#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.