Changes in section 185

With the very introduction of Companies Act, 2013, section 185, being a prohibitory section, was of great importance. There was no scope of any carve out or any route to apply to Central Government’s approval for non-applicability of such restrictions, unlike section 295 of the Companies Act, 1956. Further, the said section was applicable to both pubic as well as private companies, which was totally unacceptable by private companies. Then MCA vide exemption notification dated June 5, 2015[2] exempted private companies form the provisions of section 185 which brought great relief to the private companies, however, such relief is even subject to stipulated conditions. Therefore, to promote ease of doing business, the entire section has been substituted.

Deletion of the non obstante clause

The extant provision of section 185 starts with the following words “Save as otherwise provided in this Act”, which provides that if there is any other provision of the Act permitting lending as covered by the section then such specific permission shall prevail over this section. This creates confusion as to whether specific sanction of section 186 which starts with “without prejudice to the other provisions” can exclude section 185. To avoid such ambiguity the same has been omitted in the amended provision.

The new provisions of section 185 is partly restrictive and partly prohibitive

The intent of the current provisions of Section 185 is to ensure that directors who hold a fiduciary position with respect to shareholders do not utilize the funds of the company for their own benefit. However, the company laws over the world do not provide for a complete blanket prohibition on advancement of such loans/guarantee/security to directors and their related entities.

It is pertinent to note that where the shareholders of the company, being the ultimate owners, themselves approve the utilization of the funds of the company in the specified manner, the law need not create a bar on the same. Thus, at par with the global company laws, the provision has been amended to remove the prohibition to an extent and provides for the passing of shareholders’ resolution for granting of loans/guarantees/securities to entities in which directors are interested.

The amended provisions are partly prohibitive and partly restrictive. The section continues to prohibit the granting of loan/guarantee/security to some, while restricts the others in the following way:

• Prohibitive to:
• directors of the co., or
• directors of a co. which is its holding co.; or
• any partner of such director; or
• relative of such director
• Restrictive to:
• any private co. of which any such director is a director or member;
• any body corporate at a general meeting of which not less than 25% of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together;
• any body corporate, the BoD, MD or manager, whereof is accustomed to act in accordance with the directions or instructions of the BoD, or of any director or directors, of the lending company.

The amended provisions allow the companies to grant loans/guarantees/securities to entities in which directors are interested, in the above mentioned restrictive cases, subject to prior approval of the shareholders by a special resolution and on the condition that such loans are utilised by the borrower for its principal business activities.