One of the provisions of Companies Act, 2013 (Act 2013/Act) which has almost got sleepless nights to all as we are approaching 31st March is the provisions of section 74. With the introduction of section 74 which was notified on April 01, 2014, any deposit accepted by a Company had to be repaid in terms of section 74 (1). But are all the companies in a position to do it? What if the companies cannot repay? Below we discuss the shortcomings faced by companies for complying with section 74.
Section 2 (31) of the Act, 2013 defines “deposit” to include-
“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.”
Rule 2 (1) of the Companies (Acceptance of Deposit) Rules, 2014 prescribes the exclusions as to what will not constitute as deposit.
One of the important point at this juncture is that what about the amounts taken by company which were not considered as deposit under the Companies Act, 1956. Will the provisions of section 74 be applicable to them as well?
In view of absence of any explicit provision in the law, the view of the author would have been affirmative. The rationale being that the meaning of deposit will have to be taken as that under the Companies Act, 2013. Section 74 reads- “Where in respect of any deposit accepted by a company before the commencement of this Act….” The meaning of deposit would have to be surely taken as that under Act 2013. Accordingly, the amounts which were within the exempted meaning of deposit under Act 1956 but falling within the meaning of deposit under Act 2013 read with allied Rules will be taken to be “deposit”. Having said this, we need to know compliances that are to be done in this regard.
MCA vide the above circular (MCA circular) has provided the clarification that any money taken by a private company from its shareholders or relatives of directors which were not deposits under section 58A of the Act 1956 read with its allied rules, will not be treated as deposit under the Act 2013 read with its allied rules. Therefore, the compliances as stated below will not be applicable to such deposits subject to the condition that such companies should make adequate disclosures in the financial statement prepared after April 01, 2014 by way of notes.
However, any money taken under the Act 1956 but renewed on or after April 01, 2014 shall surely comply with the compliance provisions under Act 2013 as also clarified by the MCA circular.
Needless to say that any fresh amount taken post March 31, 2014 will be treated as deposit. Also, it is amply clear that the exemption is only with respect to amounts taken before April 01, 2014. On or after April 01, 2014, amounts taken from shareholders or relatives of directors are not exempted deposits, hence, compliance will be required.
Section 74 of the Act, 2013 provides that the in case of deposits accepted before the commencement of the Act, 2013, where the deposit or part thereof or interest thereon has remained unpaid on such commencement or where the deposit falls due after April 1, 2014, Company shall:
Therefore, pursuant to section 74 (1) read with Rule 20 of the Companies (Acceptance of Deposits) Rules, every company which has accepted deposits before the commencement of Act, 2013, to file DPT 4 with the Registrar of Companies within 3 months of the commencement of the Act, 2013 i.e. April 1, 2014 or from the date the deposits are falling due for payment. Such statement contains details of all deposits accepted by the company and sums remaining unpaid on such deposits and the interest payable thereon along with the arrangements made for repayment.
Hence, the date for filing of DPT 4 was July 31, 2014, which was further extended upto August 31, 2014 dated June 30, 2014, without incurring any additional costs u/s 403 in order to enable the companies to file the statements by way of General Circular no. 27/2014.
However, many companies are yet to observe the said compliance. Non-filing of such a statement is an offence and will be punishable in accordance with Section 450 of the Act, 2013. Therefore, it’s time to act now! In case companies have not yet filed, they should adhere to the same by paying additional fees as applicable.
Having done the filing compliance, it’s now time for the companies to either repay the deposits by March 31, 2015 or one year from the date on which the deposits were taken, whichever is earlier. In event of inability to repay make an application to National Company Law Tribunal (NCLT) for seeking extension of time for such repayments u/s 74 (2). The Ministry of Corporate Affairs (MCA) by way of Companies (Removal of Difficulties) Fourth Order, 2014 dated June 6, 2014 delegated powers under section 74(2) to CLB.
Such extension however may not be an easy affair to get. The CLB will purely act on the merits of the case. The Company shall have to give proper justification of utilization of deposit and the circumstances under which it is unable to pay. Further, the Company will have to give proper justification through facts and figures as to how does it expect to repay its deposits in light of the cash flow expectations.
All this while there was no provision as such for compulsory repayment within a specified time frame under the Companies Act, 1956, which only provided relief by way of section 58A. The main problem also seems to have arisen for private companies as pursuant to section 2 (68) read with Rule 2 (1) of the Companies (Acceptance of Deposits) Rules, 2014 any unsecured loan taken from any person other than director would qualify to be a deposit. The same was excluded from the purview of deposits under the Act 1956 read with its allied rules. All this while the private companies amongst others was enjoying the benefits of such money taken from either its members or relatives of directors, which cannot be the case henceforth. The introduction of section 74 has been a big setback for these companies as they may not be in a position to repay at all, hence, the ultimate resort is to make the CLB application. The money lying in the balance sheet for years and years had to be repaid all of a sudden by introduction of section 74 and thus the Companies are left nowhere and wondering the source of repayments or alternative modes to escape the penal provisions of section 74. Companies may even think of making application to CLB, however, considering that 31st March is already approaching, it would be very late as the companies would become liable for default u/s 74 (3) if any application is made after March 31, 2015.
However, because of the various scams in case of Shardha and Sahara, CLB may be very susceptive and may not be very liberal while considering such applications, thus, we suggest not to avail this route and instead resort to immediate repayments or other alternatives. Further, any application to CLB may agitate the depositors who may not be ready to provide their consent to such time extension. This will only worsen the matter more. The Mumbai bench of CLB in the matter of Zenith Birla (India) Ltd. wherein the depositors had filed a case against the Company under section 58 (9) of the Act 1956, directed the Company to repay its depositors within 30 days alongwith interest due inspite of the Company making an application u/s 74 (2). According to the Bench the Company had only repaid 23 depositors out of 522 and that the justification by the Company did not seem tenable.
Companies who have filed DPT 4 will have to be very careful about their repayments. Non-compliance or violation of section 74 will attract a penalty of minimum Rs. 1 crore! This amount may extend to ten crore rupees and every officer of the company who is in default shall be punishable with imprisonment which may extend to seven years or with fine which shall not be less than twenty-five lakh rupees but which may extend to two crore rupees, or with both.
If a company is unable to repay within the time limit, then the only resort it has is to make an extension of application before CLB. But what if your company is still unsure of repayments and has also missed the bus for making application before the CLB. Law of Limitation is also applicable to CLB and hence, CLB can also condone the delay for such late filing by exercising its inherent power under Regulation 44 of the Company law Board Regulations, 1991. However, the probability of condoning the deay cannot be taken for granted, hence, in case CLB struck down the same, company will be liable to the penal provision.
Well too much risk is involved and hence companies can’t afford to just sit back. They need to pull up their socks and act wise now.
[The Author is Senior Associate- Corporate Law Division with Vinod Kothari & Co. and can be contacted at email@example.com)
(Article was First Published on 29.03.2015 and republished with amendments considering General Circular 05/2015 dated March 30, 2015 on 30.03.2015)