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    Re: Guarantee by a Company

    Posted By : SHALU / Published on : 14-Apr-2022 12:15 PM / View : 111 / Comment : 2
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    Dear Friends

    Can a pvt company give guarantee on a loan taken by an huf, the karta of which is a director in the company

    As such by reading section 185 i think no....but wanted to recheck and specifically when Section 186 allows company to borrow, provide guarantee upto 60% of its paid up capital and free reserves....does transaction specified in Section 185 also falls for Section 186 limited

    Kindly throw in your view pts
    Read more on : company guarantee

    • Hello Shalu,

      as per section 185(2) of companies act 2013 

      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.

      if we go with this provision HUF is not covered under "to any person in which director is interested therefore private company can't give guarantee on a loan taken by an huf, the karta of which is a director in the company

      however there is a notification issued dated 05-06-2015 which clearly exempts such a private company from the application of section 185: 

      1. in whose share capital no other body corporate has invested any money
      2. if the borrowings of such a company from bank  or financial institution or anybody corporate is less then twice of its paid up share capital of fifty crore rupees, which ever is lower and
      3. such a company has not defaulted in repayment of such borrowings subsistings at the of making transactions under this section.

       

      therefore a private company that falls under the above criteria may grant a loan or provide a guarantee or security to any loan taken by a director or person in which the director is interested. 

       

      I hope this will be helpful to you.

      Thank You!

       

      19-04-2022 / 05:24:30 AM
      Reply
    • Dear Member!

      With reference to your query, the following provisions should be kept in mind:

      Section 185(2):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—:

      • any private companyof which any such director is a director or member;

      • any body corporateat 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

      • any body corporate, the Board of Directors, managing directoror 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.

       Exemption from Section 185 for following Private companies:

      1. in whose share capital no other body corporate has invested any money

      2. if the borrowings of such a company from bank  or financial institution or anybody corporate is less then twice of its paid up share capital of fifty crore rupees, which ever is lower and

      3. such a company has not defaulted in repayment of such borrowings subsistings at the of making transactions under this section.

      Section 186(2): No company shall directly or indirectly —

      (a) give any loan to any person or other body corporate;

      (b) give any guarantee or provide security in connection with a loan to any other body corporate or person; and

      (c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate, exceeding sixty per cent. of its paid-up share capitalfree reserves and securities premium account or one hundred per cent. of its free reserves and securities premium account, whichever is more.

      Explanation—For the purposes of this sub-section, the word “person” does not include any individual who is in the employment of the company]

      Comment: Pursuant to Section 185(2) Companies are allowed to 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 specified above. However, the Section restrict the definition of “any person in whom any of the director of the company is interested” by providing the Explanation, which does not including HUF. Hence, as per this Sub-section, Private company cannot give guarantee on a loan taken by an HUF, the karta of which is a director in the company.

      However, Section 186(2) provides that  Company may give any guarantee or provide security in connection with a loan to any other body corporate or person and also provides an explanation for “Person” here, which only excludes the employees of the Company, that means HUF is included.

      My Opinion: The confusion arises here is, Section 185(2) does not include HUF and Section 186(2) includes HUF. But it should be taken into consideration that Section 185(2) is applied when the director of company is interested in other entity to which such company wants to give guarantee. In the given case, the director of Company is the Karta of HUF, that means the section 185(2) shall apply in this case as it is more specific section in this regard. Specific provision prevails over general provision.

      Further, the government has exempted the prescribed class of Private companies through notification as specified above from complying Section 182(2). Therefore, for such class of companies Section 186(2) shall be applicable for giving guarantee to HUF, and the company may give guarantee to HUF after complying the provisions of Section 186.

      Conclusion:

      1. The Private Companies which fall under the Exemption granted by the Government through notification, may give guarantee to HUF after complying the provision of Section 186.

      2. Apart from the above companies, shall not give guarantee to such HUF in which director of the Company is Karta.

      Thank You!

      Hope it will help

       

      20-04-2022 / 05:43:55 AM
      Reply



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