2.6       Query

Whether the expression ‘for cash’ includes irrevocable revolving letter of credit

for the purpose of section 297 (2) (a) of the Companies Act

1.A company purchased goods from another private company in which some of its directors were interested as directors. The goods were purchased at prevailing market prices. The company has established an irrevocable revolving letter of credit in favour of the other private company, in terms of which the bank has got irrevocable authority to release the payment to other private company after a period of 60 days.

2.The querist has drawn the attention of the Committee to one of its earlier opinions, according to which, a ‘hundi’ which is payable on demand can be interpreted to payment of cash (Compendium of Opinions, Vol. I, second edn., 1982, p. 215). The company argues that the payment by establishing an irrevocable revolving letter of credit can also be interpreted as payment of cash, because of certainty of payment, though it is after a prescribed period of time.

3.The querist has sought the opinion of the Expert Advisory Committee as to whether establishment of irrevocable revolving letter or credit tantamounts to payment ‘for cash’ for the purpose of section 297 (2) (a), so as to make the provisions of section 297 (1) (a) inapplicable.

                                                                       Opinion                              October 13, 1987

1.The Committee is of the view that in order to establish an equivalence to cash, it is not the certainty of payment, as argued by the querist, but the equivalent liquidity, which is the decisive factor.

2.The Committee is therefore of the opinion that an irrevocable revolving letter of credit in terms of which the bank is required to release the payment after a prescribed period does not tantamount to “for cash” for the purpose of section 297 (2) (a) of the Companies Act, 1956. Consequently, provisions of section 297 (1) (a) would be applicable.

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