Clarification on Company Cash, Deposit into T P account

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Talatam Subash (Querist)
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15 October 2020 Dear All,

A Public Ltd company having an exposure of 100+ Crs Bank loan exposure, has about 35 crs unsecured loans from Directors. As per the sanction terms, Banks has restricted repayment of Unsecured Loans during the currency of the Term Loan.

The company has opened a current account (Joint) in the names of two directors and one employee with a bank which is outside the consortium (without the knowledge of Bankers) and started depositing daily cash collections into that account and made repayment of Unsecured Loans to a tune of 5+Crs. Incidentally it was founds that the company is also not paying EMI since March 2020 and thereafter as the moratorium is extended.

Is the above act legally valid? Do banks have any recourse to the above stated facts? Can this act be construed as Diversion or Embezzlement of funds?

CA Rehanuma Khan

CA Rehanuma Khan (Expert)
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16 October 2020 Point wise reply according to me:
1. The company has opened account in the names of directors and employee. This seems to be a private account. Check board resolution or other documents on the basis of which the account was opened. Deposit of company’s money in that account is clearly diversion of funds. Check MOA once as to how can such a bank account be opened? Such an act has given undue benefit to the directors. Funds of the company have been siphoned off.
2. With such repayment the terms of loan have been violated. Bank can take legal action on such violation.
3. EMI non-payment – Company has incurred loss due to such act. Directors should make good the loss.
4. Check other officials involved in this act (cash collecting team, accounts team, authorized official..)

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