Vikas Gupta
Section 74– Contrary view on Loan taken before 31.03.2014 from directors, their relatives and members of a private company including the amounts stated in (i) to(xii) of clause (b) of rule 2 of the Companies (Acceptance of Deposits) Rules,1975 on or before the commencement of companies Act,2013. In the opinion of the Author such amounts are not deposits and so are not covered by Section 74 of Companies Act,2013.
Dear Professional colleagues,
Have a serious look into what is stated herein with your skillful application of mind. Section 74 of the Companies Act, 2013, provides that any deposit accepted before the commencement of the Companies Act,2013, needs to be repaid/refunded on or before 31st March,2015. The said section also states that a return has to be filed with RoC in respect of existing deposits. Many professionals are posting on various websites saying that due dates for refund of deposits and filing of return with RoC are nearing hence they are advising for compliances within the due dates. They are also pointing the attention of the readers to the penalty in case of non compliance with said Section 74. The penalty is minimum Rs.1crore and maximum Rs. 10 crore.
In the backdrop of above let us consider the following question:
Are all unsecured loans/amounts received on or before commencement of the companies Act,2013, by private companies from its directors, their relatives and its members, repayable on or before 31st March,2015 as stipulated by Section 74 particularly in view of the definition of Deposit in new Act?
Applicable provisions are:
1. Section 2(31) of the Companies Act,2013 which defines “deposit” as “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 amount as may be prescribed in consultation with the Reserve Bank of India.” [It is pertinent to mention here that the Central Government in consultation with RBI has notified Companies (Acceptance of Deposits) Rules 2014 according to which now even amounts received from relatives of directors and members are deposit]
2. Section 74 of the companies Act,2013 the relevant portion of which is as under:
“(1) Where in respect of any deposit accepted by a company before the commencement of this Act, the amount of such deposit or part thereof or any interest due thereon remains unpaid on such commencement or becomes due at any time thereafter, the company shall-
(a)……………………………….
(b) repay within one year from such commencement or from the date on which such payments are due, whichever is earlier.”
3. Rule 2(b) of the Companies (Acceptance of Deposits) Rules,1975 the relevant provision of which is as under:
“ deposit” means any deposit of money with, and includes any amount borrowed by, a company, but does not include–
(ix) any amount received by a private companies from a person who, at the time of the receipt of the amount, was a director, relative of director or member:…………………”
Analysis of the above stated provisions:
(a) Section 74(1) of the Companies Act, 2013 is using the words “ any deposit accepted by a company before the commencement of this Act.” Thus before the Companies Act,2013 if a company has accepted any deposit under the Companies Act,1956(which was in existence prior to 2013 Act), the same needs to be repaid as per the mandate of section 74(1)(b) on or before 31st March,2015.
(b) The Companies Act,1956 which is repealed now did not define “Deposit”. But the Companies (Acceptance of Deposits) Rules,1975 which were under section 58A of the 1956 Act defined “ Deposit”. As per the definition in the above rules the amounts received from directors, their relatives and the members of private companies were not deposits in view of the clear wording “ but does not include…” Thus all amounts which fall in (i) to (xii) of clause (b) of rule 2 of Companies (Acceptance of Deposits) Rules,1975 if accepted then were not deposit as they were specifically excluded from the definition of Deposit. A company is under an obligation to repay any deposit it accepted under the Companies Act,1956 not all the amount which were not deposit then. In short the amount to be repaid on or before 31st March,2015 has to be deposit when it was accepted in view of the provision that “any deposit accepted by a company before commencement of this Act.” There can be a counter argument that the Deposit referred to in section 74 means the Deposit as per the new Act which includes loans from relatives of directors, their relatives and members but then that argument does not seem to be surviving as the definition of Deposit as in new Act shall take effect only after commencement of the new Act whereas the Section 74 of new Act is talking of deposit accepted before the commencement of new Act. So what was not deposit under the old Act cannot be covered by Section 74 of New Act.
Conclusion:- In view of the above, according to me, all the monies received from directors, their relatives and members of a private company including the amounts stated in (i) to(xii) of clause (b) of rule 2 of the Companies (Acceptance of Deposits) Rules,1975 on or before the commencement of companies Act,2013 are not required to be repaid as they were not deposit when accepted. Crux of Section 74 lies in the fact that when the amount received whether the same was deposit or not.
The provisions of Section 74 of the Companies Act are applicable only to deposits which were accepted in accordance with the provisions of section 58A of the Companies Act, 1956 read with Companies (Acceptance of Deposits) Rules,1975.
Unfortunately due to misinterpretation of Section 74 many unnecessary returns have been filed with RoC and the same is being pressed to be filed again.
Your views and discussion are invited.
Dear All,
The confusion have put at rest and General Circular No.05/2015 dated 30.03.2015 may please be referred and given below for reference for all:-
General Circular No. 05/2015
Dated: 30th March, 2015
To
All Regional Directors,
All Registrars of Companies, All stakeholders.
Subject: Amounts received by private companies from their members, directors or their relatives before 1st April, 2014 – Clarification regarding applicability of Companies (Acceptance of Deposits) Rules, 2014
Sir,
Stakeholders have sought clarifications as to whether amounts received by private companies from their members, directors or their relatives prior to 1st April, 2014 shall be considered as deposits under the Companies Act, 2013 as such amounts were not treated as ‘deposits’ under section 58A of the Companies Act, 1956 and rules made thereunder.
2.The matter has been examined in consultation with RBI and it is clarified that such amounts received by private companies prior to 1st April, 2014 shall not be treated as ‘deposits’ under the Companies Act, 2013 and Companies (Acceptance of Deposits) Rules, 2014 subject to the condition that relevant private company shall disclose, in the notes to its financial statement for the financial year commencing on or after 1st April, 2014 the figure of such amounts and the accounting head in which such amounts have been shown in the financial statement.
3. Any renewal or acceptance of fresh deposits on or after 1st April, 2014 shall, however, be in accordance with the provisions of Companies Act, 2013 and rules made thereunder.
4.This issues with the approval of the competent authority.
F. No. 1/8/2013-CL-V
Yours faithfully,
(K.M.S. Narayanan)
Assistant Director (Policy)
Dear Mr. Vikas,
We can look forward for any definition in Previous Acts or any other act, only if that word is not defined in current Act.
Since, Companies (Acceptance of Deposits) Rules, 2014 clearly defines the “Deposits” hence, we can not take definition from Companies (Acceptance of Deposit) Rules, 1975.
Sourabh
ACA
Dear Mr.Vikas
Section 73, 74 and Companies (Acceptance of Deposit) Rules, 2014 are very clear. Section 74 is very clear which says that any deposit taken from relative or unsecured loan or any amount which is standing as on 31-3-2014 have to be repaid within one year. The inference may also be taken from definition of private limited company which came in September 2013. In earlier definition of Companies Act 1956, the private companies can accept deposit from directors relative etc. but the same has been deleted in new Companies Act, 2013 as such amount taken as unsecured loan from relative etc. in previous act now become deposit. As such, Section 74 is very clear. I do not agree with your view that it is not a deposit. I am of the view that you are not interpreting the law and objectivity in true sense. Kindly review.
regards
A K Popli
FCS
Its pity that Such draconian provisions did not attract required protests from Professionals as well Business community.Even Media is ignoring such killing provisions in company act.Please see that in Draft Provisions of New company act, It was mentioned that deposits / Loan from Directors and Members not to be treated as deposits (Exempt) but Later in Notified act, “Members” word was deleted. UPA played prank and this government is busy in repairing damages caused by earlier UPA government.
My father is a director of a private limited company and I have given loan of Rs.50 lacs to my father’s company. Now with this provision, If I am abstained by law to withdraw (Because company has to repay), where should I invest my Funds.
I do not want to invest in Bank at mere 6-8% with Fixed tenure. I do not want to invest in Stock market and risk my money. What is the option left for me ? Why my father must go to Bank with beggar’s bowl and get loan with so much conditions when his family (relatives) are there ? This Law is illegal, senseless and is made without application of mind.
I have posted so many replies against this Draconian provisions earlier on this portal but now at eleventh hour, without wasting any time and interpreting the law in twists, I request all Professionals to unite and awaken the government to put things right before it is too late.I wish Lord to save business community.
I do endorse the views of Mr. Vikas Gupta. Something which was not depsoit when it was accepted can not becoem deposit with retrospective effect. Deposit accepted befroe the commencement of the Act means and shall only mean deposit which were so even under previous law. My friends, just looking ot the penalty clause of Sec 74, one should not forget ot interpret the law aqs it is worded.
Deposit is a defined term in the 2013 act. Anywhere is the entire act if not mentioned otherwise will be read as per the definition given in 2012 act. We cannot go back to rules of 1975 to borrow the definition of deposits.
Good interpretation of law but it should be corroborated by other expert opinion- This sec 74 is really a draconian provision- it will force all small private companies to die-or convert it in to LLp
A nice very elaboration of section 74 of Companies Act 2013, Shri Gupta agree with your views but there must be a through discussion on it ,before reaching conclusion of it.
This is very good interpretation of law but please advise whether there is any other opinion like this. Can it be challenged in court of law.
In my opinion, Section 73 & 74 of new Companies Act, 2013 are detrimental to new entrepreneurs who have skill and ability to run a business but may not have funds available to establish a business.
In fact what has happened that initially, the word “members” was there in exempted categories of loan in draft rules which has been omitted in final rules deliberately or unintentionally by law makers.
If a qualified group of people with very limited source of funds wishes to start business by incorporating a private limited company, their hands have been axed down by law makers by removing word “members” in light of following:
1. New entrepreneurs are not entertained by banks/financial institutions for funding their business on the pretext of policies.
2. Law has prohibited such entrepreneurs to accept unsecured loans from members or relatives of Directors.
It means small, qualified, brilliant entrepreneurs should close down business and work as laymen under the management of big corporate houses.
Which type of provisions these are and what our law makers wish to achieve by imposing such prohibitory provisions.
In case of private Companies, intent of investor protection can not be pretended as Private Companies are already prohibited from accepting deposits, loans etc. from public. it is only funds of members, Directors, Relatives etc. which a Private Limited Company infuse in the business.
In my opinion, it is totally meaningless, rubbish & senseless provision which only meant to stop the small entrepreneurs to contribute to the economy of country.
To the misfortune, none of our professional community has raised upon this issue strongly with the Government to safeguard interest of small entrepreneurs and ultimately economy of the Country. Government, Ministers and Law makers ,as always, never wish to think about the country. It only make laws only to satisfaction of their own ego and our Professional Council Members just fulfilling their personal interests.
CA R A Tiwari
9654810809
What is the actual situation under this Section 74? If there is a loan taken prior to 31-03-2014, then what are the things to be taken care. Is there any forms to be filled with ROC?
Sir, what if a person is both a member & a director & the amount is received after 1st April 2014 ?
Dear author
I wish to reproduce and draw your attention to explanation 1 and explanation 2 to Rule 19 of The companies (Acceptance of Deposits)Rules, 2014 :
Explanation 1 to rule 19
section 73 and 74 applies to eligible companies(ie. public companies referred to section 76(1) also. However in respect of deposits accepted by those eligible companies under the relevant provisions of the companies act 1956 and rules there under—– and has been repaying deposits and interest thereon in accordance with such provisions, the provisions of clause (b) of section subsection (1) of section 74 of the 2013 act shall be deemed to have been complied with if the company complies with requirements under the act and these rules and continues to repay such deposits and interest due thereon on due dates for the remaining period of such deposit in accordance with the terms and conditions and period of such earlier deposits and in compliance with the requirements under the act and these rules.
My view: In above explanation (in the context of eligible companies) , law clearly says that the deposits accepted as per the provisions of 1956 act where as in section 74 the section merely says deposits accepted before the commencement of this act. If the intention of law, in section 74, is to mean deposits accepted as per the provisions of 1956 act , it could have more expressively stated the same as stated in explanation 1 in the context of Eligible companies.
Hence the term “‘deposits” used in section 74, means loans accepted(whether deposit or not in 1956 act) during the era of 1956 act, but which are covered under the definition of deposits within the meaning of 2013 act.
Explanation 2:
Provided further that the fresh deposits by every eligible company shall have to be in accordance with the provisions of Chapter V of the act and these rules.
Explanation 2 to rule 19 makes it clear that eligible companies has to comply with chapter chapter V (sec 73 to sec 76) Only in respect of fresh deposits accepted under the 2013 act . The same clarity is lacking for non eligible companies ie private companies.
In view of the above , I am of the opinion that the view of the learned author that section 74 is not applicable to loans taken by pvt companies from its members before commencement of 2013 act is highly dangerous in the absence of necessary clarification from ministry of corporate affairs
Sir,
The Rule which you are referring i.e. Rule 2(b) (ix) is not found in the Gazette Notification.
Please download the rule – gazette notification – from MCA website. In the Rule which is notified – Rule 2(b) (viii) – it only speaks about money’s received from Director. There is no mention about “relatives of directors” or “members”.
Good interpretation which needs merit.