Loans under Companies Act 1956/2013. P C Agrawal B.Com ., LL.B., CAIIB, FCS firstname.lastname@example.org 20/2/2014 Download Source- www.taxguru.in. Contents. MCA Notification dated 12.9.2013.
P C Agrawal
B.Com., LL.B., CAIIB, FCS
20/2/2014 Download Source- www.taxguru.in
In exercise of the powers conferred by sub-section (3) of section 1 of the Companies Act 2013 (18 of 2013), the Central Government hereby appoints the 12th day of September 2013 as the date on which the following provisions of the said Act shall come into force, namely:
Joint Secretary to the Government of India
This Ministry had issued a notification on 12.09.2013 bringing into force to 98 sections or part thereof of the Companies Act 2013. The said notification is available on Ministry’s website. This Ministry has been receiving requests for clarification as to whether the provisions of the Companies Act 1956 corresponding to such 98 sections would continue to apply or not.
It is hereby clarified that with effect from 12.09.2013, the relevant provisions of the Companies Act 1956, which correspond to provisions of 98 sections of the Companies Act 2013 brought into force on 12.09.2013 cease to have effect from that date.
This issues with the approval of the competent authority.
Section 2(7) of 1956 Act:
“body corporate” or ‘corporation’ includes a company incorporated outside India but does not include—
Section 2(11) of 2013 Act:
[except that (a) – a corporation sole deleted]
Examples of ‘body corporates’:
These are not bodies corporates:
“relative” means, with reference to any person, any one who is related to such person in any of the ways specified in section 6, and no others.
A person shall be deemed to be a relative of another if, land only if, --
Schedule 1A [See Section 6(c)]
LIST OF RELATIVES
“relative” with reference to any person, means any one who is related to another, if—
Thus it will be noticed that the following are proposed to be omitted from list of relatives:
Draft Rule 1.4(yet to be notified)
LIST OF RELATIVES
For the purpose of sub-clause (iii) of sub-section (77) of Section 2, a person shall be deemed to be the relative of another, if he or she is related to another in the following manner:
Section 2(27) of Companies Act 2013:
“control” shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreement or voting agreements or in any other manner.”
Loans vs. Deposits:
Loan is lending of money with absolute promise to repay. There is a difference between loan and deposit. However, courts have held that for the purposes of Sec.295 of CA 1956 the difference is immaterial and the Section cannot be evaded by describing monies of a company advanced to a director as deposits. Sec.372A of CA 1956 specifically provides that loan includes deposits. However, there is no such mention in CA 2013.
Loans vs. advance:
There is a difference between loan and advance also. Loan is repayable whereas advance is to be adjusted against supply of goods or services. Salary advance is an example. Advance is not covered under restrictive provisions of Companies Act.
Whether subscription of debentures is a loan?
Subscription of debentures is not a loan u/s 185 of CA 2013. However, Sec.372A of CA 1956 specifically provides that loan includes debentures.
Whether book debts could be loans?
If book debt is prolonged beyond usual credit period, it could be considered as a loan.
Power to exempt class or classes of companies from provisions of this Act.
Note: No exemption notification has been issued by MCA so far under Section 462 of CA 2013.
Loan given to shareholder holding more than 10% of voting power could be deemed to be dividend. Section 2(22)(e) of IT Act reads as under:
but "dividend" does not include—
(i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ;
(ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, and before the 1st day of April, 1965 ;
(ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ;
(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off;
[(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A5 of the Companies Act, 1956 (1 of 1956);
(v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).
Explanation 1.—The expression "accumulated profits", wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956.
Explanation 2.—The expression "accumulated profits" in sub-clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, 6[but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place.
Explanation 3.—For the purposes of this clause,—
(a) "concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company ;
(b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern ;
(c) ‘financial institution’ means any non-banking institution which carries on as its business or part of its business any of the following activities, namely ---
but does not include any institution, which carries on as its principal business, ----
(b) Industrial activity, or
(f) ‘non-banking financial company’ means ---
RBI Press Release dated 8.4.1999
The Reserve Bank of India on 8.4.1999 announced that in order to identify a particular company as a NBFC, it will consider both, the assets and the income pattern as evidenced by the last audited balance sheet of the company to decide its principal business. The company will be treated as NBFC if its financial assets are more than 50 percent of its total assets (netted off by intangible assets) and income from financial assets should be more than 50 percent of the gross income. Both these tests are required to be satisfied as the determinant factor for principal business of a company.
(1) Notwithstanding anything contained in this Chapter or in any other law for the time being in force, no non-banking financial company shall commence or carry on any business of a non-banking financial institution without ---
Letter of comfort may involve moral obligation but not contractual obligation and is not a guarantee and hence not covered under restrictive provisions of the Act.
(Sec.372A of CA 1956)
This Ministry has received number of representations consequent upon notifying Section 185 of the Companies Act 2013 dealing with loans to directors which is corresponding to Section 295 of the Companies Act 1956. Section 186 of the Companies Act 2013 is yet to be notified.
It is clarified that Section 372A of the Companies Act 1956 dealing with inter-corporate loans continue to remain in force till section 186 of the Companies Act 2013 is notified.
This issues with the approval of competent authority.
This Ministry has received number of representations on the applicability of Section 185 of the Companies Act 2013 with reference to loans made, guarantee given or security provided under Section 372A of the Companies Act 1956. The issue has been examined with reference to applicability of Section 372A of the Companies Act 1956 vis-à-vis Section 185 of the Companies Act 2013. Section 372A of the Companies Act 1956 specifically exempts any loans made, any guarantee given or security provided or any investment made by a holding company to its wholly owned subsidiary. Whereas, Section 185 of the Companies Act 2013 prohibits guarantee given or any security provided by a holding company in respect of any loan taken by its subsidiary company except in the ordinary course of business.
2. In order to maintain harmony with regard to applicability of Section 372A of the Companies Act 1956 till the same is repealed and Section 185 of the Companies Act 2013 is notified, it is hereby clarified that any guarantee given or security provided by a holding company in respect of loans made by a bank or financial institution to its subsidiary company, exemption as provided in clause (d) of sub-section (8) of Section 372A of the Companies Act 1956 shall be applicable till Section 186 of the Companies Act 2013 is notified. This clarification will, however, be applicable to cases where loans so obtained are exclusively utilised by the subsidiary for its principal business activities.
The provisions in the Companies Act, 1956, relating to inter-corporate investments, loans and guarantees have been recently liberalised by the Government through Companies (Amendment) Act, 1999. However, apprehensions have been expressed in some quarters with regard to possible misuse of these provisions by companies. I shall, therefore, be grateful if the chambers could draw the attention of their constituents to the following:
(i) The companies are expected to obtain the approval for making investments into securities or grant of loan to other companies of amounts which are linked with company’s available financial resources and the resolution, for investment much beyond the networth should not be passed by the companies.
(ii) The companies should specifically indicate in the explanatory statement to the resolution, the specific securities in which it is proposed to invest the amount. En bloc approval should normally be avoided (except in the case of guarantee where the resolution can indicate an amount on annual basis).
2. If the above broad parameters are not complied with, the Government will be constrained to take suitable action against those who contravene these.
Circular : No. 8 of 1999, dated 4-6-1999.
Section 14A of the Income-tax Act 1961 (‘Act’) provides for disallowance of expenditure in relation to income not ‘includible’ in total income.
“Certain incomes are not includible while computing the total income, as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tas incentive given by way of exemptions to certain categories of income is being used to reduce aslo the tax payable on the non-exempt income by debiting the exepenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e. gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of such taxable income”.
Thus, legislative intent is to allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not.
“(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt an amount computed in accordance with the following formula, namely:
B= the average of value of investment, ;income from which does not or shallnot form part of the total income as appearing the in the balance sheet of the assessee, on the first day and the last day of the previous year;
(iii) An amount equal to one-half percent of the average of the value of investment, ;income from which does not or shalll not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year.”
(b) “deposit” means any deposit of money with, and includes any amount borrowed by, a company, but does not include ----
(ix) Any amount received from a person who, at the time of receipt of the amount, was a director of the company or any amount received from a relative of a director or its member by a private company ----
Provided that the director, relative of a director or a member, as the case may be, from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting from others;”
Can ABC Ltd accept loan from:
a) Mr A, Director of the company
b) Mr B, Shareholder of the company
c) Mr C, Director & shareholder of the company
d) Mr E, son of MD of the company
ABC Pvt Ltd granted loan to its employee Mr A on 1.10.2013 . Subsequently, Mr A was appointed as a director of the company. Is there any contravention?
ABC Ltd gives loan to XYX Ltd. Mr A is a director in both companies. Subsequently, XYZ Ltd is converted into private limited company. Is there any contravention of company law?
Can ABC Ltd give corporate guarantee to bank for giving loans to its wholly owned subsidiary abroad?
ABC Private Ltd proposes to give loan to Mr A who is sister’s husband of a director of the company. Is it permitted u/s 185 of CA 2013?
ABC Ltd proposes to give loan to a private limited company incorporated in Germany. Mr A is a director in both companies, but no director of ABC Ltd is holding any shares of Germany company. Is it permitted u/s 185 of CA 2013?
Mr A is a member of ABC Pvt Ltd and XYZ Pvt Ltd. XYZ Pvt Ltd gives loan to Mr X. Can ABC Pvt Ltd give guarantee for the loan?
MrA, who is director of ABC Ltd, is also a trustee of a public charitable trust. The Trust requests the company to give some loan. Can the company give loan to the Trust?
Paid-up capital & free reserves of ABC Ltd are to the extent of Rs.10 crores. However, ordinary resolution u/s 293(1)(d) of CA 1956 has been passed permitting borrowing upto Rs.15 crores. Accordingly, company borrowed by way of term loan of Rs.12 crores on 1.9.2013. Repayment of term loan will start from 1.4.2014. Is there any contravention?
In the above case, the company took a second term loan of Rs.3 crores on 1.10.2013 by just passing Board resolution. Is there any contravention?
Paid-up capital and free reserves of ABC Ltd as on 31.3.2013 were to the tune of Rs.10 crores. Profit after tax of the company for 9 months period ended 31.12.2013 was Rs.2 crores. Company wants to take term loan of Rs.12 crores in February 2014. Can it do so by passing Board resolution?
In the above example, can the company take Cash Credit limit of Rs.12 crores from SBI instead of term loan of Rs.12 crores by passing Board resolution?
Paid-up capital and free reserves of ABC Ltd as on 31.3.2013 were to the tune of Rs.10 crores. Company had taken term loan of Rs.10 crores in the year 2010 and outstanding as on 31.3.2013 was Rs.2 crores. Now the company wants to take new term loan of Rs.8 crores and cash credit limit of Rs.5 crores in February 2014. Can it do so by passing Board resolution?