Loan to firm where director is partner?

Dear Mr.Anoop,

As per Sec.185 of Companies Act 2013, No Company can give any loan to a firm in which such director or relative is partner subject to exception that where company do that in Ordinary Course of its business and interest charged by it is not less than Bank Rate.

Your case does not fall in exception as the company is in business of Manufacturing. The rate of interest specified by you, i.e. 16% or 10%, is irrelevant.

So, making loan in your case will contavene sec.185 of Companies Act 2013.

(in continuation)
What you can do is rearrange the directorship pattern by appointing new directors in company, who neither himself nor his relatives are partner in that firm. or convert company to LLP.

How to check Ordinary Course of its Business

a)    Is the company engaged in lending activity regularly.

b)    Lend not only to Directors and related parties but also to Arm Length Parties or unrelated parties

Sec.185 of Companies Act 2013 applies where Company grants loan to Firm in which 

• any such Director is partner   or
• relative of such director is partner

So, if the company change the directorships by appointing new director who neither himself nor his relative is a partner in that firm, Company may grant loan without contavening the provisions of Company Act 2013.

A Company can give loan to firm in which director is partner, subject to condition laid down under section 186 of Companies Act. 2013 

You may also check following link for Sec.186.

/articles/faqs-on-section-186-of-companies-act-2013-20499.asp#.U5Z8RVWSx2I

As per section 185, your company can't give such a loan since providing loan is not its primary business and even in that case interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.

Doing such will attract consequences as per Section 185(2).