According to section 185 of Companies Act, 2013 started with the words ‘Save as otherwise provided in this act.’ Thus, the restriction under section 185(1) was not applicable where loan or guarantee is permissible under other provisions of Companies Act, 2013 (e.g. Section 186 of Companies Act, 2013.)
Now, in the revised section 185, these words have been omitted.
Now in the revised section 185(1) as substituted, no company shall, directly or indirectly advance any loan, including book debt or give any guarantee or provide any security in connection with any loan taken by –
- Any director of company or of company which is holding company or any partner or relative of any such director or
- Any firm in which any such director or relative is a partner.
Such loans or security or guarantee can be given in connection with any loan taken by any person in whom any director of company is interested, if
- Special resolution is passed in general meeting
- Loans are utilized by borrowing company for its principal business activities.
Thus, loan can be given only to another company, not to director or his relative or any firm.
Restriction not applicable to specified private companies:
The restrictions under section 185 of Companies Act, 2013 are not applicable to private company
- In whose share capital body corporate has not invested any money.
- Which has borrowings from banks and FI or any body corporate not more than twice of their paid up capital or Rs 50 crores( whichever is lower)
- Private company is not in default in repayment of such borrowings.
Thus, Public Company can now give loan, provide security and grant guarantee to the body corporate, firm in which director is interested by passing Special resolution and depicting that amounts are used for the principal activities of business.
So, Section 185 of Companies Act, 2013 has liberated the feets of public companies for few miles.
Disclaimer – The above summary is based on the personal interpretation of the revised regulations, which may differ person to person. Hence, the readers are expected to take expert opinion before placing reliance on this article.