2.5       Query

Whether deposits received from a firm whose all partners

are directors of the company, are exempted

1.All partners of a firm are also the directors of one private limited company. This firm has given a loan of Rs. 10,000 to the said company.

2.The querist has sought the opinion of the Expert Advisory Committee as to (i) whether the loan will be an exempted deposit in the hands of the company u/s 58A of the Companies Act, 1956, in the light of Company Law Board’s Circular No. 1/80 (1.1.80 CLV and 7/33/78 CLX) dated 4.5.80, (ii) in case the answer to (i) above is in the affirmative whether there will be any bar on the company to pay interest on the borrowed amount @18% p.a.

                                                                    Opinion                                       September 15, 1987

1.The Committee notes that clause 2(b)(ix) of the Companies (Acceptance of Deposits) Rules 1975, provides as below:

            “deposit means any deposit of money with, and includes any amount borrowed by a company but does not include:

            (ix)       any amount received from a person who at the time of receipt of the amount was director of the company or any amount received from its shareholders, by a private company, or by a private company which has become public company under section 43A of the Act and continues to include in its Articles of Association provisions relating to the matters specified in clause (iii) of subsection (i) of section 3 of the Act.

Provided that the director or shareholders, as the case may be, from whom the money is received furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting from others.”

2.The Committee also notes that a partnership, under the Partnership Act 1932, is not a distinct legal entity apart from the partners constituting it. The rights and obligations of the partnership firm are the rights of the partners jointly and severally. The firm as such has no legal right of its own in its assets. The Committee is accordingly of the opinion that where all partners of a firm are the directors of the borrowing company, the deposits accepted from such firm will fall within the purview of Rule 2(b)(ix) quoted above, provided the directors furnish the declaration stipulated in the proviso to the said rule. Consequently, the limit regarding interest as stipulated in the Rules is not applicable. This opinion is in line with the Circular of the Company Law Board, referred to by the querist in para 2 of the query, according to which “….. if all partners of a lending firm are not directors on the Board of Directors of the borrowing company, the deposits accepted from such firms will not fall within the purview of the rule 2(b)(ix) of the Companies (Acceptance of Deposits) Rules, 1975.”

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