HUF Lending To Companies: Why The Deposit Rules Under The Companies Act, 2013 Cannot Be Ignored

Introduction

The Hindu Undivided Family ("HUF") is one of the more structurally unusual entities in Indian law. Recognised as a separate taxable person under the Income Tax Act, 1961, it is managed by a Karta, and its assets are held for the benefit of all co-parceners and members of the family unit.

Given this character, it is not uncommon for an HUF to extend financial capital to a private limited company in which its Karta or family members hold an interest. The rationale is intuitive: the family has investable surplus, the company needs working capital, and the transaction appears to be a purely domestic arrangement within a closely held group. The legal question, however, is more complex than the commercial instinct suggests.

Whether a private company can validly obtain a loan from an HUF where the Company’s Director is Karta, requires a precise analysis and available exemptions under the definition of “deposit”, which needs to be read with Chapter V, which primarily regulates acceptance of deposits by companies and the framework accepting deposits under the Companies Act, 2013 ("the Act"),

For easy reference of the reader, we are summarising the definition of “deposits”, before this article we examine each of these layers, the framework and arrive at a position that has meaningful consequences both for structuring such transactions

Definition of "Deposit" — Section 2(31) of the Companies Act, 2013

Section 2(31) of the Companies Act, 2013 provides that "deposit" includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amounts as may be prescribed in consultation with the Reserve Bank of India. The residual and inclusive character of this definition is deliberately wide — it sweeps in any receipt of money in the form of a loan unless it falls within a specific exclusion.

1. The Deposit Framework: Why a "Loan" is Not Simply a Loan

The starting point is the definition of "deposit" under the Act. Section 2(31) defines deposit to include "any receipt of money by way of deposit or loan or in any other form by a company", subject to eighteen specified categories of receipts prescribed under the Companies (Acceptance of Deposits) Rules, 2014 ("Deposit Rules").¹

The significance of this definition cannot be overstated. The statute deliberately subsumes the word "loan" within the broader category of "deposit." The consequence is that when any money comes into a company from an outside party, the Act does not ask what the parties have chosen to call the arrangement. It asks a single, threshold question: does this receipt fall within the prescribed exclusions? If yes, it is not a deposit. If no, it is a deposit by default regardless of whether the agreement uses the word "loan", "advance", or any other descriptor.

The exclusions from the deposit definition are set out in Rule 2(1)(c) of the Deposit Rules.² These exclusions function as a whitelist: only receipts that fit within an expressly enumerated category escape the deposit classification. Everything else falls within it.

2. The Relevant Exclusion: Loans from Directors and Relative, Any amount received by a company from any other company

Rule 2(1)(c) of the Deposit Rules operationalises the Section 2(31) definition by providing that for the purposes of Chapter V of the Act, "deposit" includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include eighteen specified categories of receipts. The Explanation to the rule further clarifies that any amount "shall be considered as deposits unless specifically excluded under this clause."

Rule 2(1)(c)(vi) — Any amount received by a company from any other company. An HUF is not a "company" within the meaning of the Act and therefore this exclusion does not apply.

Another exclusion most pertinent to closely held private companies is Rule 2(1)(c)(viii), which provides that any amount received from a director of the company, or from a relative of a director (in the case of a private company), shall not be treated as a deposit, provided a written declaration is obtained from the lender confirming that the amount is not sourced from borrowed funds.³

This exclusion reflects a legislative recognition that in closely held private companies, the boundary between personal and corporate capital is often permeable. A director lending from his own resources to his own company is categorically different, in risk and character, from a public solicitation of deposits. The exemption creates a carve-out for this class of transactions.

However, the exclusion is tightly drawn. It does not extend to any person connected with a director. It applies specifically to "relatives" of a director, a term that has a precise statutory meaning under the Act.

3. Who Is a "Relative" Under the Companies Act?

Section 2(77) of the Act defines "relative" with reference to any person as follows: a person is a relative of another if (i) they are members of a Hindu Undivided Family; (ii) they are husband and wife; or (iii) one person is related to the other in such manner as may be prescribed.⁴ The prescribed relationships under clause (iii) include father (including step-father), mother (including step-mother), son (including step-son), son's wife, daughter, daughter's husband, brother (including step-brother) and sister (including step-sister).⁵

The structure of Section 2(77) is relational. It does not define "relative" as a fixed list of persons but as a bilateral test: given Person A, Person B is a relative of Person A if they satisfy one of the three conditions. The provision asks, with reference to a specific individual, who qualifies as that individual's relative.

Condition (i) uses HUF membership as the criterion of relationship. It provides that two persons are relatives of each other if both are members of the same HUF. This means that if Director A is a member of the HUF, then every other member of the HUF, the Karta, co-parceners, the Karta's wife, and their children is a "relative" of Director A for the purposes of the Act.

This is the critical and often misread provision. Section 2(77)(i) identifies individual persons as relatives by reference to their membership of a common HUF. It does not, and cannot, designate the HUF itself as a relative. The HUF is the family unit that provides the context for identifying the relationship; it is the test, not the tested. The members of the HUF are relatives of each other; the HUF as a collective entity is not a relative of anyone.

4. Applying the Framework: The HUF as Lender

With these two foundational elements in place, the question of whether an HUF can extend a loan to a private company resolves as follows.

1. Can the HUF Avail the Relative Exemption?

The exemption under Rule 2(1)(c)(viii) is available only to a director of the company or a "relative of a director of the private company”. As established above, Section 2(77)(i) uses HUF membership to identify individuals as relatives of each other. The HUF itself is not an individual and, therefore, cannot be a "relative" within the meaning of Section 2(77).

Accordingly, money received from an HUF does not fall within the exemption under Rule 2(1)(c)(viii). Nor does it fall within any other exclusion under Rule 2(1)(c). Consequently, the receipt of money from an HUF is classified as a "deposit" under Section 2(31) of the Act. The description or label of the transaction as a "loan" in the agreement between the parties does not alter this statutory classification.

It may be argued, on a substance-over-form basis, that where the Karta of the lending HUF is also the borrowing company's director, the loan is in economic reality an advance by that director and should therefore attract the exemption. This argument is understandable but, in our view, does not survive the statutory text. Classification under Section 2(31) turns on the legal identity of the payer, not the economic source of the funds: an HUF is a distinct person that holds and advances money in its own right, separate from the individual who happens to act as its Karta. Section 2(77) reinforces this by treating HUF membership as the criterion that makes natural persons relatives of one another, without ever elevating the HUF itself to the status of a “relative”. Absent a specific exclusion for HUFs, the substance-over-form contention cannot displace the plain statutory classification, however closely held the company may be.

2. Can the Private Company Accept a Deposit from an HUF?

Once the receipt is classified as a deposit, the next question is whether the private company is permitted to accept it. Section 73(2) of the Act permits a company to accept deposits from its members subject to the passing of a resolution in general meeting and compliance with prescribed conditions.⁶ The key restriction for present purposes is that this route is available only for deposits from members, not from any other category of person.

Section 76 of the Act extends the deposit-acceptance power to persons other than members, but exclusively for public companies meeting prescribed eligibility thresholds of net worth or turnover.⁷ No equivalent provision exists for private companies. A private company has no statutory route to accept deposits from persons other than its own members.

The HUF, as established, is not a member of a company. Its Karta may be a member in his individual capacity, but the HUF is not. Accordingly, even if one were to accept the classification of the HUF's loan as a deposit, the private company has no legal basis to accept it. The prohibition is not cured by procedural compliance; there is no procedure available for a private company to accept a deposit from a non-member.

5. Consequences of Non-Compliant Acceptance

The Act treats the acceptance of deposits in contravention of Section 73 or 76 as a serious default, not a procedural irregularity. The consequences operate at three levels.

Mandatory Repayment: The deposit must be repaid. The illegality does not extinguish the HUF's claim to recovery of its funds.

Penalty on the Company: Under Section 76A of the Act, where a company accepts or invites, or causes any person to accept or invite on its behalf, any deposit in contravention of Sections 73 or 76 or the rules made thereunder, or fails to repay the deposit or interest within the prescribed period (or such extended period as may be allowed by the Tribunal under Section 73), the company is liable, in addition to repayment of the deposit with interest, to a fine of not less than Rs. 1 crore or twice the amount of deposits accepted, whichever is lower, which may extend to Rs. 10 crores.⁸

Personal Liability on Officers: Every officer of the company in default is liable to imprisonment for a term extending up to seven years and a fine of not less than Rs. 25 lakhs, which may extend to Rs. 2 crores. Where such contravention is committed knowingly or wilfully with the intent to deceive the company, its shareholders, depositors, creditors or tax authorities, the defaulting officer is also liable for action under Section 447 of the Act. Further, where deposits are accepted with intent to defraud, Section 75 of the Act imposes unlimited personal liability on the responsible officers for all losses and damages suffered by the depositor.⁹

6. Permissible Structure for Relatives of Directors in Their Individual Capacity, and Not as the HUF or Its Representatives

The practical consequence of this analysis is not that financial accommodation from the HUF family pool is unavailable to a private company. Rather, the legal form in which such accommodation is extended must be restructured.

The legally sound approach is for the individual members of the HUF—the Karta, co-parceners, or other members, as the case may be—to extend the loan in their individual capacities, and not as representatives of, or on behalf of, the HUF. Where such individuals are relatives of a director of the company, the receipt of the loan qualifies for the exemption under Rule 2(1)(c)(viii), and the amount does not constitute a deposit.

The conditions for adopting this structure are straightforward but mandatory. Each individual lender must furnish a written declaration, at the time the loan is received by the company, confirming that the funds are not sourced from borrowed money. The Board of Directors should pass a resolution approving the acceptance of the loan, identifying the lender, and recording that the lender is a relative of a director. The loan agreement should be executed in the individual's personal name and should not describe the individual as the Karta of, or a representative of, the HUF.

7. Practical Takeaways

The question of HUF loans to private companies is not merely one of prospective structuring. It is a live due diligence risk in the context of M&A transactions involving closely held Indian companies, particularly in founder-led businesses where HUF corpus has historically been deployed as working capital.

A target company's balance sheet that reflects borrowings from an HUF entity identified as such in the loan agreement, the board resolution, or the annual return presents a disclosure risk that the acquiring party must evaluate carefully.

8. Conclusion

 A loan taken by a company from the HUF of a promoter-director is, in the considered view of this analysis, a "deposit" within the meaning of Section 2(31) of the Companies Act, 2013, read with Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014.

An HUF is neither a "director" nor a "relative of the director" as defined in Section 2(77) of the Act and Rule 4 of the Companies (Specification of Definitions Details) Rules, 2014.

The exemption under Rule 2(1)(c)(viii) is restricted to transactions with natural persons who are directors or their relatives — they do not extend to HUFs, even where the Karta of the HUF is the director himself.

Footnotes

^{1 Section 2(31), Companies Act, 2013.}

^{2 Rule 2(1)(c), Companies (Acceptance of Deposits) Rules, 2014.}

^{3 Rule 2(1)(c)(viii), Companies (Acceptance of Deposits) Rules, 2014.}

^{4 Section 2(77), Companies Act, 2013.}

^{5 Rule 4, Companies (Specification of Definitions Details) Rules, 2014.}

^{6 Section 73(2), Companies Act, 2013.}

^{7 Section 76, Companies Act, 2013. This route is available only to public companies with a net worth of not less than Rs. 100 crores or a turnover of not less than Rs. 500 crores.}

^{8 Section 76A, Companies Act, 2013.}

^{9 Section 75, Companies Act, 2013.}

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.