Issuing of Corporate Guarantee under Companies Act 2013

It is an usual practice in Corporate Lending by the Banks to obtain Corporate Guarantee from the holding or parent company or any other related/group company of the Borrower Company. Corporate Guarantee is a written declaration or guarantee of payment made by a known flagship, or holding or parent company, on behalf of its other business entity who would be normally smaller or a subsidiary company. This guarantee to banks is provided in consideration of bankers/vendors providing credit to a business on whose behalf the guarantee is made. A corporate guarantee is a guarantee in which a flagship or holding or parent company agrees to be held responsible for completing the duties and obligations of a smaller/ subsidiary company/debtor to banks/lenders, in the event that the smaller/subsidiary company/ debtor fails to fulfill the terms of the debtor-lender contract.

Section 185 Of The 2013 Act:

(1) Save as otherwise provided in this Act, no company shall, directly or indirectly,

-          advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or

-           give any guarantee or provide any security in connection with any loan taken by him or such other person:

o    Provided that nothing contained in this sub-section shall apply to—

(a) the giving of any loan to a managing or whole-time director—

(i) as a part of the conditions of service extended by the company to all its employees; or

(ii) pursuant to any scheme approved by the members by a special resolution; or

 (b) a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.

Explanation.—For the purposes of this section, the expression “to any other person in whom director 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;

(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 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

(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.

(2) If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1), the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, and the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.

Restrictions introduced under the Provision

Under the said provision of the new Act, a Company shall not directly or indirectly give any guarantee to its directors or any other entities in which the directors are interested. It shall apply to both Public and Private Companies.

Companies (amendment) act 2015 dated on 26th May 2015 has brought in some relief for the Holding Companies and their wholly owned subsidiaries. The Amendment has now allowed a Holding Company to give guarantee or provide security with respect to any loan made by a Bank or any other financial institution to its subsidiary company,  provided that the loans made under clause (c) and (d) are utilized by the subsidiary company for its principal business activities.

Recently the Ministry of Corporate Affairs has, vide their Notification, GSR 464E dated 05.06.2015, has brought in further relief for Private Companies. The Notification has is now permitting a Private Company to provide a guarantee or offer a security in connection with a loan taken by a sister concern, provided that

(a) There is no body corporate shareholder in the lending/guaranteeing company;

(b) The lending company’s aggregate borrowings from other bodies corporate or banks or financial institutions is less than twice its paid up share capital or fifty crore Rupees, whichever is lower;

(c) There is no pending default in repayment of such borrowings by the lending company.

LIMITS FOR INVESTMENT AND GUARANTEE UNDER SECTION 186

According to Section 186 (2), a company cannot give loan, guarantee or provide any security or acquisition exceeding 60% of Paid up capital + Free Reserve + Security Premium or 100% of Free Reserve + Security Premium, whichever is MORE.

If any Company prefers to give loan, guarantee or provide any security or acquisition beyond the said limit, Section 186 (3) requires the Company to seek approval from its share holder in the General Meeting by way of a Special Resolution.