Can a company give loan to its group companies?

Can a Company give loan to group companies under Company Act, 2013?

Many corporate including Pvt Ltd Cos have other related group companies and they transfer money to & from other company as and when require. Stop doing this, even retrospectively from 12th Sep, 2013 as these can be treated as interest free loan u/s 185 of new company law. Loan has not been defined u/s 185. These transfers can be treated as loan. Any transaction of giving money to be returned with or without interest can be treated as loan. However, fund can be transferred to public ltd co. if less than 25% of total voting power is exercised or controlled by "such director(s)".

Section 185 of the Companies Act, 2013 has been made operational from 12-09-2013.This sec is applicable for all companies. This sec states that:

No company can advance loan to its “directors” or to “other persons in whom directors are interested”.

No company can give any guarantee or provide any security in connection with any loan taken by him or such other person.

EXCEPTIONS:

a. the giving of any loan to a managing or whole-time director—

(i) as a part of the conditions of service extended by the company to 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 bank rate declared by the Reserve Bank of India.

The expression “TO ANY OTHER PERSON IN WHOM DIRECTOR IS INTERESTED” means—

(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 firm 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) anybody 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

(e) anybody 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.

"Control" has been defined as to include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholding or management rights or shareholders agreements or voting agreements or in any other manner. [Section 2(g) of the Companies Act, 2013]

IMPRISONMENT & PENALTY UPTO 25 LAKHS:

If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1), 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, and 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.

COMMENTS: Kindly note the following observations:

1) Existing loan on 12th sep is not affected by above provisions. However, it should not be renewed & should be repaid on due date.

2) If any loan had already been given after 11th sep., you should book it as advance  for property/ purchase of goods/ materials etc. backed by adequate documentation . These should be return as soon as possible.

3) Deposits or advance for property/ purchase of goods, services etc  is not covered.

4) Company in the ordinary course of business can give loan at not below bank rate.

5) Sec 372 of the Companies Act, 1956 is applicable after 11th sep.

6) Above is my opinion only, you may have different opinion.

PRIVATE LTD COMPANIES HAVING TURNOVER UPTO 60 LAKHS SHOULD BE CONVERTED TO LLP

1) LLP is not a company, hence proposed limit of audit of 20 company / CA will not be applicable.

2) As companies Act will not be applicable, you can transfer fund from one LLP to another group LLP. 

3) Many of exemption which Pvt Ltd company enjoy under old Companies Act has been withdrawn, which are not applicable to LLP.

4) Compliances under new companies Act for Pvt Ltd Companies has been substantially increased, which are not applicable for LLPs.

5) There is heavy penalty for non compliances under New Company Act. Penalty of Rs 50000 is a small amount for a single violation.

6) Cost benefit analysis suggests that these should be converted into LLP.

7) However, as per sec 47(xiiib) of Income tax Act, for tax neutrality of such conversion , turnover of Pvt Ltd 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.

PRIVATE LTD COMPANIES SHOULD  BE CONVERTED INTO PUBLIC LTD COMPANIES

1) Sec 185 of New Co Act is not applicable to public ltd co 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

2) We can plan accordingly and take benefit.

3) So, we can convert our existing Pvt Ltd companies to public Ltd companies and take benefits.

THE COMPANIES ACT, 2013

185. (1) Save as otherwise provided in this Act, no company shall, directly or indirectly, advance any loan, including any 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:

Provided that nothing contained in this sub-section shall apply 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 the company to 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 bank rate declared by the Reserve Bank of India.

Explanation.—For the purposes of this section, the expression “to any other person in whom director is interested” means—

(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 firm 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 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

(e) 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.

(2) If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1), 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, and 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.

Warm Regards 

CA Nitesh Kumar More |  FCA