3.2       Query

Whether a liability of a firm taken over by a company will be considered

as a ‘deposit’ where the company is a partner of the firm.

1. ABC, a private limited company, engaged in dyes trading business, is a partner in a firm – M/s. XYZ – which manufactures dyes. M/s. XYZ has been incurring losses for the past few years. The share of ABC in these losses amounts to about Rs. 3.5 lakhs. During the year under consideration, M/s. XYZ had received an interest-free advance against an order. M/s. XYZ was able to execute the order partly. It was not in a position to execute the balance order nor was it in a position to repay back the balance of advance received, which was about Rs. 1.5 lakhs. In view of this, the company took over the liability by debiting XYZ in its books and crediting the party’s account. At the time of takeover, ABC Ltd., agreed to pay interest on the liability so taken over.

2. In the context of the above facts, the opinion of the Expert Advisory Committee has been sought as to whether the liability taken over by ABC Ltd. is a deposit as defined in Rule 2 of the Companies (Acceptance of Deposits) Rules, 1975.

 Opinion 1                                                   May 20, 1988

Presuming that it was not a case of amalgamation of partnership with the company, the liability taken over by the company should be considered as a borrowing and thus a deposit. Further, it could not be exempted under clause 2(b)(vi) as the same was not received by the company against its orders for supply of goods.

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  1 The Expert Advisory Committee referred this query for the opinion of the Company Law Committee of the Institute. This opinion is, therefore, the opinion of the latter Committee.