CAN A COMPANY GIVE LOANS TO LLP
CAN A COMPANY GIVE LOANS TO LLP
Similarly a critical analysis of some of the provisions of the LLP Act, 2008 and Companies Act, 1956 becomes necessary to answer to the second question i.e. whether a Company registered under the relevant provisions of the Companies Act, 1956 can extend loans to an LLP without obtaining the previous approval of the Central Government, if any of the directors or relatives of such directors of the company are also partners in the said LLP?
Section 295 of the Companies Act, 1956 states that save as otherwise provided in sub-section (2) no company (hereinafter in this section referred to as “the lending company” without obtaining the previous approval of the Central Government in that behalf shall, directly or indirectly make any loan to, or give any guarantee or provide any security in connection with a loan made by any other person to, or to any other person by,
a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director:
b) any firm in which any such director or relative is a partner;
c) any private company of which any such director is a director or member;
d) any body corporate at a general meeting of which not less than twenty-five per cent of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or
e) any body corporate, the Board of directors, managing director or manager whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.
Since LLP is not a firm as explained above the provisions of clause (b) of Section 295(1) shall not be applicable. Though an LLP is a body Corporate, still the provisions of clause (d) or (e) shall not be applicable since under the LLP Act, the LLP is neither required to hold any general meeting nor it is required to have any Board of Directors, Managing Director or Manager and hence a Company registered under the relevant provisions of the Companies Act, 1956 can extend loans to an LLP without obtaining the previous approval of the Central Government, if any of the directors or relatives of such directors of the company who are also partners in the said LLP. However the provisions of Section 372A of the Companies Act, 1956 shall be applicable for extending loan to LLP since it is a body corporate. Section 372A of the Companies Act, 1956 restricts extension of loan to any body corporate in excess of 60% of the paid up share capital and free reserves or 100% of the free reserves without the approval of the shareholders of the company by way of a special resolutions and approval of the Banks and Financial Institutions whose loans are outstanding.
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