• Section 185 and 186 of Companies Act and Sarfaesi Act

As per my brief understanding Section 185 and 186 of Companies Act does not allow for other Limited Companies to pledge their assets as security for the Borrower Company and the bankers also have to release such securities under the same section. 

Quote "186(2) No company shall directly or indirectly —a)give any loan to any person or other body corporate;b)give any guarantee or provide security in connection with a loan to any other body corporate or person" 

The borrowing company has it's own assets as security (plant, land and machinery) and also other limited companies assets were pledged at the time of taking the loan as they are also banking with the same bank. The borrower company in question was declared NPA due to the economic slowdown conditions in Dec 2013. This is after the Section 185 of the Companies Act came into force on 12th Sep 2013. 

Talks are in progress with the bank since past one year for OTS and to that effect we have revised our proposal two times but they are have not it accepted yet and have not given any indications of doing so.

Now the question ' if the bank enforces Sarfaesi, is it at the discretion of the bank to release the securities of other limited companies as per the above companies act and just auction the borrower companies assets?'
Asked 2 years ago in Business Law from Hyderabad, Telangana
The Companies  Act cannot be used to put any fetters on the sale by secured  creditors because a secured creditor under Section 13 of  SARFAESI Act has been granted a right to enforce the security  interest “without the intervention of the court or tribunal” in  accordance with the provisions of the SARFAESI Act. 

2) the provisions are not only a complete code for enforcement of secured  asset by a secured creditor but in case of conflict with any other  statute, the provisions of the SARFAESI Act would prevail. 

3) The ultimate purpose of Section  185 of the  Companies Act, 2013 is to put  additional restrictions on loan to directors only and not on giving of corporate guarantee by  the holding company to its subsidiary company
Ajay Sethi
Advocate, Mumbai
44345 Answers
2575 Consultations

5.0 on 5.0

Section 186:- This section enlists the exceptions and specifies the limits up to which a company can give loan.

The section 185 of CA, 2013, restrict the company on giving loans, guarantee or provide security to Directors or any other person in whom Director is interested.

a)    As a part of service extended to all of its employee.
b)    Any Scheme Approved by members by special resolution.

In Case any amount is outstanding on 12th September as a loan to Director or anyone in whom Director is interested.

A. The loan can still continue to appear in the books of accounts of Company; however it can’t be renewed and is to be repaid on the end of the term. If it’s a loan repayable on demand then still it is suggested to make a formal agreement with tenure specified in it.

The above explanation gives a brief picture about the referred section in this regard. 
Now as far as recovery under sarfesi act is concerned 
in terms of sub-section (3) of Section 13, the notice shall also give details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor. Banks should ensure that drawings in the working capital accounts are covered by the adequacy of current assets, since current assets are first appropriated in times of distress. It is mandatory by the Banks to follow the RBI guidelines on asset classification before any account can be classified as an NPA and any irregularity in this regard can be fatal and can nullify the proceedings initiated under the SARFAESI Act. Further RBI keeps updating or modifying the guidelines governing asset classification.
A borrower / guarantor aggrieved by the action of the Bank can file an appeal with DRT and then with DRAT, but not with any civil court. The borrower / guarantor has to deposit 50% of the dues before an appeal with DRAT.
If the borrower fails to comply with the notice, the Bank may take recourse to one or more of the following measures:
Take possession of the security
Sale or lease or assign the right over the security
Manage the same or appoint any person to manage the same.

The Sarfaesi act covers any asset, movable or immovable, given as security whether by way of mortgage, hypothecation or creation of a security interest. There are some exceptions in the act such as personal belongings. However, only that property given as security can be proceeded under the provisions of SARFAESI Act. If the property of the borrower is his own mortgaged residential house, it is also NOT exempted from the Sarfaesi act.
T Kalaiselvan
Advocate, Vellore
34510 Answers
372 Consultations

5.0 on 5.0

Please be informed that  SARFAESI Act by and large override other laws in force

Moreover the provisions of SARFAESI Act or the rules made there under shall be in addition to, and not in derogation of, the Companies Act, 1956 (1 of 1956), the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) or any other law for the time being in force. 

In your case,  the provisions of SARFAESI act will apply irrespective of Sec 185 and 186 of Companies Act 2013 (amendment dated 12 Sep 2013.)

Also i presume you have filed your grievance if any under Sec 17 of SARFAESI Act,  Even a guarantor should have appealed under Sec 17. 
The borrower company assets should be auctioned first. 

Since the guarantor is a limited company in the event of the short fall AFTER sale of assets of Borrower company, then the guarantor company should be provided enough opportunities for guarantor company to repay the loan and assets can be put in to auction (subject to there being no charge / claims from the bankers of the guarantor company ). 

In the event of the guarantor company having a charge/claim on its assets on account of its own borrowings from their banker's, the banker's liability should be settled first ahead of the liability arising out of guarantee.  

Hope this helps. 

Rajgopalan Sripathi
Advocate, Hyderabad
1267 Answers
155 Consultations

5.0 on 5.0

1. Section 186 imposes embargo on multi-layered investments and it applies also to the provision of loans, guarantees, to non-corporate bodies. Clause (a) under sub-section   (2) introduces this fetter by making it applicable to any person or other body corporate. A company cannot provide loans to a non-corporate entity such as a  partnership firm or a sole proprietor without approvals u/s 186. 

2. The bank is bound to release the securities of other limited companies. The assets of borrower company alone come within the realm of rights created in favour of the company under SARFAESI.
Ashish Davessar
Advocate, Jaipur
22966 Answers
631 Consultations

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