Dear NCLT : Till Now We Believed Circulars Do Not Override Law?

 

While disposing off a Petition under Section 74(2) of the Companies Act, 2013 (the 2013 Act) of Darshan Jewel Tools Private Limited, Mumbai Bench of National Company Law Tribunal (NCLT) has ruled on 17th February, 2017 that in the light of a general circular issued by the Ministry of Corporate Affairs, the petition has become redundant, effectively reversing the settled legal position on the point whether circulars can override the provisions of law?

Darshan Jewels had sought extension of time in repayment of deposits accepted from the directors and shareholders for a period of 3 years until 31st March, 2018.While the petition of the company was pending, Ministry of Corporate Affairs issued a general circular on 30th March, 2015 that the deposits accepted by private companies prior to 1st April, 2014 from the members, directors or their relatives shall not be treated as deposits under the 2013 Act and the relevant rules provided appropriate disclosure is made in the financial statement by the company. On this basis, it sought withdrawal of the Petition.

Without examining the legal validity of the general circular issued by Ministry of Corporate Affairs, NCLT dismissed the Petition. The operative part of the order is reproduced here –

“In the light of the above discussion and the present legal position, the Company Petition, now under consideration, has become redundant. The General Circular (supra) issued by Ministry of Corporate Affairs dated 30th March, 2015 has clarified that the amounts received by a Private Limited Company from their members, Directors and relatives prior to 1* April, 20L4 shall not be treated as deposits under the Companies Ad, 2013. In the financial statements and in the Petition, the Company has duly recorded the figures of such amount along with relevant details. As a consequence of the said General Circular, this Petition has now become redundant. The same is, therefore, dismissed due to non-applicability of the relevant provisions of Companies Act, 2013. No order as to cost.”

Dear NCLT, the legal position on general circulars is otherwise and not what has been ruled in the order. The circulars lack statutory recognition. Not only the Principal Bench of erstwhile Company Law Board has reiterated the position that general circulars lack statutory recognition, Bombay High Court, relying on the judgment of Supreme Court in State Bank of Travancore v. CIT [1986 AIR 757]  held that ”such an order, instruction or direction cannot override the provisions of the Act; that would be destructive of all the known principles of law as the same would really amount to giving power to a delegated authority to even amend the provisions of law enacted by the parliament.” [Banque Nationale De Paris v. CIT [(1999) 237 ITR 518 Bom].

The legal position on the validity of the circulars vis-a-vis statutory provisions stands settled. NCLT, not only ignored to examine the legal position but accepted the general circular issued by Ministry of Corporate Affairs as the ‘new legal position’. The question that arises is – whether NCLT was not bound to examine the legal validity of the general circular, which stated a position in complete contrast to the statutory provisions? The cursory manner in which the ruling has been given makes a strong case against ‘tribunalisation’ in the country. Judicial examination of the provisions is lacking.

Unfortunately, this position is likely to continue as the circular favours the companies and the MCA, having issued the circular, is not going to challenge this ruling.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

# All You Need To Know About DPT-4

DPT-4 filing has become an enigma. With the extended last date approaching fast, the confusion around Form DPT-4 have sprang up again. I would say, few represent genuine concern, but majority of them are discernible upon serious reading of the law. All these concerns have been floating around since Sections 73 & 74 of the Companies Act, 2013 were notified. To rest all doubts, I am presenting here the interpretation.

First off, Ministry of Corporate Affairs (MCA) extended the date of filing DPT-4 till 31st August, 2014. It is a different matter that it was a case of Law Making Through Circulars (Read my Blog #Wake-up MCA – Act Amended Through Removal of Difficulties Power Under Section 470 at http://ashishmakhija.com/?p=71). No challenge to this power of MCA was presented, as it was a ‘please-all’ circular.

Now, let me address the concerns attached with DPT-4. The concerns are: –

  1. Whether private companies, who are likely to be exempt from the net of Section 74, need to file DPT-4 by 31st August, 2014?
  2. Whether the companies liable to file DPT-4 should state deposits as per Companies Act, 1956 or deposits as per Companies Act, 2013 in DPT-4?

Exemption to Private Companies

This is an easy one to answer. Yes, the MCA has proposed to exempt private companies from the applicability of section 74 and a draft notification was hosted on the MCA portal for public comments.

Four notifications relating to exemption to Section 8 companies, private companies, government companies and nidhi companies were laid in Rajya Sabha on 14th July, 2014 to fulfill requirement of Section 462 of the Companies Act, 2013. It is not clear whether these notifications were also laid in Lok Sabha. As per law, the MCA is liable to lay it before both Houses of Parliament, while it is in session, for a total period of 30 days which may be comprised in one session or in two or more successive sessions. If both Houses agree in disapproving the notification, then the notification shall not be issued or if they agree in making any modification, then the notification shall be issued with modification as agreed upon by both the Houses.

MCA can issue the notification provided all the formalities as stated above are completed. Till date, MCA has not issued the notification exempting any class of companies from the applicability of Section 74. Therefore, until such a notification sees the light of day, the compliance of Section 74 has to be made by all the companies.

Hope does not fade until 31st August, 2014 and the risk-taking companies can wait till the last day and if no such notification is issued, can file DPT-4 before the clock strikes 12 on the night of 31.08.2014.

Which definition of deposit to be applied for the purposes of Section 74?

This question assumes significance, as there is a marked difference between the definition of deposit as per CA 1956 and CA 2013. On careful analysis, it is logical to apply the definition of deposit as per CA 2013 and accordingly DPT-4 should be prepared showing all outstanding deposits. The reasons of this conclusion are enumerated below:

  1. The earlier definition of deposit as contained in Explanation to Section 58A of CA 1956 is no longer in force with notification of Sections 73, 74 and 76 of the CA 2013. Hence, it cannot be applied in the context of Section 74. It is nobody’s case that provisions of CA 1956 can still be enforced. It is a matter of different discussion altogether in view of the fact that section 465 is not yet notified and this Section deals with repeal of CA 1956 with some savings.
  1. A loan, which was not deposit, being exempt or otherwise, might have become deposit under CA 2013. Section 74 talks about ‘deposit’ and it does not talk about ‘deposit accepted under the CA 1956’. Here ‘deposit’ would mean deposit as per CA 2013, irrespective of the fact whether it was taken before the commencement of CA 2013.
  1. The auditor of such a company, while auditing for financial year 31.03.2015, will definitely consider the definition of deposit as per CA 2013 and all loans will be recategorised as deposits as per new Act.
  1. Let us consider the argument from other side. Whether any deposit of money, which was treated as deposit earlier, will it continued to be treated as deposit though it may be now exempt under Deposit Rules, 2014? Take an example of clause (v) of exempt deposits – “any amount received against the issue of commercial paper or any other instruments…”. It is now exempt under CA 2013 but was not exempt earlier. Since it is no longer a deposit, there is no need to show such items in DPT-4.
  1. The character of money received undergoes a change on 1.4.2014 from a ‘deposit’ to exempt deposit or vice versa due to change in law and DPT-4 requires status of deposit on the commencement of the Act.

MCA was expected to step in and clarify this aspect. They could have clarified otherwise. Unfortunately, this has not happened and hence DPT-4 be filed as per the above interpretation and particularly because it requires auditor’s certificate and the interpretation, which is stricter, must be deployed.

Last Date is not 31.08.2014 for all companies

It is generally presumed that last date for filing DPT-4 is 31.08.2014 in all cases. This is not so. DPT-4 is to be filed within 3 months from the commencement of the Act or from the date on which such payments are due. Due date is equally relevant and if the due date falls after 31.08.2014, then DPT-4 may be filed by 30.11.2014.

Ashish Makhija: ashish@ashishmakhija.com

 Disclaimer: The views expressed here are views based on my personal interpretation and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

 

# Is Payment of Filing Fee or Tax Payment by Professional on behalf of the Company Deposit under Companies Act, 2013?

Whether filing fee or tax deposit by a Professional on behalf of a Company will be treated as a Loan or Deposit under Companies Act, 2013

 Any professional be it a Chartered Accountant or a Company Secretary renders various services to a company including filing of documents or filing of tax returns. Many a times, even some portion of tax is  deposited by the professional on behalf of the company. In some cases, the professionals also deposit filing fee through their credit cards under online filing regime. In turn, these professionals claim reimbursement from the companies with or without raising bills for professional services. In other words, sometimes filing of forms is done gratis and no bill is raised. The question that arises is what is the nature of such tax payments or filing fee from company’s standpoint?

 The tax deposited by a professional or filing fee paid by him on behalf of the company is incidental to service rendered by the professional. It is immaterial whether for such a service a bill is raised or not as service does not loses its character, even if not billed. The tax deposited or filing fee paid by a professional is a mere claim of reimbursement by him. It does not fall under the definition of deposit or loan. The professional, in the books of account of the company, will be shown as trade creditor until paid. It is a transaction in usual course of business and not a loan or deposit.

Let us also examine this aspect from standpoint of whether it falls in one of the exempt categories of Deposit Rules, 2014. On this note, it can be stated that the need to look at exempt categories arises if and only if it falls under the definition of deposit as defined in the Rules.. In terms of Rules,Deposit includes any receipt of money by way of deposit or loan or in any other form, by a Company“.

The payment of fee or deposit of tax by a professional on behalf of the company is neither a deposit or loan. Hence it does not fall under the term deposit under the Rules. The words ‘in any other form’ will have to be interpreted by using the principles of ejusdem generis. By applying this principle, the amount spent on behalf of the company is neither a deposit nor loan. It is a mere case of reimbursement on account of services rendered. We need to make a distinction on account of nature of transaction. The nature of transaction here is incidental to service rendered and hence the professional can claim the amount as reimbursement.

Let us take another case where a company has to deposit heavy amount of tax and is short of funds, it may take financial assistance from outside to support its tax payment. The nature of assistance here is in the nature of deposit/loan as the intent is also to take financial assistance. It may fall under exempt deposit if the assistance is taken from bank or from other companies or other exempt categories. It is not a case of service rendered. The person who has financed it will be treated as lender and not creditor. A distinctive factor between this transaction and previous one is the element of service. The lender per se is not rendering service but providing financial assistance. The professional, on the other hand, is providing service and not lending money.

 It can, therefore, be concluded that professional depositing tax or filing fee on behalf of the company will not be in the nature of deposit or loan.

Ashish Makhija: ashish@ashishmakhija.com

 Disclaimer: The views expressed here are views based on my personal interpretation and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

 

 

#Wake up MCA #2: Law Making Through Circulars – A New Trend

Is MCA circular extending time for DPT-4 filing beyond vires?

Section 74 lays down the time limit within which the company having deposits on the commencement of CA 2013 has to file a statement in DPT – 4. MCA, on the basis of reference received from various quarters, extended time for filing by 2 months i.e. up to 31.08.2014. The extension of time has been granted by way of a general circular no. 27/2014.

We are learning new ways of governance and legislation through circulars. Ministry of Corporate Affairs is changing the laws through circulars. The time limit for filing DPT-4 is specified in the Act and the Executive machinery (read MCA) has no power to amend, alter, reduce or enhance the time limit. This a classic example of stepping on the domain of Legislature.

The circular is per se bad in law. On practical side, since it is a beneficial circular, unless challenged, it will be deemed as good. Challenge or no challenge, MCA should refrain from issuing circulars for which it has no power.

Another aspect which has been overlooked is that Section 74(1)(a) allows time limits under two different situations. It mandates filing of statement within a period of three months from such commencement or from the date on which such payments are due.

This means the time limit of 3 months from commencement of  CA 2013 is not sacrosanct. It could be 3 months from the due date. To explain, if the due date is 30th April, then DPT-4 is to be filed on or before 31st July. The MCA’s circular categorically states that time for filing DPT-4 is expiring on 30th June, 2014. It has failed to take into account the alternative limit.

MCA, by issuing such circulars, is compounding confusion. Law making through circulars is a new trend. This trend needs to be halted as MCA should realise that buck stops at them.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

#Way Out – Deposits from Members

Deposit Rules 2014 bar deposit or loan from a member, which was hitherto permitted under the Companies Act, 1956. Leaving aside contentious issues of Section 74 for repayment of deposits, the question that bothers the companies is as to how to accept loan from members. If they are not directors, it will be treated as a deposit.

Going around, here is the typology:

  • Member creates a Fixed Deposit in a Bank
  • Bank grants loan to the Company on the pledge of the Fixed Deposit

Company gets loan from Bank, which is outside the definition of Deposits being exempted specifically. The grant of security by the member to the Bank for loan taken by the Company cannot be treated as deposit by any stretch of imagination.

The only time this can become deposit is when the company fails to repay it as per the term and the bank encashes the Fixed Deposit. In this situation, the member will step into the shoes of the Bank and will become lender to the Company. At this stage, he may become a depositor. This situation can be clearly avoided.

You may wish to read the detailed opinion. Here it is:

  1. I.    QUERY

1.1.Whether the security given by a member (who is not a director) of a Company to a Bank, for securing the loan given by the Bank to the Company, will be considered as ‘deposit’ to the Company by the member in terms of the provisions of the Companies Act, 2013?

II. REPLY TO THE QUERY

2.1.          In order to reply to the aforesaid query, it is imperative to understand the relevant provisions in relation to the term ‘deposit’, under the Companies Act, 2013 (“New Act”) and the Companies Act, 1956 (“Old Act”).

2.2.The Explanation to the Section 58A of the Old Act is reproduced as follows:

Section 58A:

Explanation. – For the purposes of this section, “deposit” means any deposit of money with, and includes any amount borrowed by, a company but shall not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.”

2.3.         Further, it is to be noted that the ‘categories of amount’ excluded from the definition of deposit as mentioned in the Explanation to the Section 58A of the Old Act, were prescribed in the Companies (Acceptance of Deposits) Rules, 1975. Relevant provisions of the Companies (Acceptance of Deposits) Rules, 1975 are reproduced as under:

“Section 2: Definitions.

….

(b) “deposit” means any deposit of money with, and includes any amount borrowed by, a company, but does not include

 (ii) any amount received as a loan from any banking company or from the State Bank of India or any of its subsidiary banks or from a banking institution notified by the Central Government under section 51 of the Banking Regulation Act, 1949 (10 of 1949), or a corresponding new bank as defined in clause (d) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or from a co-operative bank as defined in clause (b-ii) of section 2 of the Reserve Bank of India Act, 1934 (2 of 1934) ;

 …

 (ix) any amount received by a private company from a person who, at the time of the receipt of the amount, was a director, relative of director or member:

Provided that the director or member, as the case may be, from whom 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; 

Explanation.-For the removal of doubts, it is hereby declared that any deposit received or renewed by a company before the commencement of the Companies (Acceptance of Deposits) Amendment Rules, 1978, shall continue to be governed by the rules applicable at the time of such deposit or renewal as the case may be.

…”

(emphasis supplied)

2.4.         Therefore, it is apparent from the conjoint reading of the Explanation to the Section 58A of the Old Act and the relevant provisions of the Companies (Acceptance of Deposits) Rules, 1975 as reproduced above, that any amount received by a private company from its members shall not be considered as deposits and hence, the company was not required to make the compliances required thereto under the Old Act.

2.5.            However, under the New Act, the term ‘deposit’ is defined under Section 2 (31) as    under:

“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;

2.6.         Further, it is to be noted that the ‘categories of amount’ excluded from the definition of deposit as mentioned in Section 2 (31) of the New Act, were prescribed in the Companies (Acceptance of Deposits) Rules, 2014. Relevant provisions of the Companies (Acceptance of Deposits) Rules, 2014 are reproduced as under:

“Section 2: Definitions.

….

(c) “deposit”includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include

 (iii) any amount received as a loan or facility from any banking company or from the State Bank of India or any of its subsidiary banks or from a banking institution notified by the Central Government under section 51 of the Banking Regulation Act, 1949 (10 of 1949), or a corresponding new bank as defined in clause (d) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or in clause (b) of section 2 of Banking Companies  (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980) or from a co-operative bank as defined in clause (b-ii) of section 2 of the Reserve Bank of India Act, 1934 (2 of 1934) ;

 …

 (viii) any amount received from a person who, at the time of the receipt of the amount, was a director of the Company:

Provided that the director from whom 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 loans or deposits from others; 

…”

(emphasis supplied)

2.7.         It is thus, apparent from the combined reading of the provisions of both the Acts as reproduced hereinabove that now, under the New Act, any amount received by the Company from its member is no longer  not under the exempted category and shall be treated as deposit within the meaning of the term ‘deposit’ under the New Act.

2.8.         In the facts and circumstances of the case, the Company has received a loan from a Bank and has not received any amount from its member. It is only that the member has given a security to the Bank in order to secure the amount so lent to the Company by the Bank.

2.9.         It is imperative to deal with the essential limbs of the definition of deposits under the Companies (Acceptance of Deposits) Rules, 2014 which defines the term deposits 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 …………..”.Plain reading of the said phrase indicates that the definition of deposits under the Rules has three limbs and includes any receipt of money by way of:

a)    Deposit

b)    Loan

c)    In any other form

Now, the Security provided by the member in the present case cannot be construed as giving of  deposit or loan to the Company. However, it is important to interpret the  phrase “in any other form”appearing in the definition.

2.10.      The phrase ‘in any other form’ has been used to express the ‘form of receipt of money’. The law maker has inserted the said phrase to capture any other form of receipt viz. security deposit, advances etc. Thus the phrase has been inserted to include all forms of receipt of money regardless of the term used for its depiction in the financial statements. The fundamental requirement of receipt of money should be present in the transaction, for it to be termed as deposit. In any case, providing security is neither a deposit nor a loan.  Thus, giving of security by a member towards the loan availed by the Company can in no manner be construed as receipt of money and consequently as a deposit.

2.11.      In the conspectus of the aforesaid discussion, the Security provided by the member towards the loan taken by the Company from the Bank doesn’t fall within the definition of ‘deposit’ under the New Act. Further, the security so given by the member of the Company to the Bank would not cause the said loan to be considered as the amount given by the member to the Company, indirectly, in the nature of a ‘deposit’ as the definition does not cover the cases of indirect loans. It is pertinent to add that the situation will be different if the Bank realises money from the security of the member upon failure of the company to pay back the loan. In such a case, the member will step into the shoes of the Bank and then it may be possible to deem that the member has given a deposit/loan to the company. In other words, in the eventuality of realisation of security that the member may become as a lender to the company brining such a transaction under the ambit of deposit.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer : This opinion is based on relevant facts for the opinion and is based on my personal interpretation of the provisions of the Companies Act, 2013. I undertake no responsibility for any non-compliance if reliance is placed on the aforesaid opinion.