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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Corporate and Economic Laws

Case: Kaveri Agro Foods Ltd, an unlisted public company, wants to give a loan of Rs 2 crore to Mr Sundar, a director of its holding company Kaveri Holdings Ltd. The aggregate of Kaveri Agro's paid-up capital, free reserves and securities premium is Rs 100 crore, and no special resolution has been passed. Under the Companies Act, 2013 (Section 185), what is the position of this proposed loan?

The loan is generally prohibited under Section 185 because a director of the holding company is a covered borrower. It can be given only if an exemption applies or a special resolution is passed with the prescribed conditions. Board approval, a size test or a bank-rate interest charge alone is not enough.

  1. AIt is permitted if the board approves it by a unanimous resolution
  2. BIt is permitted because the amount is below 60% of net worth
  3. CIt is generally prohibited unless it falls within an exempt category or a special resolution is passed with the prescribed conditionsCorrect
  4. DIt is permitted if interest is charged at the bank rate

Explanation

Section 185 restricts loans to directors of the company or of its holding company, and to persons in whom the director is interested. A loan to a director of the holding company is covered. Such a loan is prohibited unless an exemption applies or a special resolution is passed with the prescribed conditions. Board approval or a size test alone does not cure the restriction.

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