Section 185 talks about loan to directors only but not to company in normal situation. Since director work on behalf of company their action towards company plays a vital role. Section doesn’t prohibit loan to a holding company but it protect the interest of the public at large by taken into consideration 2 perspective i.e.
Use of that fund should be for principle business activity of that company.
And if director of subsidiary company the lender and holding company the borrower are same then loan should be sanctioned through special resolution.
In deciding this scenario section 186 also plays a vital role as it talks about investment by a company with some restrictions.
Situations for Analysis:
Whether Lender Company (i.e. Subsidiary) can give Loan/Guarantee/ Security to Holding Company in any of the below mentioned situations:
Where Directors of Lender Company are Directors or shareholder of Holding Company.
Holding Company Private Limited
Holding Company Public Limited
Where directors of lender company are not directors or shareholder of holding Company.
SITUATION – I
Where Directors of Lender Company are Directors or shareholder of Holding Company.
SOLUTION:
Not fall u/s 185(1)
Not fall u/s 185(3)
May or May not fall u/s 185(2)
Holding Company is Private Limited Company: In case holding Company (Borrower) is Private Limited Company. Lender (Subsidiary) can give loan to such holding Company by complying with conditions of sub section 2 of Section 185.
Conditions:
Special Resolution passed by the Company in General Meeting.
The loans are utilized by the borrowing company for its principal business activities.
Holding Company is Public Limited Company: In case holding Company (Borrower) is Public Limited Company. Lender (Subsidiary) can give loan to such holding Company because such transaction shall not fall u/s 185.
SITUATION – II
Where directors of lender company are not directors or shareholder of holding Company.
SOLUTION:
The above mentioned situation doesn’t fall under any sub section of Section 185. Therefore, one can opine that subsidiary company can give loan/ guarantee/ investment holding company in the above mentioned situation.
Loan by Lender Company to holding in all above mentioned situation:
Section 185(1): This sub-section restrict only for Loan/ Guarantee/ Securities to Individuals not Companies or Body Corporates. Therefore, this sub section doesn’t restrict the above mentioned transaction.
Section 185(2): This Sub section allows by passing of Special Resolution to give loan to (Private Company, Body Corporate in which directors of lender Company are Directors or Shareholders)
In situation where director of lender company are not directors or members in other Company then this transaction doesn’t fall u/s 185(2) and no need to pass Special Resolution.
In situation where director of lender company are directors or members in other Company then this transaction doesn’t fall u/s 185(2) and need to pass Special Resolution.
There is no restriction anywhere under Section 185(1), (2) and doesn’t fall under 185 (3). Therefore, one can opine that in this situation Company can freely give loan to Holding by complying the other p
rovision of Companies Act, 2013 (like Section179 (3), 186 etc.)
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