The company provided security for a loan of ₹25 lakh taken by Rupa Chemicals Limited (RCL), in which Harshal and Sujit, directors of the company, hold 10% and 15% equity shares, respectively, with voting rights. The Secr

According to section 185(2) of Companies Act 2013, a company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the director of the company is interested, subject to the condition that - A special resolution is passed by the company in general meeting: Provided that the explanatory statement to the notice for the relevant general meeting shall disclose the full particulars of the loans given, or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security and any other relevant fact; and the loans are utilised by the borrowing company for its principal business activities. Explanation-For the purposes of this sub-section, the expression "any person in whom any of the director of the company is interested" means - any private company of which any such director is a director or member; anybody 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 anybody 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. Analysis and Answer Section 185(2) of the Companies Act, 2013 is applicable in the situation where the lending corporate is giving loan or providing guarantee or security in connection with the loan taken by the other corporate in which the director/s of lending are interested. Harshal and Sujit, directors of lending company- Disha Beauty Products Limited are together holding 25% voting powers in Rupa Chemicals Limited, Hence, in term of clause (b) of explanation to Section 185(2) Rupa Chemicals Limited is a body corporate in which the directors of the lending company are interested. The transaction of providing security shall be valid, if the following two conditions are fulfilled: Disha Beauty Products Limited should pass a special resolution in the general meeting, and A declaration should be given by Rupa Chemicals Limited that the loans are utilised for its principal business. The transaction would be invalid if Disha Beauty Products Limited had passed a resolution in the general meeting but not a special resolution. The requirement of declaration has been satisfied. In view of above, as Disha Beauty Products Limited (the lending company) failed to pass a special resolution in the general meeting the security has been provided in violation of section 185(2) of the Companies Act, 2013 and hence the observation of the Secretarial Auditor that the transaction is invalid is correct.