Introduction:

The Corporate Laws (Amendment) Bill, 2026 proposes an important change to Section 185 of the Companies Act, 2013 by bringing Limited Liability Partnerships (“LLPs”) within the specific prohibition relating to loans, guarantees and securities.

At first glance, the proposed amendment may appear straightforward. However, a more nuanced question arises when the LLP itself does not have the concerned directors as its partners, but has body corporates as its partners, with individuals nominated by those body corporates acting as designated partners of the LLP.

The question that arises in the above structure is:

“Whether an advance of a loan by a company to a Limited Liability Partnership (LLP) is prohibited or restricted under Section 185 of the Companies Act, 2013, where the partners of the LLP are exclusively bodies corporate, and the individuals nominated by such bodies corporate to act as Designated Partners are also directors of the lending company?

The answer requires a careful examination of the Companies Act, the LLP Act and, importantly, the language employed in the proposed amendment.

The distinction between a “partner” and a  designated partners who are nominees of” body corporate” therefore becomes central to this analysis. While the LLP Act recognises an individual nominated by a body corporate to act as a designated partner, the underlying partnership interest may continue to vest with the body corporate itself.

This gives rise to an important question of statutory interpretation: should the expression “partner” in Section 185 be given its ordinary statutory meaning, or should it be expanded to include an individual who acts as a nominee/designated partner on behalf of a body corporate?

This article examines these aspects and evaluates the interpretative principles that may be applied in determining whether such a loan would fall within the proposed prohibition.

In order to understand the above we need to the comprehend some provisions of Companies Act, 2013 and LLP Act, 2009

Section 185 of Companies Act, 2013

Prior to the proposed amendment, Section 185(1)(b) of the Companies Act, 2013, prohibited a company from advancing loans, or providing guarantees or securities, to “any firm in which any such director or relative is a partner.”

Because an LLP is a body corporate with a separate legal personality distinct from a traditional partnership firm, the narrow statutory use of the word “firm” created an interpretational loophole. Companies could circumvent the absolute prohibition under Section 185(1) by routing loans to LLPs in which their directors were partners, arguing that LLPs fell outside the ambit of “firms”.

To suppress this mischief and advance the legislative intent of curbing improper siphoning of corporate funds to director-controlled entities, the Corporate Laws (Amendment) Bill proposes to insert the words “or limited liability partnership” after “any firm” in Section 185(1)(b).

While the proposed amendment seeks to suppress the mischief of routing funds through LLPs by bringing them within the threshold of Section 185(1)(b), it gives rise to a fresh interpretational conundrum. The fundamental objective of Section 185 is to prevent the siphoning of corporate funds to entities where directors exert personal or proprietary influence. However, under Section 7 of the Limited Liability Partnership Act, 2008, where all partners in an LLP are bodies corporate, individual nominees must be appointed as Designated Partners.

This creates a critical question of statutory interpretation:

Where a company advances a loan to an LLP whose partners are exclusively bodies corporate, and the individuals nominated by those corporate partners to act as Designated Partners are also directors of the lending company, does such a transaction fall within the absolute prohibition of the amended Section 185(1)(b), or does it remain outside Section 185(1) on the ground that the directors are merely representative nominees and not ‘partners’ in their individual capacity?”

Let’s Analyses the definition of partner / designated partner under Limited Liability Act, 2009 to understand the above distinction between a designated  partner and a Designated partner as a Nominee .

Section 2(q) of the LLP Act defines

a “partner” in relation to an LLP as a person who becomes a partner in accordance with the LLP agreement.

Separately, Section 2(j) defines

a “designated partner” as a partner designated as such under Section 7.

Section 7(1) of the LLP Act say’s that

“Every limited liability partnership shall have at least two designated partners who are individuals and at least one of them shall be a resident in India:

Provided that in case of a limited liability partnership in which all the partners are bodies corporate or in which one or more partners are individuals and bodies corporate, at least two individuals who are partners of such limited liability partnership or nominees of such bodies corporate shall act as designated partners”

Thus, basis to the above reading of the provisions of LLP Act we can say that there is a visible distinction reflected in the LLP Rules, which separately capture:

• Individual partner
• the body corporate;
• its nominee;
• the designation of the individual; and
• the authority under which the nominee acts.

The Fillip form framework also specifically refers to a “Name of Nominee in case of body corporate” demonstrating that the nominee and the body corporate are not simply treated as the same person.

And thus, basis to the above analysis it can be said that where the body corporate is the actual partner and the individual merely acts as its authorized nominee/designated partner, the individual cannot be considered as a person/designated partner as the owner of the LLP.

Now let’s analyses the application of Section 185 after the Proposed Amendment

First Approach – Literal Rule of Interpretation

The amended provision uses the expression “limited liability partnership in which any such director or relative is a partner” and does not expressly carve out or exclude a director who acts as a designated partner on behalf of a body corporate.

Basis to the literal rule of interpretation, statutory words are ordinarily required to be given their plain, natural and grammatical meaning where the legislature is clear and unambiguous.

Accordingly, it may be argued that, once an individual is recognised and functions as a designated partner of the LLP, the absence of any specific exclusion for a nominee designated partner could bring such an individual within the expression “partner” for the purposes of Section 185.

On this interpretation, where a director of the lending company acts as a designated partner of the borrowing LLP, the transaction may fall within the prohibition under Section 185 and, consequently, the company may not be permitted to advance a loan, guarantee or security to such LLP.

However, if this interpretation if applied it may seem to not be in line with the separate distinction recognised under the LLP Act between the body corporate which is the actual partner and the individual who merely acts as its  designated partner and also with the actual purpose of section 185 of Companies Act, 2013.

Now, let’s analyse the above basis to the above discussion:

Second Approach- Purposive and Harmonious Interpretation

The purpose underlying Section 185 is essentially to prevent directors, who occupy a fiduciary position, from using or facilitating the use of company funds for their own benefit or for entities in which they have the kind of interest or connection contemplated by the section.

Accordingly, if we analyse with the Lense of purposive rule, its guides us to look beyond the bare words to identify the object for which the provision was intended to address and read two statutory provisions in a manner which gives effect to both rather than creating an inconsistency between them where two provisions operate in the same field.

Against this background merely treating a director as a “partner” of an LLP because he or she acts as the designated partner of a body corporate partner may extend Section 185(1)(b) beyond both the statutory distinction created by the LLP Act.

As a nominee designated partner does not, merely by virtue of such nomination,

1. acquire a partnership interest,
2. profit-sharing entitlement or
3. economic ownership in the LLP;

the partnership interest continues to vest in the body corporate represented by such nominee.

Further the nominee acts in a representative capacity on behalf of the body corporate partner, although he or she continues to be subject to the statutory duties and responsibilities attached to the office of designated partner.

Therefore, where a director of the lending company is only a designated partner of the borrowing LLP and is not independently a partner in that LLP, there is a strong basis to contend that the LLP should not fall within the expression “limited liability partnership in which any such director or relative is a partner” proposed to be inserted in Section 185(1)(b).

Accordingly, the loan, guarantee or security should not be regarded as absolutely prohibited under Section 185(1)(b) merely because of such nominee position, subject, of course, to examining whether the transaction is otherwise covered by any other limb of Section 185 of Companies Act, 2013.  

Conclusion:

Accordingly, a combined reading of the LLP Act and Section 185, supported by purposive , provides a reasonable basis to contend that a nominee designated partner should not automatically be treated as a “partner” for the purposes of Section 185(1)(b). Therefore, a loan, guarantee or security to such LLP should not be regarded as prohibited merely because a director of the lending company acts as its nominee designated partner, provided the director does not independently hold a partnership interest and the transaction is not otherwise covered by any other restriction under Section 185.

The Article is written by Ms. Krishna Shah – Senior Manager.