Loans & Deposits in a private limited company

The Companies Act 2013 has heralded a new era in governance and compliance. A critical portion of many of the private limited companies was raising funds from friends and relatives as loans or deposits, which was allowed under the earlier Companies Act, 1956 but disallowed under the new act.

Companies and their promoters had been given one year till 31st March 2015 to repay these loans and deposits, while of course was difficult given that the funds were already invested in the business, and at many times a significant multiple to the equity capital of the company.

The fine, on the company, for not repaying these was Rs1 crore to Rs10 crore, irrespective of the amount of loan or deposit. Further, the directors were personally liable for fines from Rs25 lakhs to Rs2 crores and imprisonment of upto 7 years!

The only two options were to either repay the deposits / loans or apply to the Company Law Board (CLB) for an extension, which was anyways unlikely to grant it.

To the relief of all these companies and promoters, the Ministry of Corporate Affairs (MCA) has clarified that if any amount was not considered a deposit under the Companies Act, 1956 the same status would continue, i.e. it will not be considered as a deposit under the new Act. Do that for this to apply the amount should have been received prior to 1st April 2014 (i.e. on or before 31st March 2014).

Additional conditions for disclosure have been laid down in respect of such loans / deposits. The company will have to disclose the notes in its financial statement the figure of such amounts and the accounting head in which such amounts have been shown.

While this news came very late in the year, it is nevertheless a welcome clarification.

Link to the MCA Circluar: General Cicular 5/2015