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Loan from emplyees by Pvt Ltd company

Veena (Assistant to CEO) (37 Points)

26 November 2010

I have a query

Can a private limited company take deposits / loan from its employees?

If no what is an option to it if the employees want to lend money to company.

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3 Replies

CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 26 November 2010

As such there is no restriction for seeking loan from employees, other than any director of the company.... A. So a company can ask for such loan, but mind it overhere, that amount raised from such loan is to b spent for the specific purpose only, for which such loan is raised...... B. Moreover, if any employee deposits amount with company, then such amount cannot b used bu company for any purpose. Such amount is to b deposited in seperate special account in scheduled bank or SBI or post office savings account..... C. So, if its loan, company must use it mandatorily for specific purpose only. And if its deposit/pf contbn/int on such amount shall b deposited in seperate bank a/c or p.o savings a.c

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V CHANDRA SEKARA RAJU (CA FINAL) (908 Points)
Replied 26 November 2010

ACCEPTANCE OF DEPOSIT U/S 58A OF THE COMPANIES ACT, 1956

Question:1 As per section 3(1)(iii)(d) of the Companies Act, 1956 a Pvt. Limited Company is prohibited from inviting or accepting deposits from persons other then its members, directors or their relatives. In the background of the term deposit not being defines under section 2 or 3(1)(iii) but defines u/s 58A. What the term used in section-3(1)(iii) implies?

Can a Pvt. Company borrow any amount specified under exempted categories in Rule 2(b)(i) to (xi) of deposit rules?

Answer:1 The term deposit is not defined u/s 2 or 3(1)(iii) of the Companies Act, 1956. It is defined in Deposit Rules, 1975. Pvt Company is governed by sec. 58A and rules there under. The same meaning is extended for the purpose of Section 3(1)(iii).

Yes, a Pvt. Co. can borrow any amount specified under exempted categories in Rule 2(b)(i) to (xi) of deposit rules, 1975. Also a Pvt. Co. can borrow inter corporate Deposit.

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Question:2 Subsequent to the amendment in sub clause (xi) of rule 2b w.e.f. September 25, 2002, the exemption available to public companies in respect to the acceptance of deposit from director was withdrawn. In case of a Public Company is already holding deposits from director, what is the legal provision in this regard. Whether the company is required to repay the amount and in what period? In case the company is not in a position to repay, whether the company can file the SLA and continue to hold the Deposit?

Answer:2 In case a public company is already holding public deposits from director, till the time of maturity the company is under no compulsion to repay the deposited amount. But in case no maturity period is specified the company has to refund the deposit amount within a reasonable period say, 6 months or at earliest possible time. If in case the company is not in a position to repay, the company has to file the SLA and continue to hold the deposit.

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Question:3 A Pvt Co. has accepted deposits from Shareholder/Director of the company. In case subsequent to the acceptance the depositor cease to be the shareholder/Director of the Company can Company continue to hold the deposit up to the completion of the tenure of the deposit.

Answer:3 A Pvt. Co. has accepted deposits from Shareholder/Director of the company and after acceptance of deposit, the depositor cease to be the Shareholder/Director of the company. The company can continue to hold the deposit up to the completion of the tenure of the deposit. It is even difficult for the company to repay the deposit since the funds are invested by the company keeping the maturity date in view.

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Question:4 In case of Joint holders, can a private company accept deposit from all the Joint holders or only the Joint holder or only the first name holder.

Answer:4 No unanimous consensus arrived till date. Some of the learned members were of the view that all Joint holders are members so company can accept from all Joint holders. But others disagree. According to them for the purpose of Companies Act, 1956 only first named holder is recognized for the purpose of Dividend, Voting rights etc. so company can accept deposit from only first named holder.

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Question:5 If a Company has financial problem which lead to default in the payment of deposits or violation of any provision of Section-58A. Can a company seek any relief under the provisions of the said section? What are the procedural requirements under Companies (Application for extension of time or exemption under section 58A) Rules?

Answer:5 Under section-58A (8), the Central Government may, if it considers it necessary for avoiding any hardships or for any other just and sufficient reason, by order, issued either prospectively or retrospectively from a date not earlier then the commencement of the Companies (Amendment) Act, 1974, grant extension of time to a company or class of companies to comply with, or exempt any company or class of companies from, all or any of the provisions of this section.

Thus, under section 58A (8) relief can be sought by the company by making an Application to the Central Government.

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Question:6 After accepting deposit the company has incurred losses due to which the company’s reserve and paid-up capital is depleted. As a result the deposit accepted have crossed maximum permissible limit. Is there a violation?

Answer:6 The company’s reserve and paid-up capital is to be considered only at the time of acceptance of Deposits. Moreover, as per DCA Circular No. 3/17/79-cl-X dated 30/06/1979 there is no contravention of provisions where due to losses deposits exceeds limits.

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Question:7 Mr. A has given a deposit of Rs. 15,000/- along with one of his friend as a joint holder. His friend also has given a deposit of Rs. 15,000/- along with Mr. A as a joint holder. That’s how both of them treat themselves as small depositors. Is this view correct?

Answer:7 As per section-58AA which deals with the concepts of small depositors both Mr. A and his friend are treated as small depositor.

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Question:8 A small depositor means a depositor who has invested in a financial year a sum not exceeding Rs. 20,000 in a company and includes his successors, Nominees and legal representatives. Who will be considered as a successor and legal representative since nothing has been specified?

For example Mr. A has given a deposit of Rs. 15,000/- in his own name and deposit of Rs. 15,000/- each in the names of his wife, son, daughter, son-in-law, daughter-in-law and two grand children. Which all deposit are to be aggregated to arrive at his status of small depositor?

Answer:8 Successor and his legal representative is not defined in the Companies Act, 1956. Since Mr. A has given a deposit of Rs. 15,000/- in his own name he is considered as a small depositor as defined in section-58AA. His wife and son will be treated differently. This is only when Mr. A dies who will be his successor and his legal representative is decided.

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Question:9 Section-58AA prohibits the company to accept further deposits from small depositors if the default in payment persists. Does it mean that inspite of the default the company can accept deposits of value of more than Rs. 20,000/-?

Answer:9 Under Section-58A (2) no company shall invite any deposit unless the company is not in default in the payment of any deposit/part thereof and any interest thereupon in accordance with the terms and conditions of such deposits. Since, section prohibits only to invite deposits in cases of defaults. Further Company Law Board (CLB) in such cases may allow company to accept deposits as restriction is only on invitation.

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Question:10 Sub section (7) of Section 58AA states that where a company had accepted deposits from small depositors and subsequent to acceptance of deposits obtains loans for the purpose of working capital from any bank, it shall first utilize the funds so obtained for the repayment of the small deposits before applying any such funds for any other purpose. What does this section imply, whether the company is required to utilize the funds to repay the deposits if they are due for payments or otherwise in case the company has defaulted in repayment of the principal or interest to the small depositors the section will apply?

In such a case whether the bank can take any action against the company for diversion of funds as loan was obtained for the business requirements and not for repayments of deposits.

Answer:10 Under Section 58AA (7), the company is required to utilize the funds to repay the deposits if they are due for payment. Generally unsecured loans, which are short term loans, are part of working capital. The bank and customer have cordial relationship. If bank is convinced he allows returning deposits otherwise the company has to borrow from elsewhere and repay the deposits and then utilize the balance amount as working capital.

Yes, indeed the bank can take action against the company for diversion of funds as loan was obtained for the business requirements and not for repayment of deposits.

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Question:11 Acceptance of Deposits through commercial paper whether fall within the preview of deposits under section 58A of the companies Act, 1956

Answer:11 Acceptance of Deposits through commercial paper are exempted vide Notification No. GSR 1075(E) dated 29/12/1989.

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Forum where aggrieved deposit holder can approach for relief:

The depositor can approach Company Law Board (CLB) in the prescribed Form No- 4 mentioned in Companies Regulation along with prescribed fee s. And CLB depending on the case direct company to repay within the period prescribe by CLB.