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Section 185/186

21 February 2014

A private company wants to give expansion loan to its wholly owned company.Both have commom directors.Is it allowed as per new Act?Is section 185 of the New Act applicable? Or since its an intercorporate loan , section 186 (not yet notified) will be applicable?

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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 21 February 2014

. 1. As on date two relevant Sections are in force: Sec.185 of CA 2013 dealing with loans to related parties and Section 372A of CA 1956 dealing with inter-corporate loans & investments. Sec.186 of CA 2013 has not yet been notified.

2. The given case is covered by Explanation (c) to Sec.185(1) of CA 2013 since there are common directors and hence loan is not permitted. Object of this Section is to control related party transactions.

3. Restrictive provisions of Section 372A are not applicable in this case. [Ref. Sec.372A(8)(a)(iii)/ 372A(8)(c)]

4. As a general rule of interpretation, in case of conflict between two provisions, the stricter provision will apply. Since it is a related party transaction prohibited u/s 185, benefit of Section 372A will not be available.

5. MCA in its Valentine Day circular dated 14.2.2014 has also stated that guarantee given by holding co. to its subsidiary co. will be covered u/s 372A(8)(d), but they have not touched loans. It seems intention of MCA is to cover the same u/s 185.

However, the issue is not free of doubts inspite of issuing 2-3 circulars on the subject. MCA has to make its intention very clear by issuing exemption notification u/s 462 of CA 2013 instead of issuing circulars creating more confusion.

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Still Learning (cs) (234 Points)
Replied 21 February 2014

Thanks a ton.

Also I would like to add that both, the holding and subsidiary companies are private companies. Section 372 A shall not be applicable.

So in this case, it is to be understood by me that, section 185 (iii) of the new Act does not permit a company (public or private) to give loan(for expansion purposes) to its wholly owned private company having commom directors because 'Person in whom the director is interested' specified under the section includes any private company of which director is a director or member.

Please correct me if I am wrong.

P C Agrawal (Registered independent director Past Chairman of Aurangabad Chapter of ICSI Practicing Company Secretary at Aurangabad) (8229 Points)
Replied 21 February 2014

Yes pl, you are right.

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Still Learning (cs) (234 Points)
Replied 26 February 2014

Again under this, can FDs be drawn in favour of Group Companies with common directors, or corporate guarantees be given for the benefit of Group Companies ??Are they covered under section 185?