Term loans and advances as defined in Banking Regulation Act can be used interchangeably. The act defined “secured loan or advance" means a loan or advance made on the security of assets the market value of which is not at any time less than the amount of such loan or advance, and defined "unsecured loan or advance" as a loan or advance not so secured; It means, when a person including a company obtains any loan or any advance from bank that will stand on equal footing.
Compliance under companies Act on obtaining loan or advance from bank: Whenever a company takes any loan or advance from bank which creates any interest or lien of the company’s property or asset or undertaking or both as security or as mortgage needs to file e-form CHG-1 for intimating Registrar of companies about creation of charge on the asset or property or undertaking of the company.
Analysing term loan and advance with respect to Section 185 and 186 of companies Act, 2013
Section 185: Loan to directors
Section 185 (1) provides that, save as otherwise provided in the Companies Act, 2013, 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.
As section 185 applies on both direct and indirect loan, but the meaning of indirect loan will connote that the company shall not give a loan to a director through the agency of one or more intermediaries. The Word "indirectly" in the section cannot be read as converting what is not a loan into a loan.
Section 186: Loan and Investment by Company
Section 186 (2) provides that, 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; andrn(c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate,
exceeding sixty per cent. of its paid-up share capital, free reserves and securities premium account or one hundred per cent. of its free reserves and securities premium account, whichever is more.
What is “Loan” and “advance”?
The Term Loan and advance has not been defined under Companies Act, 2013. Therefore, we have to take help of the dictionary meaning and judicial clarifications in this regard.
Dictionary Meanings
Loan is defined as a thing that is borrowed, especially a sum of money that is expected to be paid back with interest.
Advance is defined as to pay (money) to (someone) before it is due. Another meaning, advance means a loan, an advance from the bank, as per this definition also advance and loan can be used interchangeably if taken by bank.
Judicial Pronouncement/Meanings
In the case of Shree Ram Mills Ltd Vs. Commissioner of Excess Profit Tax, MANU/SC/0054/1954 = AIR 1953 SC 485, the Hon’ble Supreme Court has described meaning of “Loan” as:
Money so left, could by a proper agreement between the parties, be converted into a loan, but in the absence of an agreement mere inaction on the part of the managing agents cannot convert the money due to them, and not withdrawn, into a loan. A loan imports a positive act of lending coupled with an acceptance by the other side of the money as a loan. The relationship of borrower and lender cannot ordinarily come about by mere inaction.
The Hon’ble Madras High Court in the case of KM. Mohammed Abdul Kadir Rowther Vs. S. Muthia Chettiar /1959 that advance means literally a payment beforehand. In certain cases, it may be a loan but it cannot be said that a sum paid by way of advance is necessarily a loan.
Is Section 185 applicable to advance?
Section 185 talks about “advance any loan”, not “advance or loan/advance and loan”, and hence the word “advance any loan shall be read together and word advance is a verb and loan is a noun, accordingly “advance any loan” means to give any loan.
Is Section 186 applicable to advance?
An advance is not loan as discussed above, hence there is no question of applicability of section 186 on any advance which not amounts to loan.
Conclusion
In common parlance, the terms “loans and advances” are used together or used interchangeably, but in view of various judicial pronouncements as discussed above “Loan” and “Advance” both are two different terms carrying independent meaning. It is pertinent to refer to the case of In London Financial Association v. Kelk L.R. (1884) 26 Ch. D. 107, it was observed, that the words- 'advancing' and 'lending' might each have a different signification, money might be 'advanced' without being 'lent’ and that the relation of borrower and lender did not exist in a great variety of the transactions. The Bombay High Court in the case of Dr. Fredie Ardeshir Mehta Vs. UOI MANU/MH/0090/1991 = 1991 (70) Company Cases 210 Bombay has observed as, the essential requirement of a loan is the advance of money (or of some article) upon the understanding that it shall be returned, and it may or may not carry interest.
An advance in the nature of the loan will come under the ambit of Section 185 and 186, not merely an advance.