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Private company's partnership with its directors

Shilpa (Company Secretary) (234 Points)

08 March 2013

Dear professionals,

I want to know can "Private Company" enter into a parnership with its Directors? Is there any prohibition under the Companies Act, 1956 or any other act?

With regards

Shilpa

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6 Replies

Ankit (CA, CS) (3064 Points)
Replied 08 March 2013

Dear Shilpa,

A company can be a partner since there is no restriction under the Partnership Act. Only that it should be authorised under its MoA and AoA and also the DCA has clarified as under:

Circular No. 1-81 (20-1-81-CL-V), dated 14-9-1981 expressed the following view: "A question has been raised whether an incorporated company can enter into a partnership with some other person or some other company. The matter has been examined by this department in consultation with the Department of Legal Affairs and I am directed to say that prima facie a company entering into a partnership with some other person or some other company would be ultra vires and will be against the principle that a particular company or an incorporated body cannot lawfully employ funds for purposes not authorised by its constitution which would normally be the memorandum and the articles of association. However, a company or an incorporated body, if so authorised by its constitution, can enter into partnership with an individual person or with another company irrespective of nationality and residence."

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Shilpa (Company Secretary) (234 Points)
Replied 08 March 2013

Thanks Ankit

From the above case, it can be concluded that Company can enter into a Partnership provided its MOA & AOA authorises it.

But is there any prohibition on entering into a partnership by a Company with its Directors?

With regards

Shilpa

Ankit (CA, CS) (3064 Points)
Replied 08 March 2013

You are welcome Shilpa.

I dont think there is any restriction in such a partnership also....since both..the company as well as the directors are eligible to become partners, they can enter into the same...

however, you should maintain an arms legth in the transactions....