1. The whole-time directors and executives of a public limited company have the facility to obtain cash from the company against cheques drawn by them in favour of the company. The facility has been extended because the place of work is away from the city and it is not possible for the directors and executives to go to their respective banks during the working hours. Normally, cheques received under this facility are deposited in the company’s bank account on the following day. Sometimes, especially during the first week of a month, the company may deposit the cheques for collection after 3/4 days, thus allowing time for the salary cheques issued by the company to the directors and executives to be credited to their respective bank accounts.
2. The querist sought the opinion of the Expert Advisory Committee on whether the cash given to the directors against cheques under the above facility is to be treated as a ‘loan’, at least till such time the cheque is deposited into the bank and is violative of section 295 of the Companies Act, 1956.
Opinion August 13, 1982
The Committee notes that the term ‘loan has not been defined in the Companies Act, 1956. Thus, it has to be interpreted in accordance with its general commercial usage. “According to Black’s Law Dictionary ‘loan’ means a lending, advance with absolute promise to repay, delivery of money by one party and receipt by another on agreement, express or implied, to repay, or a deposit”1. In accordance with this definition the duration of loan, the purpose for which it is given and the payment of interest thereon are irrelevant factors for recognizing a transaction as a loan. Thus, in the opinion of the Committee, since the facility given by the company to its directors, as explained by the querist, meets all the abovementioned ingredients of a loan, it is violative of Section 295 of the Companies Act.
|