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urgent

naina singh (student) (111 Points)

25 May 2008

Greeting Members,

During the audit of a Private limited company, i noticed that the company has accepted and also given the loan to various person/parties(some are individual or some are companies or some are HUF). some of them are related to the company or some are not. While finalising the Balance Shhet and Audit Report my senior told me to check whether section 58A of the Companies Act applicable to them or not. I have no idea regarding the applicability of section 58A of the companies Act.

Please tell me the Cases where section 58A is applicable. and also whether section58A is applicable in that case or not.

And also guide me regarding the checking of applicability of Section299&301 of the companies ACt.

Its very urgent.

Thanks in advance

Naina

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4 Replies

S.Srinivasaraghavan (Chief Financial Officer and Co) (11318 Points)
Replied 25 May 2008

Section 58A is attracted if the pvt ltd. company borrows money from parties other than the corporates and directors of the borrowing pvt ltd.company or from relatives or of directors of the borrowing pvt ltd. company or from the members of the borrowing pvt ltd. company. Section 58A is not atracted if the borrowing is from the banking companies, governments or approved financial institution.

In the case of loans to directors and shareholders, deemed dividend provisions of IT Act may be attracted.

Section 299 and 301 are applicable if the company enters into contract or arrangements in which directors are directly or indirectly interested

Shreyalmuri (CA Final) (236 Points)
Replied 26 May 2008

Hi Just go with the following - regards to Section 58A.......

58A. Deposits not to be invited without issuing an advertisement
¹[58A. Deposits not to be invited without issuing an advertisement

(1) The Central Government may, in consultation with the Reserve Bank of India, prescribe the limits up to which, the manner in which and the conditions subject to which deposits may be invited or accepted by a company either from the public or from its members.

(2) No company shall invite, or allow any other person to invite or cause to be invited on its behalf, any deposit unless-

(a) such deposit is invited or is caused to be invited in accordance with the rules made under sub-section (1), ²[***]

(b) an advertisement, including therein a statement showing the financial position of the company, has been issued by the company in such form and in such manner as may be prescribed ³[ and]

⁴[(c) the company is not in default in the repayment of any deposit or part thereof and any interest thereupon in accordance with the terms and conditions of such deposit.]

(3)(a) Every deposit accepted by a company at any time before the commencement of the Companies (Amendment) Act, 1974 in accordance with the directions made by the Reserve Bank of India under Chapter IIIB of the Reserve Bank of India Act, 1934, shall, unless renewed in accordance with clause (b), be repaid in accordance with the ⁵[terms and conditions of such deposit].

(b) No deposit referred to in clause (a) shall be renewed by the company after the expiry of the term thereof unless the deposit is such that it could have been accepted if the rules made under sub-section (1) were in force at the time when the deposit was initially accepted by the company.

(c) Where, before the commencement of the Companies (Amendment) Act, 1974, any deposit was received by a company in contravention of any direction made under Chapter IIIB of the Reserve Bank of India Act, 1934, repayment of such deposit shall be made in full on or before the 1st day of April, 1975, and such repayment shall be without prejudice to any action that may be taken under the Reserve Bank of India Act, 1934 for the acceptance of such deposit in contravention of such direction.

⁶[(3A) Every deposit accepted by a company after the commencement of the Companies (Amendment) Act, 1988, shall, unless renewed in accordance with the rules made under sub-section (1), be repaid in accordance with the terms and conditions of such deposit.]

(4) Where any deposit is accepted by a company after the commencement of the Companies (Amendment) Act, 1974, in contravention of the rules made under sub-section (1), repayment of such deposit shall be made by the company within thirty days from the date of acceptance of such deposit or within such further time, not exceeding thirty days, as the Central Government may, on sufficient cause being shown by the company, allow.

(5) Where a company omits or fails to make repayment of a deposit in accordance with the provisions of clause (c) of sub-section (3), or in the case of a deposit referred to in sub-section (4), within the time specified in that sub-section,-

(a) the company shall be punishable with fine which shall not be less than twice the amount in relation to which the repayment of the deposit has not been made, and out of the fine, if realised, an amount equal to the amount in relation to which the repayment of deposit has not been made, shall be paid by the Court, trying the offence, to the person to whom repayment of the deposit was to be made, and on such payment, the liability of the company to make repayment of the deposit shall, to the extent of the amount paid by the Court, stand discharged;

(b) every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to five years and shall also be liable to fine.

(6) Where a company accepts or invites, or allows or causes any other person to accept or invite on its behalf, any deposit in excess of the limits prescribed under sub-section (1) or in contravention of the manner of condition prescribed under that sub-section or in contravention of the provisions of sub-section (2), as the case may be,-

(a) the company shall be punishable,-

(i) where such contravention relates to the acceptance of any deposit, with fine which shall not be less than an amount equal to the amount of the deposit so accepted;

(ii) where such contravention relates to the invitation of any deposit, with fine which may extend to ⁷[ten lakh rupees] but shall not be less than ⁸[fifty thousand rupees];

(b) every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to five years and shall also be liable to fine.

(7)(a) Nothing contained in this section shall apply to -

(i) a banking company, or

(ii) such other company as the Central Government may, after consultation with the Reserve Bank of India, specify in this behalf.

(b) Except the provisions relating to advertisement contained in clause (b) of sub-section (2), nothing in this section shall apply to such classes of financial companies as the Central Government may, after consultation with the Reserve Bank of India, specify in this behalf.

⁹[(8) The Central Government may, if it considers it necessary for avoiding any hardship or for any other just and sufficient reason, by order, issued either prospectively or retrospectively from a date not earlier than 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 either generally or for any specified period subject to such conditions as may be specified in the order:

Provided that no order under this sub-section shall be issued in relation to a class of companies except after consultation with the Reserve Bank of India.]

¹⁰[(9) Where a company has failed to repay any deposit or part thereof in accordance with the terms and conditions of such deposit, the ¹⁰[Tribunal] may, if it is satisfied, either on its own motion or on the application of the depositor, that it is necessary so to do to safeguard the interests of the company, the depositors or in the public interest, direct, by order, the company to make repayment of such deposit or part thereof forthwith or within such time and subject to such conditions as may be specified in the order:

Provided that the ¹¹[Tribunal] may, before making any order under this sub-section, give a reasonable opportunity of being heard to the company and the other persons interested in the matter.

(10) Whoever fails to comply with any order made by the ¹¹[Tribunal], under sub-section (9) shall be punishable with imprisonment which may extend to three years and shall also be liable to a fine of ¹²[not less than rupees five hundred] for every day during which such non-compliance continues.]

¹³[(11) A depositor may, at any time, make a nomination and the provisions of sections 109A and 109B shall, as far as may be, apply to the nomination made under this sub-section.]

Explanation- For the purposes of this section, "deposit" means any deposit of money with, and includes any amount borrowed by, a company but shall not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.

1. Ins. by Act 41 of 1974, sec. 7 (w.e.f. 1-2-1975).

2. The word "and" omitted by Act 5 of 1997, sec. 4 (w.e.f. 1-3-1997).

3. Subs. by Act 5 of 1997, sec. 4, for "prescribed" (w.e.f. 1-3-1997).

4. Ins. by Act 5 of 1997, sec. 4 (w.e.f. 1-3-1997).

5. Subs. by Act 31 of 1988, sec. 9, for "terms of such deposit" (w.e.f. 1-9-1989).

6. Ins. by Act 31 of 1988, sec. 9 (w.e.f. 1-9-1989).

7. Subs. by Act 53 of 2000, sec. 18, for "one lakh rupees" (w.e.f. 13-12-2000).

8. Subs. by Act 53 of 2000, sec. 18, for "five thousand rupees" (w.e.f. 13-12-2000).

9. Ins. by Act 46 of 1977, sec. 3 (w.e.f. 24-12-1997).

10. Ins. by Act 31 of 1988, sec. 9 (w.e.f. 1-9-1989).

11. Subs. by Act 11 of 2003, sec. 9 for "Company Law Board".

12. Subs. by Act 53 of 2000, sec. 18, for "not less than rupees fifty" (w.e.f. 13-12-2000).

13. Ins. by Act 21 of 1999, sec. 3 (w.r.e.f. 31-10-1998).

Dilse,

$hreyalmuri...:-)

naina singh (student) (111 Points)
Replied 26 May 2008

Thanks Sir

RAVI BHUSHAN (COMPANY SECRETARY) (57 Points)
Replied 27 May 2008

Hi Naina

If we carefully look into the provision of section 3(1)(iii) than we find that this section put four restrictions on a Private Limited Company, inter alia provide that a Private Limited Company shall not invite or accept any public deposits from person other than its members, Directors or their relatives.

That is a private limited company can accept deposits from its Members, Directors or their relatives, in audit one should check that whether a private limited Company accepted or invited deposits from the persons other than permitted person.

Now question arises that what is deposits:-

Subjects to 11 exclusions as given in Rule 2(b) of Companies (Acceptance and Invitation) Rules 1975, Deposits any deposits of money with, and includes any types of borrowings by the Company.

Rule 2(c) provides a depositor means any person who has given loan to the company.

That is definition of deposits is very browed.

In the light of above mention rules we can say if loan accepted by the Company is properly shown in the balance sheet as secured or unsecured loan as the case may be and books of accounts properly showing the rate of interest than it will be loan and not deposits.

In this regard I heard a discussion of Dy. ROC of Delhi with Vice Chairman of ICSI-NIRC, he was suggesting that if a private limited company accepting application money and keeping in balance sheet for a unreasonable time without allotting shares in this regard, than it can be treated as deposits, and that will amount to violation of 3(1) (iii).

As far as applicability of section 58A is concerned than it is not applicable to all companies other than none banking financial institution or other company as specified by the Central Government

It may be noted that deposits are always unsecured borrowings

Section 299 is talking about discloser of interest by the director of the company who is interested in transactions or contract; this is applicable to both private as well as public company.

Section 301 is talking about Register of contracts, companies and firms, in which directors are interested,

This registered is required to maintain by both private and public companies.