Section
185 of Companies act 2013-Fetter to granting loan to individuals
The
Companies Act, 2013 (“Act”) encapsulates details code for regulation of company
affairs. Section 185 of the Act stipulates the provisions as regards granting
of loans to the directors or to such entity where the directors are directly or
indirectly related or associated. The loans cannot be granted in violation of
Section 185-186 of Companies Act 2013. In case of violation of the provisions,
penalty to the company, Directors and its officer in default who grant loans in
contravention are prescribed.
The object of the company is also laid down in Memorandum
of Association ands Article of Association. Clearly, the company cannot
function, contrary to the object laid down in the Article of Association. The
company that deals in financing such as Non Banking Finance company (NBFC)
clearly spells out it subject in the Article of association and subject to
approval of Reserve Bank of India shall be entitled to provide loan for the purposes
envisaged in the Article and as per the license so obtained. However, there are
clear fetter in granting loan by a company to its own Directors or relatives of
Directors’ as per section 185 of Companies Act 2013. The advancing of loan by
way of inter corporate deposit has to be in sync with the object of the company
as per article. It clearly appears that a company which is not a NBFC cannot
provide individual loan even to a third party who may or may not have a linkage
with Director or Directors’ of the company. In case, loan is advanced to an
individual, that may not have a legal mandate and may face obstacle in
processing that through the courts of law. The endeavour herein is to find out
the nuances in this regard.
The terms of Section 185 of the Companies Act
2013, shall be worthy of perusal before going further:
185. Loans to directors, etc.—
(1) 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.
(2) A
company may advance any loan including any loan represented by a book debt, or
give any guarantee or provide any security in connection with any loan taken by
any person in whom any of the director of the company is interested, subject to
the condition that—
(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 utilised by the recipient of the loan or guarantee or
security and any other relevant fact; and
(b) the
loans are utilised 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.
(3) Nothing contained in sub-sections (1) and (2)
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 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 utilised by the subsidiary
company for its principal business activities.
(4) If
any loan is advanced or a guarantee or security is given or provided or
utilised 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; and
(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.]
Section 185(2) of the Companies act 2013
stipulates exemptions in granting loan or guarantee in connection to a loan in
certain conditions, such as:
(i)
If company passes a special
resolution in a general body meeting;
(ii)
The loan should be utilized for
company’s principal business activities;
(iii)
The notice for general body meeting
should contain an explanatory statement and in that meeting a resolution for
granting of loan should be passed while disclosing complete particulars of
loans given or provided along with detailing the purpose for which the loan or
security is provided ;
To buttress the issue further, it may be apt to
refer to a judgment of NCLAT Chennai. The NCLAT Chennai (Company Appeal (AT) No. 68 of
2019) TA No. 129 of 2021 (Filed under Section 421 of the Companies Act, 2013)
dealt with a matter arising out of the Impugned Order dated 20.12.2018 in CP
No. 615 / BB / 2018, passed by the `National Company Law Tribunal’, Bengaluru
Bench, Bengaluru) captioned as Som Prakash Satsangi Vs Registrar of Companies, Bangalore,
Karnataka & Ors. While upholding the orders of NCLT
Bengaluru, the NCLAT has held as under:
“In the light of foregoing deliberations, on a
careful consideration of contentions advanced, on behalf of the respective
sides, taking into account of the facts and circumstances of the present case,
in a `holistic and conspectus manner’, keeping in mind that the `Default’,
remained for one year and six days, this `Tribunal’, comes to a consequent
conclusion, that in as much as the `Appellant’, is liable for the `Violations’,
and `Non-compliances’ committed by it, by means of Section 185 of the Companies
Act, 2013, the `impugned order’, dated 20.12.2018, in CP No. 615 / BB / 2018,
passed by the `National Company Law Tribunal’, Bengaluru Bench, to the extent
of `imposing Compounding Fee’ on the `Appellant’ and its `Directors’, and
`Prosecution’ against `Former Directors’, is free TA No. 129 of 2021 from
any `Legal Infirmities’. Accordingly, the `Appeal’ is devoid of merits and it
fails”.
It needs emphasis to point out that the section
185 of Companies Act 2018 was amended on 03.01.2018 with effect from 07.05.2018,
pursuant to which, the `liability’, for non-compliance of Section 185 was `imposed’,
on `every officer’ in `Default’, in addition to the `liability’ on the
concerned `Company’. Initially, the liability was only of a company. The
liability of every officer finds mention after 2018 amendment.
It may be mentioned that as per
`Pre-amended Section 185 (2) of the Companies Act, 2013’, the `Company’ in
`Default’, was liable for `Fine’, which shall not be less than Rs.5,00,000/-,
but which may extend to Rs.25,00,000/- and the `Director’ or other `Person’, to
whom the `Loan’ is advanced, is `Punishable’ with `Imprisonment’ or `Fine’,
which shall not be less than Rs.5,00,000/-, but which may extend to
Rs.25,00,000/- or with both.
The word Loan has not been defined
under Companies Act, 2013 and in order to ascertain the import whereof the
dictionary meaning of the term “Loan” mean a sum of money or other valuables or
consideration that any individual or entity borrows from another individual
entity, individual etc with a condition that it be returned or repaid at a
later date generally with interest, but may also be returned as per the
conditions laid down, without interest.
As per section 185 of Companies Act 2013, any
loan or finances by a company is prohibited, unless exempted as per section 185(2)
of the Companies Act 2013.
That it is no res integra as held by the Hon’ble
Supreme Court of India in Central Board of Trustees v. Indore
Composite Private Limited, (2018) 8 SCC 433, that, if an `Order’ is passed
by an `Adjudicating / Judicial Authority’, without taking into account, the
`Applicable Law’ or without providing sufficient reasons on the facts of the
case shall not reflect the conscious application of mind and in such a
situation the Order passed shall be `Bad
in Law’ and such an order it is `liable’
to be set aside.
What therefore follows that a professionally,
managed `Company’ is expected to comply with the requirements of `Law’. A “Company”
is a separate `Juristic Entity’ vis-à-vis its `Director’, and therefore,
can neither seek `reliefs’ nor `plead’ on their behalf. It is to be borne in
mind that even un-amended Section 185 (1) & (2) of the Companies Act, 2013
clearly stipulates `contravention of Section 185 (1) would make the erring
Company liable with a fine which may extend to Twenty-Five Lakh Rupees.’
If there is “violations and non compliance” committed by it, by means of Section
185 of the Companies Act, 2013, necessary order to the effect that Compounding
Fee’ could be imposed as per above.
Therefore, NCLAT after taking
note of law laid down Central Board of Trustees (Supra)
has held on the facts and law on the aforesaid aspect i.e section 185 of the
Act in a holistic manner and has upheld order of NCLT “Bengaluru”. It was held
that the `Default’ was committed and continued for one year and six days. The
NCLAT thus came to a consequent conclusion and the order passed by NCLT cannot be faulted and levying of `imposing
Compounding Fee’ on the `Appellant’ and its `Directors’, and `Prosecution’
against `Former Directors’, is free from any `Legal
Infirmities’. The `Appeal’ was dismissed as devoid of merits.
CRIMINAL PROS$ECUTION
What is evident is that section 185 of the Companies Act, 2013 clearly
prohibits extending of any loan directly or indirectly by a company including
any loan represented by a book debt to any of his Directors or any other person
in whom the Director is interested or giving of any guarantee or providing of
any security in connection with any loan taken by him or such other person and
the punishment prescribed is of imprisonment which may extend to six months or
with fine which shall not be less than Five (5) Lakh rupees or which may extend
to Twenty Five (25) Lakh or with both.
Another dimension to it could be that a parallel
prosecution could be lodged as per section 447 of the Companies Act that renders
culpable any person found to be guilty of fraud punishable with imprisonment
for a term which shall not be less than Six (6) years but which may extend to
ten years and shall also be liable to fine not less than the amount involved in
the fraud but three times of the amount involved in the fraud. The Section 452
of the Companies Act also comes in play, where punishment is prescribed for the
offence including imprisonment which may extend to two years. Section 468 Cr.P.C
relates to limitation period, however, where the offence is punishable with
fine only or with imprisonment not exceeding one year or three years, then any
prosecution is required to be launched within Six Months to one year as the case
may be, depending on quantum of punishment prescribed. Where the summoning is
issued by a criminal court in respect of commission of offence punishable for
imprisonment which may extend upto ten years, the bar under Section 468 CrPC is
not attracted and criminal prosecution could be launched without any fetter.
The Section 185 of the Companies
Act 2013, therefore, clearly prohibits granting of loan to any entity or
corporate and if the same is granted the pre-conditions as per Section 185(2)
has to be complied with. The shareholders in general annual meeting has to be
taken in confidence while following all requites as per law. It also appears that
no loan to any individual/third person is envisaged as per section 185 of the
Companies Act 2013. A company which is incorporated for the purpose other than
financing and granting of loan cannot possibly grant loan to any
individual/third party, as per the trap of Section 185 of the Act. Even as
regards granting of loan to corporate and even to a sister concern there are
stringent pre-conditions that has to be adhered to for the purpose of granting
of loan. The another dimension to it is that in case of violation of the
provisions in granting loan shareholders of the company can initiate complaint
against the Board of Directors and the company granting loan. The complaint
could also be raised before Registrar of Companies and upon inquiry, if prima
facie satisfied, even registrar of Company can launch a criminal prosecution
against the company granting loan and its erring directors and even the other
corporate entity to whom the loan is granted can also be roped in.
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Anil K Khaware
Founder &
Senior Associate
Societylawandjustice.com
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