Re- Section 185- Advance to Proprietorship Firm in which Director of the Co is Prop.

[Arjun Gupta]

A Private Limited Company wants to give advance a sum of money to a Proprietorship Firm whose Proprietor is the Director and Shareholder of the Company. Private Company will charge Interest on such advance from Prop. Firm at 6% p.a. Also, such amount of such advance is within the limit of 60% of Paid Up Share Capital and Free Reserves of the Company.

a) Can Company give advance to Firm in such scenario? If yes, what formalities (with respect to ROC) are required to be done to complete the transaction?

b) Said Private Company (which is willing to give advance) also fulfills the conditions of Exemption Notification of Section 185 dt 05th June 2015. Whether in such scenario, any formalities i.r.o ROC needs to be done? 

Exemption Notification dt 05th June 2015

Regards

CA. Arjun Gupta

[Priti Joshi]

Hello Arjun,

As per my understanding of law, If its Proprietorship, it is not distinct entity, but will be considered as Loan to Director.

Loan to Director can be given in 2 circumstances, 

1. as a part of the condition of their service extended by the company to all its employees; or WTD/MD/Manager. or

2. to WTD/MD/Manager, pursuant to any Scheme approved by the members by a special resolution

In this case, the Capacity is not of Director, but as Outside Concern of Director, hence as per this understanding, NO LOAN can be given to Proprietorship or Partnership Firm, in which Director is interested.

Other Professional views are solicited.

Regards.

PCS Priti Joshi

Proprietor 

M/s Priti Amresh Joshi & Co

Mulund East

9860212022

[Priti Joshi]

As per Exemption notification, if a Private Company fulfills all 3 Exemption Criteria, then it is exempted from provisions of Section 185.

Regards

PCS Priti Joshi

Proprietor 

M/s Priti Amresh Joshi & Co

Mulund East

9860212022

[Arjun Gupta]

Thanks for the prompt response Ms. Priti. In my case, our Company fulfills all the 3 criteria as mentioned in exemption notification. So, can we conclude that the Company can give loan to the Prop. Firm by virtue of Notification dt 05th June 2015?