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Loans, Investments
and Guarantees to Corporates
(Bankers angle)
…by CS JITESH GUPTA
(FCS, PGDTL, MIMA, FMSPI, MBA)
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Primary Function
Major Source of Income
Major funds used for this purpose
LOANS AND ADVCANCES BY BANKS
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Loans are the major source of funding for most of the Companies apart from their Share Capital.
Following sections of the Companies Act, 2013 are applicable to the company:
Section 77 (Duty to Register Charges etc.) Section 78 (Application for Registration of
Charge) Section 79 (Section 77 to apply in certain
matters) Section 80 (Date of Notice of Charge) Section 81 (Register of Charge to be kept by
Registrar)
APPLICABLE PROVISIONS
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Section 82 (Reporting of Satisfaction of Charge)
Section 83 (Power of Registrar to make entries of satisfaction)
Section 84 (intimation of appointment of receiver or manager)
Section 85 (Company’s Register of Charge) Section 86 (Punishment for contravention) Section 87 (Rectification by CG in register of
charges) Section 180 (Restriction on power of board) Section 185 (Loan to Directors) Section 186 (Loan and investment by
company)
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Lending of money is not without risk
Therefore a banker must take proper precautions in this regard
Following are some major precautions:
Due Diligence of the Company
Credit Rating
Financial Standing
Availability of Collateral
Management Guarantees
PRECAUTIONS
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Bank Relationship
Search Report by a PCS/other professional
Total borrowing limit allowed as per companies Act, 2013
if any default is there in repayment of other loans
Future Business plans
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Section is not applicable on Private Limited Company
Special Resolution is required in case of:
Monies to be Borrowed are exceeding the aggregate paid-up share capital and free reserved (apart from temporary loan obtained by company bankers in the ordinary course of business)
Temporary loans
Loans repayable on demand or within 6 months from the date of the loan such as short-term cash credit arrangements, the discounting of bills and the issue of other short-term loans of a seasonal character, but does not include loans raised for the purpose of financial expenditure of a capital nature.
Section 180 (Restrictions on powers of board)
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In that case a Banker needs to check:
whether Special Resolution was passed in the General Meeting of the company before giving the loan to the company
No debt incurred by the company in excess of the limit imposed by clause (c) of sub-section (1) shall be valid or effectual, unless the lender proves that he advanced the loan in good faith and without knowledge that the limit imposed by that clause had been exceeded.
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Loans & advance given to Directors, security provided in connection with loan to Directors and to any other person to whom directors are interested are strictly disallowed under the Act.
The expression “to any other person in whom
directors is interested” means:
(a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;
(b) any firm in which any such director or relative is a partner;
Section 185 (Loan to Directors)
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(c) any private company of which any such director is a director or member;
(d) any body corporate at a general meeting of which not less than twenty five percent of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or
(e) 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.
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185 NOT APPLlCABLE ON: Government Companies if company obtains approval
from Ministry or department of the central Government/State Government which is administratively in charge of the company
Private companies if –
(a) Body Corporate not be a Shareholder
(b) No repayment default subsisting of such borrowings at time of giving loan
(c) Not borrowed money from Bank/Financial Institution/ Body Corporate exceeding the amount lower of the following:-
(i) Twice its Paid up capital or (ii) Rs. 50 Crore
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if loan is given to MD or WTD as a part of the condition of services extended by the company to all its employees or scheme is approved by the members by special resolution.
If loan is given in the ordinary course of business by the lending company.
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The Company is punishable with a fine Rs. 5,00,000 to Rs. 25,00,000
Director or other person to whom any loan is advanced or guarantee or security is given is Imprisonment upto 6 months or fine Rs. 5,00,000 to Rs. 25,00,000 or both.
Fine and penalty for company
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Company can’t give any loan, guarantee and provide any security exceeding:
60% of the paid-up share capital, free reserves
and securities premium account or
100% of the free reserves and securities premium account
(whichever is more)
unless the consent for all the Directors present in the meeting is received
Section 186 (Intercorporate Loans)
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If limit is crossed, special resolution need to be passed in the General Meeting
Prior approval of Public financial institution/Bank shall be required if there is any default in repayment of loan and lending limit is crossed
Register of loans, guarantee, security and acquisition made by the company (MBP-2)
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No company which is in default in the repayment of any deposits accepted before or after the commencement of this Act or in payment of interest thereon, shall give any loan or give any guarantee or provide any security or make an acquisition till such default is subsisting
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provision is not applicable to government company engaged in the defence production and company other then listed company, if company obtain approval of the ministry or department of the Central Government/State Government which is administratively in charge of the company
NOT APPLICABLE ON:
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The company is punishable with a fine which shall not be less than Rs 25,000 but which extend to Rs 5,00,000
Every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 2 years and fine which shall not be less than Rs 25,000 but may extend to Rs 1,00,000
Fine and penalty
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First duty to register the charges is to Companies
CHG-1 (Charge Creation/modification) need to file within 30 days from the date of its creation or modification
ROC may on the application by the companies allow to registration within 300 days on payment of additional fees on this and application shall be supported by a declaration from the company by its secretary or directors that such delay shall not adversely affect right of any other creditors of the company
Section 77 (Duty to register charge)
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if form is not filed within 300 days then the delay shall be condone by the RD on an application made in form CHG-8 by the company.
upon receiving the form the ROC will issue
CHG-2 (Certificate of registration of charge) or
CHG-3 (Certificate of registration of modification of charge) as case may be.
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If Company fails to file the required form, then the charge holder in whose favour the charge is created, may file form (CHG-1) to ROC with Instrument after giving 14 days notice to the borrower company.
Where application made by Charge holder, then the charge holder is entitled to recover the whole amount of ROC fee and additional fee.
Section 78 (Application for Registration of charge)
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Section 77 relating Duty to register a charge is also applicable if:
company acquire property which is subject to charge.
any modification in the terms and conditions or the extent or operation of any charge.
Section 79 (Section 77 to apply in certain matters)
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Where any charge on any property or assets of a company or any of its undertakings is registered under section 77, any person acquiring such property, assets, undertakings or part thereof or any share or interest therein shall be deemed to have notice of the charge from the date of such registration
Section 80 (Date of Notice of Charge)
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Registrar shall be kept a register of particular of charge filed with it.
Register is open for inspection.
Section 81 (Register of Charge to be kept by
Registrar)
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Give intimation to the registrar for satisfaction of charge within 30 Days from the date of payment or satisfaction
Form CHG-4 (Particulars for satisfaction of charge) shall be filed
ROC will issue CHG-5 (Memorandum of satisfaction of charge)
Section 82 (Satisfacation of charge)
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If bank/PFI received the order to appoint a receiver or a manager.
File the form CHG-6 (Notice of appointment or cessation of receiver or manager) within 30 days from the date of passing of order.
Section 84 (intimation of appointment of receiver or
manager)
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The company shall be punishable with fine which shall not be less than Rs. 1,00,000 but which may extend to Rs. 10,00,000
Every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 6 months or with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 1,00,000 or with both.
Fine and penalty for company
