ArticlesNCLTRulings

Whether advance payment towards the construction of the project by the individual can be treated as deposit under Companies Act, 2013?

Drafted by CS Ashish Baid

Crux of the matter:

Depositor lent Rs. 18 lakhs to the Company towards its real estate business for booking a Corporate Studio. Advance was paid with the terms mutually agreed upon whereby the Company agreed to pay regular amount of approx. Rs. 18000 for next 50 months or till possession of the property. Bank Guarantee was also executed for one year. Lapse in the whole transition:
– Payment of Rs. 18000 approx. was paid for about 3 years out of 50 months
– Bank Guarantee was not renewed after one year
– Property was not owned by the Company and the approved plans & building layouts are not in the name of the Company.
– The property was owned by the subsidiary company.
– Construction wasn’t commenced even after 4 years from launch of the  project

Legal framework:

Section 73(4) under Companies Act, 2013 and applicable rules if any.

 

Legal Provision(s) in the said matter:

Counsel pled that the investment made by the petitioner falls within the ambit of Companies Act, 2013 under definition 2(31) which read as, “deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India; “Further, reference was provided in line with the Rules framed thereunder, Companies (Acceptance of Deposits) Rules, 2014, under Rule 2(1) (c) (xiii) which read as, “as advance, accounted for in any manner whatsoever, received in connection with consideration for an immovable property under an agreement or arrangement, provided that such advance is adjusted against such property in accordance with the terms of agreement or arrangement;”

Proviso of the above rule: “Provided that if the amount received under items (a), (b) and (d) above becomes refundable (with or without interest) due to the reasons that the company accepting the money does not have necessary permission or approval, wherever required, to deal in the goods or properties or services for which the money is taken, then the amount received shall be deemed to be a deposit under these rules:

Judgement:

NCLT, Delhi bench vide it’s order date December 12, 2017 in the matter of violation of deposit under section 73 of Companies Act, 2013 gave clarity on the advance made towards the construction of the property and whereby there is an arrangement or agreement made between the depositor and the borrower company where it was agreed upon by both the parties for repayment of the advance.

Penalty:

– All accounts / assets are frozen .
– Directed MCA to scrutinise the funds and Inter Corporate deposits.
– Repayment of double the principal amount along with 18% interest .
– ROC to initiate criminal proceeding against the Directors of the Company in the court  of Special Judge, Delhi for accepting public deposit.
– Monthly report to be submitted by Regional Director before the NCLT Bench about the progress of the proceeding

Disclaimer: This article is drafted with the intention to impart the knowledge about the consequence of the Non-compliance of the act. Viewers of this article are requested to seek the expert opinion before referring this article. Author of this article is nowhere liable directly or indirectly for any loss/damage.   

ABOUT THE AUTHOR:

Ashish Baid is a Company Secretary by professional and associated with Merchant Banker, working on SME IPO. Additionally, he is passionate about writing articles on various subject related to Corporate laws. Have written many articles on corporate laws, SEBI related case laws, Labour Law, etc.

 

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