3.27 Query
Interpretation of Companies (Acceptance of Deposits) Rules, 1974—1. A private limited company accepts money on current account from a partnership firm under the same management. As and when the company needs funds, it asks the firm to make deposit in its current account and similarly when the firm needs funds, it draws out of its current accounts with the company, which throughout remains in credit. This type of operations are carried out almost on a day-to-day basis and the company pays interest on the credit balance of the current account of the firm.
Kindly suggest: -
1. Whether these transactions will be termed as deposits u/s 58A of the Companies Act, 1956?
2. If yes, then what will be the position in the law and what steps the company and firm should take to clear the legal flaw?
Opinion September 17, 1977
1. The term “deposit” has been defined in the Explanation to Section 58A as under:--
“For the purpose 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”. Rule 2(b) of the Companies (Acceptance of Deposits) Rules 1975 lays down that certain categories shall not be deemed to be a “deposit” for the purpose of Explanation to Section 58A. From these definitions it is clear that a current account as in the present case would come within the definition of the term “deposit” for the purpose of Section 58A. 2. It is clear that the deposit of money in the current account is violative of the provisions of Section 58A read with Rule 2(b) of the Companies (Acceptance of Deposits) rules, 1975. The only exception provided is that contained in the proviso to Rule 3 which is as under:--
(a) that the deposit does not exceed 10% of the aggregate of the paid up share capital and free reserves of the company, and
(b) that it is repayable not earlier than three months from the date of such deposit or renewal.
However, the above relaxation is applicable for deposits against unsecured debentures or deposit from a shareholder or deposit guaranteed by a Director. The company will, therefore, require to take immediate steps to rectify the violation and for that purpose the company should apply to the Central Government seeking condonation of the default in accepting deposit in contravention of the Rule in accordance with the procedure laid down in Section 58A(4).
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