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372a-185

27 February 2014

A private company wants to give expansion loan to its Group company, also a private company.Both have commom directors and common shareholders.Thhe companies are NOT holding- subsidiaries of each other. Can it give loan under section 372A (old Act) or is it prohibited under section 185 (new Act)? If not loan, can FD be drawn or guarantees given to the group company?

I am confused bacause the new circular states that 372A continues till 186 comes into the picture.Since 372A does is not applicable to private companies, it means loan can be given to group companies having common directors.

Do we totally ignore section 185 becaause of the new circular??

What do we advice th management??What will be the correct thing to do?
Please help.

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2 Replies

CS BHAVIN SHETH (MANAGER-Company Secretary) (131 Points)
Replied 27 February 2014

Dear STill,

As per my view, Section 185 of CA,2013 is notified and private company comes under tis purview, thus Company provide loan or guarantee to its subsidiary or group companies.

As intitially it was permitted with CG approval under section 295 of CA,1956.

Thus in my view, make managment aware about, fines and rules under section 185, if they agree for the same , then go ahead,

regards

BHAVIN SHETH

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P C Agrawal (Registered independent director Past Chairman of Aurangabad Chapter of ICSI Practicing Company Secretary at Aurangabad) (8229 Points)
Replied 27 February 2014

1) Sec.185 prohibits giving of loan or providing security/guarantee in connection with loan to group companies in which directors are interested.

2) Sec.372A (which is still in force) permits inter-corporate loans within specified limits. Hence there is a conflict between Sec.185 of new Act and Sec.372A of old Act.

3) In my view in case of conflict, Sec.185 will prevail over Sec.372A since Sec.185 aims to put restrictions on related party transactions whereas Sec.372A is general provision not limited to related parties. As per general rule of interpretation, specific provision should prevail over general provision.

4) Though MCA has tried to clarify the position by issuing two circulars on the subject, but these circulars have raised more queries than clearing doubts of corporate sector (e.g. Sec.372A talks of exemption for wholly owned subsidiary whereas circular states only 'subsidiary'; Sec.372A talks of exemption for loans as welll as guarantee/security to WOS whereas circular talks of guarantee/security only and not loans; Circular has wrongly given reference of Sec.185 instead of 186 etc. etc.) . Moreover, circulars are not part of law and can always be challenged in court.

Hence my answer to your query is that loan/guarantee/security cannot be given to group companies as it is prohibited u/s 185. You can also go through my PPT on the subject at the following link:

/forum/ppt-on-loans-under-companies-act-1956-2013-282527.asp#.Uw7GWdpWHIU

Thanks

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