Is it possible for a private company to accept loans from a partnership firm where directors are also partners? if yes, what limits are applicable? And if no, what other ways fund can be introduced the company?
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Is it possible for a private company to accept loans from a partnership firm where directors are also partners? if yes, what limits are applicable? And if no, what other ways fund can be introduced the company?
Yes, a private limited company can accept loans from a partnership firm in which its directors are partners, but certain rules and limitations under the Companies Act, 2013 and Income Tax Act must be considered.
✅ 1. Companies Act, 2013 – Key Provisions
Section 2(31) – Definition of Deposits
Loans from a partnership firm are not treated as deposits, so they are permitted, subject to certain conditions.
However, if directors are also partners, then Section 185 and Section 188 of the Companies Act, 2013 may become applicable due to the related party nature of the transaction.
🔷 Section 185 – Loan to Directors
Section 185 prohibits loans to directors and entities in which they are interested, but there are exceptions:
A company may give loan to any person in whom any of the director is interested subject to:
Thus, if the private company is accepting (not giving) a loan from the firm, and directors are partners in that firm, Section 185 does not directly apply because it governs giving loans, not accepting.
🔷 Section 188 – Related Party Transactions
Loan transactions from a firm in which directors are partners may be classified as related party transactions under Section 188.
So, you must:
✅ 2. Income Tax Act – Section 40A(2)(b)
If the loan carries interest, and it's paid to a related party (the firm where director is a partner), then the interest rate should be reasonable and at arm’s length — otherwise, it may be disallowed.
✅ 3. Limits on Loan
There’s no specific monetary limit under the Companies Act for taking loans from a partnership firm. However, the following should be ensured:
❓ If Not Via Loan – Other Funding Routes
If taking a loan is not viable or desirable, here are other ways to introduce funds:
1. Equity Infusion
2. Unsecured Loan from Directors (in Personal Capacity)
3. Convertible Debentures or Compulsorily Convertible Preference Shares (CCPS)
✅ Summary
Source of Funds |
Allowed? |
Conditions |
Partnership firm where director is a partner |
✅ Yes |
Ensure it's a related party transaction; follow Sec 188 if applicable |
Director in personal capacity |
✅ Yes |
Must be out of own funds (not borrowed) |
Equity investment |
✅ Yes |
Follow share allotment procedures |
Loan from external parties |
✅ Yes |
Follow deposit rules |
From the company's perspective, this is simply a borrowing transaction, and Sections 179 and 180 of the Companies Act do not prohibit such loans. However, the key concern lies in the interpretation of Section 73 (Deposits).
Understanding Section 73 and its Implications
Section 73 defines deposit as any receipt of money by way of a deposit, loan, or any other form by a company. Notably, the exemption does not explicitly include money received from a firm. This leads to two possible interpretations:
However, private companies are exempt from Section 73, provided they meet the criteria for exemption. It’s advisable to verify eligibility, as this would eliminate the need for the above interpretations.
Considerations from the Firm’s Perspective
More often than not, the term ‘lending activities’ instantaneously brings RBI to mind. However, lending business is not the domain of RBI alone, there are state legislations on money-lending.
Conclusion
If your company qualifies for an exemption under Section 73, it may accept a loan from a partnership firm. However, if no such exemption applies, you should exercise caution when interpreting the acceptance of deposits, as this remains the key determining factor in the given case.