Hi Nilesh,
Right you are! A private company CAN borrow money from general public—that is from lenders other than its directors, shareholders and their relatives. Clause (d) of Section 3(1)(iii) defining a private company reads thus:[(d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives:]The word "Deposit" hasn't been defined in the Companies Act. Section 2A of the Act says that words and expressions not defined therein would derive their meaning from the Depositories Act 1966. We look up the Depositories Act but don't find "deposit" defined there either. Then we go to Section 58A, which contains similar prohibitions relating to acceptance of deposits. The Explanation at the end of Section 58A defines "deposit" to include borrowings as well. But it begins with the restrictive words "For the purposes of this Section". So that definition it seems can't be transported to Section 3(1)(iii)(d) to ascertain the meaning of Deposit used in that section. Explanation below Section 370 says "for the purposes of this section, "loan" includes any deposit of money". Here again it's difficult to see how this interchangeability of meaning assigned to Loan and Deposit in Section 370 could be extrapolated to Section 3(1)(iii)(d). Had the Explanation not been prefaced with the words "for the purposes of this section" as in Section 58A, we might have thought the legislature doesn't distinguish between Loan and Deposit and they essentially mean one and the same thing wherever used in the Companies Act. Under Section 227(1A)(d) one of the six matters on which the auditor is supposed to comment whilst framing his Audit Report in the case of a company is:[[d) whether loans and advances made by the company have been shown as deposits]This clearly indicates the lawmakers do not think Deposit and Loan are two sides of the same coin. So, in the absence of any explicit definition of "deposit" in terms of its acceptance by a private company, it seems we'd be better off giving this word its natural meaning. A thing to be noted in clause (d) is the use of the words "invitation or acceptance". A loan is never invited or accepted; a company short of funds would approach a bank or other moneylender to grant it a loan. In case of a Deposit, it'd be the other way round—the depositor would approach the company in pursuance of its invitation to place money with it and earn interest. Besides a deposit is unsecured; a loan is almost always secured. Let's also see how the Black's Law Dictionary defines Deposit and Loan:"Deposit means the act of giving money or other property to another who promises to preserve it or to use it and return it in kind; especially the act of placing money in a bank for safety and convenience'"Loan means an act of lending a grant of something for temporary use; a thing lent for the borrower's temporary use; especially, a sum of money lent at interest".The fact that the Black's dictionary hasn't used Deposit and Loan synonymously and has assigned separate definitions to the two terms clearly means the two terms are different and can't be used synonymously. There are scores of case laws where the courts have differentiated between Deposit and Loan. In Gurcharan Das v. Ram Rakha Mal AIR 1937 Lahore 81, the court noted that one of the differences between the two terms was that whereas in case of a deposit it was the duty of the depositor to approach the depositee on the due date of maturity of deposit; in the case of a loan, it was incumbent upon the debtor or the borrower to seek out the creditor or the lender on the due date and settle the loan. The Madhya Pradesh High Court in Sharda Talkies Firm v. Smt. Madhulata Vyas AIR 1996 MP 68 had this to say:[There is a subtle distinction between a deposit and a loan. In the case of a loan, the amount is given by the creditor to the debtor at the request of and for the requirements and dues of the debtor under certain terms and conditions. In the case of a deposit, the depositee receives money at the instance of the depositor. In the case of a deposit, the requirement of the depositee is neither relevant nor material. The depositor has to go to the depositee for depositing the amount or the depositee may go and collect the amount. But in case of a loan, the debtor has to request the creditor to advance certain amount for meeting his requirement for using the amount.]Sometimes it may not be so easy to tell if money standing to someone's credit is a Deposit or a Loan. The Supreme Court laid down the following test in Ram Janki Devi v. Jaggilal Kamalapat AIR 1971 SC 2551:[The case of deposit is something more than a mere loan of money. It will depend on the facts of each case whether the transaction is clothed with the character of a deposit of money. The surrounding circumstances, the relationship and character of the transaction and the manner in which parties treated the transaction will throw light on the true form of the transaction. The documents by themselves are not conclusive evidence to establish whether a transaction is on account of Deposit or Loan]I think the final argument that would clinch the issue is what is known as the Heydon's Rule or the Mischief Rule. What was the position before the provision was introduced? What was the mischief that the law sought to set right? Before clause (d) was introduced on 13th December 2000, the law was that a private company could accept public deposits subject to the restrictions placed by Section 58A. But notwithstanding Section 58A, we had fly-by-night- operator companies accept deposits from gullible people and then vanish into thin air leaving the depositors high and dry. So this was the Mischief. The remedy the law brought was altogether prohibiting the acceptance of deposits by private companies. So clearly it was the interests of the small, unorganized depositors that the law sought to safeguard. A loan is granted after the lender has satisfied himself about the creditworthiness of the company and has also obtained a collateral to fall back upon in case of default. So parties giving out loans to private companies never had their interests in jeopardy, it would appear. Based on the above discussion, in my opinion, a private company can raise loans from members of general public, even if they aren't its members, directors or other relatives.Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, ndpatel2 wrote:>> Dear Friends,> > I think Pvt Co can accept loan from public.> There is thin line difference between loan and deposits. So its for > the company to establish that it has accepted loan and not deposit.> > Pls discuss and enlighten,> Thanks,> CS. Nilesh Patel> +919909900278> > > --- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, sdathale > wrote:> >> > in continuation to my earlier reply i have to state that the > articles of private limited company contains 4 clauses viz:> > > > 1) restriction on number of members> > 2) prohibition for any invitation from public to subscribe any > shares> > 3) the right to transfer the shares > > and fourth one : > > 4)Prohibits any invitation or acceptance of deposits from persons > other that its members, directors or their relatives> > > > as such private limited can not borrow from public> > > > s.d.athale> > Mumbai> >
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