 2013 regarding the provisions related to advancing loan by the Companies to their directors and tries to conclude the present scenario while dealing with the question of such transaction concerning private companies.
What is a Private Company?
- As per section 2(68) Private company means a Company having a minimum paid-up share capital as may be prescribed, and which by its articles,
i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two hundred:
Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and
(iii) prohibits any invitation to the public to subscribe for any securities of the company
- Furthermore, the Act defines the types of companies that can be incorporated and registered under it. Section 3(2) provides that the company can be following types
i) A company limited by shares (members liability is limited up to its share capital invested in a company which is also recorded in Memorandum of Association and that member cannot be held liable beyond that limit);
ii) company limited by guarantee (a company limited by guarantee as a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.;
iii) An unlimited company ( No restrictions on the member’s liability, each member’s liability will extend over companies entire debt; despite not having limited liability in case debts the members cannot be sued individually, this type of company is still regarded as a separate legal entity);[
iv) One Person Company is s new category of Private Company introduces in the Companies Act, 2013 in Section 2(62) of the Act whereas, there is only one shareholder in the company and it is still eligible for registration as a company under this Act.
CAN PRIVATE COMPANIES GRANT A LOAN TO ITS DIRECTORS?
- As per Section 185 of Company Act 2013,
No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by, —
(a) any director of company, or of a company which is its holding company or any partner or relative of any such director; or
(b) any firm in which any such director or relative is a partner.
A Private Limited Company Can Give Loan To Its Director If Following Condition Given Below Are Satisfied:
(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 utilized by the recipient of the loan or guarantee or security and any other relevant fact; and
(b) the loans are utilized by the borrowing company for its principal business activities.
Explanation. -For the purposes of this sub-section, the expression “any person in whom any of the director of the company is interested” means—:
(a) any private company of which any such director is a director or member;
(b) any body corporate at a general meeting of which not less than twenty-five 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
(c) any body corporate, the Board of Directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or Directors, of the lending company.
Section 185(3) of the Act provides exceptions to the restrictions on the company to grant loans. The company can advance loans or give a guarantee, or security to-
(a) the giving of any loan to a managing or whole-time director—
(i) as a part of the conditions of service extended by theophany all its employees; or
(ii) pursuant to any scheme approved by the members by a special resolution; or
(b) a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the rate of prevailing yield of one year, three years, five years or ten years Government security closest to the tenor of the loan; or
(c) 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; or
(d) 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:
Provided that the loans made under clauses (c) and (d) are utilized by the subsidiary company for its principal business activities.]
PENALTY
If any loan is advanced or a guarantee or security is given or provided or utilized in contravention of the provisions of this section,—:
(i) the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees;
(ii) every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees;
(iii) the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.]