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Can a company provide loan to a partnership firm?

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Sreedevi Pillai

9 Points Posted on 27 May 2024

Dear Experts,

A private limited company (Subsidiary) wants to lend money to a partnership firm (group entity) where the Directors of the private limited company or their relatives are not partners in the partnership firm. However, one of the partners of the partnership firm is the Holding Company and Directors of the Holding Company and Subsidiary Company (lending company) are the same.

Can we go with the strict interpretation of the Section 185 and extend loan to the partnership firm considering that the directors of the lending company or their relatives are not partners in the partnership firm, even though the directors of the lending company and of one of the partners which is the holding company are the same?

If the interest here is falling under indirect category, can we take shelter under Section 184 and interested directors can disclose their interest and then enter into this arrangement with the partnership firm?

Thank you.

Replies (1)

Donald Leak

Lawyer

27 Points Posted on 13 April 2025

Hello,

Given the interlinkage of the directors of the Subsidiary and Holding company, even though the directors of the lending Subsidiary do not directly have an interest in the partnership firm, there is a possibility that the loan could fall under the indirect interest category. The presence of a common directorship between the Subsidiary and Holding company would likely trigger the restrictions under Section 185 of the Companies Act, 2013.

Even though there is a disclosure mechanism under Section 184, disclosure alone will not exempt the transaction from Section 185’s restrictions. Therefore, the loan may not be permissible under a strict interpretation of Section 185, unless an appropriate exemption or legal structuring is available (for example, through compliance with other provisions or obtaining prior approval from the shareholders in the general meeting, if applicable).

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