Introspecting the Retrospective: A Critical Analysis of the Prospective Application of the Term ‘Deposit’ under the Companies Act, 2013 – By K.M. Thomas

Introspecting the Retrospective: A Critical Analysis of the Prospective Application of the Term ‘Deposit’ under the Companies Act, 2013

An Article Authored by:

K.M. Thomas, 3rd Year, NUALS

Introduction

In the recent judgment titled Nitin Rekhan v. Union of India & Ors. (2022) ibclaw.in 209 HC, the High court of Delhi has held that there cannot be a retrospective application of section 2(31) of the Companies Act, 2013, which deals with the definition of deposits. The court, in this case, has held that penal interest cannot be imposed upon the respondent company since the application money given by the Petitioner would not come under the ambit of Rule 2(b)(vii) of 1975 Rules read with General Circular of 2015.The judgment was delivered by a single Judge Bench of Justice Chandra Dhari Singh. The case came to the Delhi High Court as a writ petition under Article 226 read along with section 482 of the Code of Criminal Procedure.

In this piece, the author seeks to analyse the judgment by discussing the key issues dealt with in this case and then critically analysing the judgment.

Factual Matrix

The petitioner in this case paid a sum of Rs. 40, 00,000 /- to the directors of the Respondent Company for issuing shares in the company on 27th December 2010.  However, the respondents failed to allot shares within the stipulated time, and neither did they return the money to the petitioners. The petitioners alleged that the respondent company is liable to pay the interest accrued for the amount paid for the allotment of shares i.e. Rs. 40,00,000 as per Rule 17 of the Companies (Acceptance of Deposits) Rules, 2014 imposes a penal interest at the rate of 18 % per annum on the deposits which are accepted by a private company from the public. The petitioner initially approached the Registrar of Companies after filing an online complaint on 11th  December 2018. However, the petitioner alleges that despite the show cause notice having been issued, the respondent did not take any action, the status of the same is currently reflected as “under examination” on the website of the Ministry of Corporate Affairs. The petitioner, in this case, prayed for passing appropriate orders and to pass appropriate directions to the respondent company to do duty under section 73 and 76 A of the Companies Act, 2013 and to take appropriate action on the complaint filed.

Judgment

The court in this case had mainly two questions to adjudicate the first one being, whether the Companies Act 2013 and the Companies (Acceptance of deposits) Rules, 2014 are applicable, and the second one being if the amount in question can be treated as deposits?.

The court first observed that the Companies Act of 2013 was notified in a staggered manner and Section 2(31) of the Companies Act, 2013 which defines “deposit”, came into force from 1st April 2014. Further, the court observed that the Companies (Acceptance of Deposits) Rules, 2014 came into force on 1st April 2014.

The court further placed reliance on General Circular No. 05/2015, dated 30th March 2015, issued by the Ministry of Corporate Affairs, observed that as per the circular any amount received by private companies prior to 1st April 2014, shall not be treated as ‘Deposits’ under the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014, provided that the private company shall disclose the same in the notes of the Financial Statement for the financial year commencing on or after April 1st, 2014.

Thus, the court held that section 2(31) of the Companies Act, 2013, cannot be applied retrospectively for the share purchase agreement between the Respondent Company and the Petitioner. Further Section 2(31) of the Companies Act, 2013 which defines “deposit”, came into force on 1st April 2014. Therefore, the court held that penal interest is not applicable.

Critical Analysis

Prima- facie this judgment holds good, as it goes along the lines of the General Circular No. 05/2015, dated on 30th March 2015 released by the Ministry of Corporate Affairs and the relevant statutes mentioned above, in not applying the retrospective effect on the penal interest rate.

It is also pertinent to note that the MCA vide notification dated 31 March 2015, made amendments in Rules 2 of the Companies (Acceptance of Deposits) Rules, 2014, wherein it has been explicitly stated that application money received under the Companies Act, 1956 and before 01/04/2014, for which allotment has not been made until 31/ 03/2015, provided the same has been disclosed in the balance sheet for the financial year which is ending on or before 31/03/2014, the company shall either return such amounts or allot the shares.  Thus, looking at this amendment, it is quite clear that there has been a retrospective application of the Companies (Acceptance of Deposits) Rules, 2014.

However, what needs to be questioned here is the consistency of the general Circular No. 05/2015 dated 30th March 2015, issued by the Ministry of Corporate Affairs with the amendment made on 31st March 2015 to Rule 2 of the Companies (Acceptance of Deposits) Rules, 2014.  In the amendment, there has been a retrospective application of the Companies (Acceptance of Deposits) Rules 2014 to the Companies Act of 1956, however, in the circular dated  30th March 2015, the MCA has explicitly stated that the amount received by private companies prior to 1st April 2014 shall not be treated as deposits under the Companies Act, 2013 and Companies (Acceptance of Deposits) Rules, 2014 subject to the condition that relevant private company shall disclose, in the notes to its financial statement for the financial year commencing on or after 1st April 2014 at the figure of such amounts and the accounting head in which such amounts have been shown in the financial statement. Thus, it can be said that the amendment supports the retrospective application of the Companies (Acceptance of Deposits) Rules, 2014, while the circular does not support the retrospective application.

Thus, this inconsistency or dilemma puts the investors who have paid the application money prior to 01/04/2014, for which allotment has not been made until 31/ 03/2015 in a precarious position since a mere repayment of the application money is made, without any interest or any other increments. Thus, providing companies a leeway of keeping the amount given as share application and appropriating it for their benefit and then returning back to the investors, this legal loophole essentially in common parlance can be said to create a provision for such companies to avail interest-free loans.

Further, the intent of the Companies (Acceptance of Deposits) Rules, 2014, is to provide investors to whom the shares have not been allotted an incentive by giving them interest on the amount for which the shares have not been allotted yet, even for investors who have made investment prior to the enforcement of Companies (Acceptance of Deposits. Thus, the court by solely relying on the circular has essentially invalidated the legislative intent.

Conclusion

In the current case the Petitioner invested in the respondent company with the hopes of getting returns in the form of dividends from the shares subsequently issued. Here in this case the Respondent company by not allotting shares, even after the application money has been credited for several years clearly shows the malafide intention of the respondent company

Further, when looked into the inflation rate  from  27th December 2010 (Date on which share application money was paid) to 9th February 2018 ( the date on which the application money was repaid), it can be  realized that there has been a substantial hike in the inflation rates, thus preventing the Petitioners to effectively allocate the amount invested in the respondent company elsewhere, and thus preventing the Petitioner to earn a better return by allocating the money more effectively and efficiently.

Thus, it can be concluded that in situations where amount credited by the investors in companies prior to 1st April 2014 and allotment of the shares has not been made even after 1st April 2014, such amounts will not be considered as deposits, as long as they are reflected in the financial statement, and thus essentially placing such investors at a precarious position. There should be either new provisions or the above-mentioned circulars, notifications etc. should be re- notified in a such a manner enabling investors (for the investment made prior to April 1st 2014) to receive adequate interest at least post 1st April 2014 or at least direct the companies to return  the investors  their investment along with an opportunity cost.

 

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