loan to or from Partnership Firm

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Deepak Sharma (Querist)
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28 December 2009 Dear all,

Please tell me about legal formalties, restictions or prohibition, if any, for loan to/from Partnership firm by any company

Thanks & Regards

CA Tilak Raj Sharma

CA Tilak Raj Sharma (Expert)
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28 December 2009 These rules are governed by partnership deed. Only restrction for Cash loan and cash repayment of loan. You need to take loan by account payee cheque and should also pay by same.

Deepak Sharma

Deepak Sharma (Querist)
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28 December 2009 Thanks! Tilak Ji,

But an another restriction in sec. 295 of Companies Act. According to this Section No Company can give any loan or guarantee for loan to Firm in which director or relative of Director are Partners without prior approval of Central Government
Can you give me any other refrence besides it regarding loan to/from Firm

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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03 August 2024 When dealing with loans to or from a partnership firm by a company, several legal formalities, restrictions, and considerations come into play. Here’s an overview of the relevant provisions and procedures:

### **1. Legal Formalities and Restrictions**

**A. Loans from a Partnership Firm to a Company**

1. **Section 295 of the Companies Act, 1956 (Repealed)**
- Under Section 295 of the Companies Act, 1956, prior approval from the Central Government was required for a company to provide loans or guarantees to firms where a director or relative of a director was a partner.

2. **Companies Act, 2013**
- **Section 185 (Loans to Directors and Entities in Which Directors Are Interested):**
- **Prohibition:** Section 185 of the Companies Act, 2013 restricts a company from providing loans, including guarantees, to its directors or to entities in which its directors have a substantial interest, without approval from the Board and/or shareholders. This prohibition generally applies to loans or guarantees to entities in which the director has a substantial interest.
- **Section 186 (Loans and Investments by Companies):**
- **Permissibility and Restrictions:** Section 186 provides the framework for loans and investments by a company, including limits and conditions. It does not specifically address loans to partnership firms but sets out general rules for loans to other entities.
- **Section 188 (Related Party Transactions):**
- **Disclosure and Approval:** Transactions with related parties, including loans, must be disclosed and approved by the Board and/or shareholders as per Section 188.

3. **Registrar of Companies (ROC) Approval:**
- Depending on the nature and structure of the transaction, the company may need to seek approval from the ROC for certain transactions.

**B. Loans from a Company to a Partnership Firm**

1. **Section 185 and Section 186 (Companies Act, 2013):**
- **Loan Restrictions:** The provisions under Section 185 and Section 186 would similarly apply to any loans given by a company to a partnership firm, particularly if the partnership firm is related to any director or key managerial personnel of the company.

2. **Corporate Governance Requirements:**
- Ensure that all loans comply with corporate governance standards, including disclosure and approval requirements.

**C. Other Considerations**

1. **Income Tax Act, 1961:**
- **Interest Income:** If a company provides a loan to a partnership firm, any interest income received would be subject to taxation as per the provisions of the Income Tax Act.
- **Transfer Pricing:** If the partnership firm and the company are related entities, transfer pricing rules may apply to ensure that interest rates and other terms are at arm's length.

2. **Partnership Act, 1932:**
- **Partnership Agreements:** Ensure that the partnership deed allows for loans from a company and complies with any internal restrictions or conditions.

3. **Company’s Memorandum and Articles of Association (MoA and AoA):**
- Ensure that the company's MoA and AoA permit loans to or from partnership firms and that the transaction aligns with the company’s objectives and powers.

### **Procedure for Loan Transactions**

1. **Board Approval:**
- Obtain approval from the Board of Directors for the loan transaction. Ensure that the transaction is documented in the minutes of the Board meeting.

2. **Shareholder Approval:**
- If required, obtain approval from the shareholders in a general meeting, particularly for transactions that are significant or fall under related party transactions.

3. **Documentation:**
- Draft a formal loan agreement detailing the terms, interest rate, repayment schedule, and other relevant terms. Ensure compliance with applicable laws and regulations.

4. **Disclosure:**
- Disclose the loan transaction in the company's financial statements and any regulatory filings, as required.

5. **Compliance with Regulations:**
- Ensure compliance with all applicable provisions of the Companies Act, 2013, Income Tax Act, and other relevant regulations.

### **Summary**

For a company dealing with loans to or from a partnership firm, compliance with Section 185, Section 186, and Section 188 of the Companies Act, 2013, is crucial. Additionally, income tax regulations and partnership agreements should be considered. It’s advisable to consult with legal and financial professionals to ensure all legal requirements and formalities are met.