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Conteravention of Sec 58A of Companies Act

Priyanka Agarwal (Articled Assistant) (28 Points)

16 September 2009

Can a private co. accepts deposits or unsecured loans from persons other than directors, members and their relatives?????

what is the difference b/w unsecured loans and deposits ??

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3 Replies

Ankur Garg (Company Secretary and Compliance Officer) (114773 Points)
Replied 17 September 2009

Hi,

No. A private co. can not accept deposits or unsecured loans from persons other than directors, members and their relatives. The same is prohibited by section 3(1)(iii)(d).

Distinction between Loan and Deposit

1. In the case of a deposit, the delivery of money is usually at the instance of the giver and it is for the benefit of the person who deposits the money. Deposits could be for safe keeping or as a security for the performance of an obligation undertaken by the depositor. In the case of a loan, however, it is the borrower at whose instance and for whose needs the money is advanced.

2. The borrowing is primarily for the benefit of the borrower although the person who tends the money may also stand to gain thereby by earning interest on the amount lent ordinarily, though not always, in the case of a deposit, it is the depositor who is the prime mover while in the case of a loan, it is the borrower who is the prime mover.

3. The other and more important distinction is in relation to the obligation to return the amount so received. In the case of a deposit which is payable on demand, the deposit would become payable when a demand is made. In the case of a loan, however, the obligation to repay the amount arises immediately on receipt of the loan.

Regards

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Ajay Mishra (Company Secretary) (74337 Points)
Replied 17 September 2009

1. Deposits in case of Private Limited Company

Private Company is prohibited to accept any invitation or acceptance of unsecured loans/deposits from the persons other than its members, directors or their relatives. Therefore a private company can accept deposits through private arrangement from its members, directors and their relatives.

Rule 2(b)(ix) exempt any unsecured loan money received from directors and shareholders from the definition of deposits. According to Rule 2(b)(ix), any amount received from members of a private company limited by guarantee are not exempt.

For any invitation and acceptance of unsecured loan/deposits from relatives of directors and member, the company will have to file a statement in lieu of advertisement in accordance with the provisions of Rule 4A of the Companies (Acceptance of Deposits) Rules, 1975. The company will also have to file annual return of deposits in accordance with Rule 10.

2. Consequences of acceptance of deposit by Private Limited Company

If a private company acceptance an amount, which may be classified as deposit under section 58A read with Companies (Acceptance of Deposits) Rules, 1975, it will cease its status of a private company and has to make all the compliances for such deposits as per the requirement of said rules, as well as to comply with all the provisions as may be applicable on public limited company such as section 58A, 58AA, 58AAA, 81, 256, 257, 198, 268, 269, Schedule XIII, 274(i)(g), 295, 297, 300, 301, 372A, etc.

Regards