article _cpt_185 v 186 - bm_dec 2015

571December 1 To 15, 2015 u Taxmann’s Corporate Professionals Today u Vol. 34 u 25

Section 185 vs. Section 186 of Companies Act, 2013 – A case of head on collision scenario

Whether A Pvt. Ltd. can give loan by following the procedure of section 186 to B Pvt. Ltd. having common director and is not qualified to get exemptions as mentioned in section 185 irrespective of the restriction imposed in section 185?

Section 186(1) of the Companies Act, 2013 state that “Without prejudice to the provisions contained in this Act", a company shall unless otherwise prescribed, make investment through not more than two layers of investment companies. Further, in terms of sub-sections (2) and (3) of section 186 direct or indirect loan, investment, guarantee or security exceeding 60% of the paid up share capital and free reserves and securities premium account or 100% of the free reserves and securities premium account require prior approval of shareholders by passing special resolution. This means that if the aggregate of the existing and proposed, loan, investment, guarantee or security is less than the above limit then approval of Board shall be enough and no need to obtain approval of shareholders.

Section 185(1) states that “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. Section 185 shall not be applicable to Govt. company, Nidhi company and also private limited company. The exemption available to private limited company shall be subject to fulfilment of all the following conditions:–

(a) Private company in whose share capital no other body corporate has invested any money;

(b) If the borrowing of private company from bank or financial institutions or any body corporate is less than twice of its paid up share capital or ` 50 cr. whichever is lower; and

(c) Such company has no default in repayment of such borrow-ings subsisting at the time of making transactions under this section.

Bhuwneshwar mishra General manager,

Cs, GhCl ltd.

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Section 185 vs. Section 186 of Companies Act, 2013

December 1 To 15, 2015 u Taxmann’s Corporate Professionals Today u Vol. 34 u 26

Illustration: Reflecting conflict between sections 185 and 186Let “A” and “B” are the private limited companies having common directors. “A” has made payment of certain outstanding bill of “B” to various third parties. “A” in its books of account treated this as an unsecured debt to “B” and “B” has also given the similar treatment as “unsecured loan from A”. Let us further assume that both the companies did not qualify to get exemption under section 185 and they are not the investment companies. Assuming the quantum of loan from “A” to “B” is more than 60% of the paid up capital and free reserves and securities premium account and 100% of the free reserves and securities premium account. In order to comply with the requirement of section 186, “A” has obtained approval of shareholders by passing special resolution.Now the pertinent question is- Whether the transaction between “A” and “B” is prohibited by section 185 on the condition that both the company have common director and does not qualify the conditions of exemption as available to private company? orWhether compliance of section 186 is sufficient and section 185 in this regard shall be ignored.Interpretation - “Save as otherwise provided in this Act” as mentioned in section 185 The answer to the above query can be given in the light of various judicial precedents and principle of interpretation. Let us assume that section 185 is applicable in this transaction as “A” has paid outstanding bill of “B” inspite of the fact that both have common directors. Hence as per the Explanation (c) of sub-section (1) of section 185, the director of “A” shall be deemed to be interested in “B” and hence making of payment by “A” on behalf of “B” amount to a loan given to a director or to the entity in which director is interested. But above argument gets diluted when we read the opening para of the section 185, i.e., “save as otherwise provided in this Act………”

The expression “save as otherwise provided in this Act” is called a saving clause and in a statute, it seeks to create an exception on a special item out of the general things mentioned in the statute; seek to save or protect what is provided in any other provision of the statute on the same subject. The phrase “save as otherwise provided in this Act” is employed in statutory drafting when a section using this phrase seeks to protect or exclude the operation of some other section which contains a similar provision.In other words, the expression “save as otherwise provided in this Act” seeks to keep applicability of any other provision on the same subject unaffected besides the provision in which these words are used or create an exception in respect of any provision on the same subject. The Supreme Court in the matter of Lalu Prasad Yadav v. State of Bihar AIR 2010 SC 1561 with reference to section 378 of the Code of Criminal Procedure, 1973 held that:—

‘“Save as otherwise provided in sub-section (2)” - are in the nature of exception intended to exclude the class of cases mentioned in sub-section (2) out of operation of the body of sub-section (1). These words have no other meaning in the context but to qualify the operation of sub-section (1) and take out of its purview two types of cases referred in sub-section (2).’

In Webster Comprehensive Dictionary (International Edition), the word “save” is defined as follows:- “save.- Except; but - 1. Except; but 2. Archaic Unless”. In Williams v. Milotin, the High Court of Australia, while construing the words “save as otherwise provided in this Act” stated:–

‘....In fact the words “save as otherwise provided in this Act” are a reflexion of the words “except” - or “save” - “as hereinafter excepted”’.

In light of the above we may say that the opening para “save as otherwise provided in this Act” would indicate that due credit

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to be given to section 179 (power of Board); section 186 (loans and investment by company) and such other provisions of the Act dealing with the loan, guarantee, security, investment etc. Hence, we may also say that section 185 and even section 179 are general sections as compare to section 186 and therefore, both the sections cannot be interpreted in absence of section 186 which is more focussed and special provisions dealing with loan and investment by company.Interpretation - “Without prejudice” as mentioned in section 186 The term “prejudice” means damage or detriment to one’s legal rights or claims1. “Dismissal without prejudice” means a dismissal that does not bar the plaintiff from refiling the lawsuit within the applicable limitations period whereas “dismissal with prejudice” means after an adjudication on the merits, barring the plaintiff from prosecuting any later law suit on the same claims, i.e., if after a dismissal with prejudice, the plaintiff files a later suit on the same claim, the defendant in the later suit can assert the defense of res judicata (claim preclusion). Hence, a provision enacted “without prejudice” to another provision has not the effect of affecting the operation of the other provision and any action taken under it must not be inconsistent with such other provision2. We may also say that the expression “without prejudice to the provisions contained in this Act” means without affecting any other provision of the Act or in addition to any other provision of the Act.3 In the matter of Dwarkadas Agarwall v. Dharam Chand Jain AIR 1954 Cal. 583 it was held that the effect of the insertion of that qualifying phrase, i.e., “without prejudice to the provisions contained in….” is that the obligation lying on the Court to direct a winding up of a banking company in the circumstances stated in the section, would be subject to the exception that the Court would be at liberty to exercise the powers conferred by section 37. Section 186 of the Companies Act, 2013 start with the phrase “without prejudice to the provisions contained in this Act”

which means, the provisions of section 186 would not affect the operation of the other provisions contained in this Act. And any action taken under section 186 related to “inter-corporate loans, investments, guarantee or security” should not be inconsistent with other provisions of the Act such as section 179(1)(e) & (f) which gives power to the Board of Directors to invest the fund of the company and to grant loans or give guarantee or provide security in respect of the loans.

Hon’ble Justice Venkatarama Aiyar stated that “the rule of construction is well settled that when there are in an enactment two provisions which cannot be reconciled with each other, they should be so interpreted that, if possible, effect should be given to both. This is what is known as the rule of Harmonious Construction”4. Thus a construction that reduces one of the provisions to a “use less lumber” or “dead letter” is not harmonious construction.

Hence, applying the above principle of interpretation, we may say that section 186 is a special provision dealing with transaction between body corporate has overriding effect (to the extent it is not inconsistent with other provisions of the Act) over the general provision contained in section 179 and section 185. Hence, provisions stipulated in section 186 for loan, investment, guarantee or security will cover the inter-corporate loan, investment, guarantee or security whereas general provisions mentioned in section 179 and section 185 would deal with the rest of the kind of loans, investment, guarantee or security.

Further, proviso to section 179(3) provides the delegation of power to the Committee of the Board of Director or Managing Director or any other Principle Officer of the Company but no such provisions are contained in section 186. Hence in absence of any specific prohibition in section 186 and in the light of interpretation of the words “without prejudice to the provisions of this Act”, and applying the principle of harmonious construction, we may say that Board’s power under section 186

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may be delegated in accordance with section 179 by passing resolution at a meeting of the Board of Directors.

Section 185 v. 186: Applicability of one puts other in trouble

In the given illustration if company “A” choose to comply with section 185 then it is prohibited from making any payment on behalf of “B” on the ground that both have common director and “A” does not qualify to avail exemption provided vide notification number 1-1-2014 – CLV, dated June 5, 2014. The payment on behalf of “B” by “A” in terms of Explanation (‘c’) of section 185(1) would amount to a loan given to an entity in which the director is interested.

If this argument, for the time being assumed to be logical, then section 186 is redundant and of no use. Hence, principle of harmonious construction for interpretation of statutes gets diluted.

Principle of supremacy of Special Provision over General Provision

There is a settled law that wherever there is a conflict between general provision and special provision, special provision prevails. It is the duty of the courts to avoid that and wherever possible to do so, to construe provisions which appear to conflict so that they harmonise5. Provision of one section of the statute cannot be used to defeat those of another unless it is impossible to effect reconciliation between them6.

In Pretty v. Solly (1859-53 ER 1032) quoted in Craies on Statute Law at p.206, 6th Edition Romilly, M.R. mentioned the rule thus:—

“The rule is that whenever there is a particular enactment and a general enactment in the same statute and the latter, taken in its most comprehensive sense, would overrule the former, the particular enactment must be operative, and the general enactment must be taken into effect only the other parts of the statute to which it may properly apply.”

In the matter of J K Cotton Spg. and Wvg. Mills Co. Ltd v. State of UP AIR 1961 SC

1170, it was held that “whether there is a conflict between special provision and general provision, the special provision prevails over the general provision; the general provision applies only to such cases which are not covered by the specific provision; the rule applies to resolve conflict between different provision in different statutes as well as in same statute.” Further, Justice G. P. Singh in his book “Principle of Statutory Interpretation” stated that “a familiar approach in such a case is to find out which of the two apparently conflicting provisions is more general and which is more specific and to construe the more general one so as to the more specific.”

N. S. Bindra’s “Interpretation of Statutes” also agrees that “where there is a general provision which, if applied, in its entirety, would neutralise a special provision dealing with the same subject matter, the special provision must be read as a proviso to the general provision, and the general provision, insofar as it is inconsistent with the special provision, must be deemed not to apply.” It was held in the matter of Mangilal v. State of Rajasthan [1997] AIHC 1892 (Raj.) that when a specific provision is made for certain purpose, under the rules of interpretation of law, it excludes the general provision.

If there is an apparent conflict between two independent provisions of the law, the special provision must prevail.7 If a special provision has been made on a certain matter, that matter is excluded from the general provision.8 A construction which reduces the statute to a futility has to be avoided. A statute or any enacting provision therein must be so construed as to make it effective and operative on the principle expressed in maxim ut res magis valeat quam pereat, i.e., a liberal construction should be put upon written instruments, so as to uphold them, if possible, and carry into effect the intention of the parties. If the choice is between two interpretations, the narrower of which would fail to achieve the manifest purpose of the legislation court should avoid a construction which would reduce the legislation to futility, and should rather accept the bolder construction, based

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on the view that Parliament would legislate only for the purpose of bringing about an effective result. Whenever it is possible to do so, it must be done to construe the provisions which appear to conflict so that they harmonise. It should not be lightly assumed that Parliament had given with one hand what it took way with the other. The provisions of one section of the statute cannot be used to defeat those of another unless it is impossible to effect reconciliation between them. Thus a construction that reduces one of the provisions of a “useless lumber” or dead letter is not harmonised construction9.

This principle is expressed in the Latin maxim Generalia specialibus non-derogant (also known as the rule of implied exception) meaning general things do not derogate from special things; universal things do not detract from specific things. This well known proposition of law says that when a matter falls under any specific provision, then it must be governed by that provision and not by the general provision. The general provision must admit to the specific provisions of law. It is a basic principle of statutory interpretation.

When there is a conflict between a general and a special provision, the latter shall prevail. The said principle has been stated in Craies on Statute Law, 5th Edn., at P. 205, thus:—

“The rule is that whenever there is a particular enactment and a general enactment in the same statute, and the latter, taken in its most comprehensive sense, would overrule the former, the particular enactment must be operative, and the general enactment must be

taken to affect only the other parts of the statute to which it may properly apply10.”

Conclusion

Keeping in view the above discussion, we may say that by using the word “save as otherwise provided in this Act” in section 185, Legislature has made its intention clear that this provision is general provision and will be implemented while giving due credit to specific provisions such as section 186 which deals with the loan and investment by company. Section 186 commenced with the phrase “without prejudice to the provisions contained in this Act” which means in addition to other provision and without affecting the operation of other provisions. While implementing section 185 in the given illustration, section 186 becomes redundant which is against the principle of harmonious construction. On the other hand if we implement section 186 then prohibition imposed under section 185 becomes redundant. Hence, for the purpose of given illustration both the sections cannot be implemented at the same time.

The only option left is to apply principle of supremacy of special provision over the general provision as discussed hereinabove.

Hence, in the light of above we may say that by passing Special Resolution “A” can give loan to “B” even though they have common director and restriction is imposed under section 185. However, in order to remove any controversy it is expected from the Ministry of Corporate Affairs to give clear guidance on above kind of transaction.

lll

1. Black’s Law Dictionary, by Bryan A Garner 8th Edition Page 1218. 2. ITO v. Gwalior Rayon Silk Manufacturing (Weaving) Co. Ltd. AIR 1976 SC 43. Source: Principle of Statutory Inter-

pretation – Justice G P Singh – 8th Edition – Page – 294. 3. Union of India v. Sneha Khemka [2004] 51 SCL 26 (SC). 4. Venkataramana Devaru v. State of Mysore AIR 1958 SC 255. 5. Raja Krushna Bose v. Binod Kanungo AIR 1954 SC 202. 6. Kailash Chandra v. Mukundi Lal AIR 2002 SC 829. 7. Union of India v. India Fisheries (P.) Ltd. [1965] 35 Comp. Case 669 (SC). 8. Venkateshwar Rao v. Govt. of Andhra Pradesh AIR 1966 SC 828. 9. Income Tax Commissioner v. Hindustan Bulk Carriers AIR 2003 SC 3942. 10. CIT v. Shahzada Nand & Sons AIR 1966 SC 1342.

article _cpt_185 v 186 - bm_dec 2015

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