Special Resolution explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
A company that wants to give a loan, give a guarantee, provide security or buy securities beyond the limit in section 186(2) of the Companies Act, 2013 needs the previous approval of its members by special resolution. This guide is about the guarantee and security limb of that rule. It gives a specimen special resolution with its explanatory statement, shows how the limits and the amount cap work, and lists what the Board and the register must record. If you want the resolution, notice and filing prepared together, our board resolution drafting service can do it.
Section 186(2) bars a company from giving a loan, giving a guarantee or providing security in connection with a loan to any other body corporate or person, or acquiring securities of another body corporate, beyond the higher of sixty per cent of its paid-up share capital, the reserves counted for this purpose and its securities premium account, or one hundred per cent of those reserves and the securities premium account. If the aggregate of what has been done and what is proposed crosses that limit, section 186(3) requires prior authorisation by a special resolution passed in a general meeting. Rule 13 of the Meetings of Board Rules requires the resolution to specify the total amount up to which the Board is authorised. The Board's own resolution must be passed at a meeting with the consent of all directors present (section 186(5)).
When you need this resolution
You need it when the guarantee or security you plan to give, added to loans, investments, guarantees and security already given to or in all other bodies corporate, would take the total above the limit in section 186(2). Typical cases are a parent standing behind a group company's bank loan, a company giving security over its assets for a sister concern's borrowing, or a company giving a surety to a lender of a supplier.
The resolution is not needed where the section itself exempts the transaction. Under the first proviso to section 186(3) and rule 11(1) of the Meetings of Board Rules, the requirement of section 186(3) does not apply where a loan or guarantee is given or security is provided by a company to its wholly owned subsidiary or a joint venture company, or where a holding company acquires securities of its wholly owned subsidiary; the company must still disclose the details in its financial statement under section 186(4). Section 186(11) also takes out loans, guarantees, security and investments made by banking companies, insurance companies, housing finance companies and companies financing industrial enterprises or providing infrastructure facilities, in the ordinary course of business, and certain investments listed there, except sub-section (1). Read the text for your company's class.
A related issue is a loan or guarantee to a director or a connected person; that falls under section 185. See our guides on section 185 and 186 and on loans to directors.
Specimen special resolution with explanatory statement
The specimen is a model. Keep the limbs that apply (loan, guarantee, security, acquisition), state the total amount in figures and words, and attach the explanatory statement to the notice.
ITEM NO. OF THE NOTICE OF THE GENERAL MEETING OF TO BE HELD ON AUTHORITY TO GIVE GUARANTEES AND PROVIDE SECURITY, AND TO MAKE LOANS AND INVESTMENTS, ABOVE THE LIMIT IN SECTION 186 To consider and, if thought fit, to pass the following resolution as a SPECIAL RESOLUTION: "RESOLVED THAT pursuant to section 186(3) and other applicable provisions of the Companies Act, 2013 and the rules made under it, including rule 13 of the Companies (Meetings of Board and its Powers) Rules, 2014, as amended, and subject to the Articles of Association of the Company, the consent of the members be and is hereby given to the Board of Directors of the Company (which expression includes any committee of the Board and any person authorised by the Board for this purpose) to: (a) give guarantees or provide security in connection with loans made to by ; [(b) give loans to ...]; [(c) acquire by subscription, purchase or otherwise the securities of ...]; in one or more tranches, notwithstanding that the aggregate of the loans and investments made, and the guarantees given and security provided, to or in all other bodies corporate, including those now proposed, may exceed the limits in section 186(2) of the Act, subject to a total amount outstanding at any time not exceeding Rs. (). RESOLVED FURTHER THAT the Board be and is hereby authorised to decide the terms and conditions of each guarantee, security, loan or investment, including the form and ranking of any security over the assets of the Company, to negotiate and finalise the documents, to sign and deliver them, to settle any question or difficulty that may arise, and to do all acts, deeds and things that may be necessary or incidental to give effect to this resolution. RESOLVED FURTHER THAT the authority in this resolution shall remain in force until / it is revoked by the members], and shall not affect anything done under it before that time." EXPLANATORY STATEMENT 1. Section 186(2) of the Companies Act, 2013 limits the aggregate of loans, guarantees, security and acquisitions of securities to or in other bodies corporate, and section 186(3) requires a special resolution where the aggregate, including the transactions now proposed, will exceed that limit. The limit on the Company as at is Rs. . 2. The Company has so far given loans of Rs. , made investments of Rs. , given guarantees of Rs. and provided security of Rs. to or in , as shown in the latest financial statements. 3. The Company proposes to ] in connection with taken by , which is . The Board expects the borrower to use the funds for . 4. The Board met on and approved the proposal with the consent of all directors present. 5. The Board recommends the resolution for approval by the members as a special resolution. 6. None of the directors, key managerial personnel or their relatives is concerned or interested in the resolution, financially or otherwise, except and except to the extent of their shareholding in the Company. Place: Date: By order of the Board of Directors , Company Secretary
Clause-by-clause explanation
| Part | What it does | Drafting tip |
|---|---|---|
| Heading and item number | Identifies the business and states it is a special resolution | Put the item in the notice and mark it "special resolution" |
| Main resolution | Gives the Board authority above the section 186(2) limit | Name the limbs you actually need; list borrowers or classes of borrower |
| Total amount | Meets rule 13, which requires the resolution to specify the total amount up to which the Board is authorised | Give a figure in numbers and words, not a formula |
| Authority to Board | Allows terms, documents and security to be settled | Say whether it covers committees and officers |
| Duration | Limits how long the authority lasts | Choose a date or the next annual general meeting |
| Explanatory statement | Informs members of the facts | State the limit, the amounts so far, the proposal, the Board's view and the interest of directors |
The law behind the resolution
The prohibition and the limit. Section 186(2) says no company shall directly or indirectly give any loan to any person or other body corporate, give any guarantee or provide security in connection with a loan to any other body corporate or person, or acquire by way of subscription, purchase or otherwise the securities of any other body corporate, exceeding sixty per cent of the total of its paid-up share capital, its distributable reserves (the section uses the defined term) and its securities premium account, or one hundred per cent of those reserves and the securities premium account, whichever is more. The word "person" does not include an individual in the company's employment (Explanation to section 186(2)). See section 186.
The special resolution. Under section 186(3), where the aggregate of the loans and investments so far made and the amount for which a guarantee or security has so far been provided to or in all other bodies corporate, along with the proposal, exceeds the limit, no investment or loan may be made, no guarantee given and no security provided unless previously authorised by a special resolution passed in a general meeting. The proviso exempts the wholly owned subsidiary and joint venture cases described above. Rule 13 requires the resolution to specify the total amount up to which the Board is authorised to give the loan or guarantee, provide the security or make the acquisition, and says the company must disclose the full particulars in its financial statement under section 186(4). See rules 11 to 13 of the Meetings of Board Rules.
The Board's resolution. Section 186(5) says no investment may be made and no loan, guarantee or security given unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present, and, where any term loan is subsisting, with the prior approval of the public financial institution concerned. The proviso removes the need for that prior approval where the aggregate does not exceed the section 186(2) limit and there is no default in repayment of instalments or payment of interest. See our model board resolution for giving a loan to another company and board resolution on investments under section 186.
Other conditions in section 186. A company in default in repaying deposits or paying interest on them cannot give any loan or guarantee or provide any security until the default ends (186(8)). Section 186(7) restricts loans at an interest rate lower than the prevailing government security yield. Every company giving a loan, guarantee or security must keep a register (186(9), (10)); rule 12 requires Form MBP-2, with entries made chronologically within seven days of the transaction. See rules 12 and 14: the register.
Explanatory statement and filing. The special resolution must be accompanied by an explanatory statement as the Act requires for special business; see section 102. After the meeting, file the resolution with the Registrar as the Act requires; see filing resolutions in Form MGT-14.
Penalty. Section 186(13) prescribes a fine on the company and imprisonment and fine on officers in default for contravening the section. The Act as amended should be checked for the current figures.
Stamp duty, registration and execution
The resolution itself is not chargeable with stamp duty. The guarantee or security document the Board later signs is a separate instrument; its duty is fixed by the Stamp Act and Schedule of the State where it is executed. See stamp duty on guarantee and indemnity deeds, the guide to indemnity and guarantee contracts and a specimen deed of guarantee. If security is created over the company's assets, the charge may need to be registered with the Registrar and, for immovable property, may fall under section 17 of the Registration Act, 1908; check the position for each asset.
Steps: calculate the limit and the aggregate; hold the Board meeting and pass the resolution with the consent of all directors present; issue the notice with the explanatory statement; pass the special resolution; file it; sign the guarantee or security documents; update the MBP-2 register within seven days; and disclose the particulars in the financial statement.
Common mistakes
- Giving a guarantee or security without calculating the aggregate against the section 186(2) limit.
- Passing the Board resolution by majority instead of with the consent of all directors present.
- Omitting the total amount from the special resolution, contrary to rule 13.
- Using an open-ended authority with no cap and no duration.
- Forgetting the prior approval of the public financial institution where a term loan is subsisting and the aggregate exceeds the limit.
- Treating a guarantee for a director or connected person as a section 186 matter only, when section 185 may apply.
- Failing to enter the transaction in the register within seven days.
- Not disclosing the guarantee and security in the financial statement.
Need help with a section 186 resolution?
We calculate the limit, draft the Board and special resolutions with the explanatory statement, and prepare the filing and register entries. Start with our board resolution drafting service.
Key takeaways
- A special resolution in general meeting is needed when guarantees, security, loans and investments will exceed the section 186(2) limit.
- Rule 13 requires the resolution to specify the total amount authorised.
- The Board's resolution needs the consent of all directors present.
- Wholly owned subsidiary and joint venture cases are exempt from section 186(3), with disclosure.
- Keep the MBP-2 register and disclose in the financial statement.
Read next
- Section 186 of the Companies Act, 2013: loans and investments
- Rules 11 to 13 of the Meetings of Board Rules
- Board resolution for giving a loan to another company
- Sections 185 and 186: loans and investments by companies
Disclaimer: This specimen is a general model for information. Every document must be adapted to its facts and to the law, rules and forms in force when it is signed or filed; stamp duty, registration and court fees depend on the State and the forum. This article is general information, not legal advice; check the official text before acting.