Deposits and Registration of Charges
Weightage: Chapters 5 and 6 of ICAI's Paper 2 syllabus, together roughly 10 marks. Two short, rule-dense chapters where nearly every mark turns on a threshold or a time limit.
Where these chapters sit in the company's life
A company has been incorporated and has raised share capital. It now needs to borrow, and it does so in two ways that the Act treats separately.
It may take deposits — money from members or from the public that is not share capital. Because depositors are unsecured and often unsophisticated, the Act surrounds deposits with conditions.
It may borrow against security, creating a charge over its assets. Because a later lender needs to know what has already been pledged, the Act requires charges to be registered on a public file.
Both chapters answer the same underlying question — how are people who lend to a company protected — by two different mechanisms: conditions on the borrowing itself, and publicity of the security.
What is a deposit
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.
The definition is deliberately wide and then narrowed by exclusions, so the practical work is always in the exclusions.
Amounts not treated as deposits
The prescribed exclusions run to a long list, and the ones examined are these.
Amounts received from the Central Government, a State Government, or any amount whose repayment is guaranteed by them, and amounts received from local authorities or statutory authorities.
Amounts received from foreign governments, foreign or international banks, multilateral financial institutions, foreign export credit agencies, foreign bodies corporate and foreign citizens, subject to the Foreign Exchange Management Act, 1999.
Amounts received as a loan or facility from any banking company, or from the State Bank of India or its subsidiary banks, or from a banking institution notified by the Central Government, or from a co-operative bank.
Amounts received as a loan or financial assistance from public financial institutions, regional financial institutions, insurance companies or scheduled banks.
Amounts received against issue of commercial paper.
Amounts received by a company from any other company — an inter-corporate deposit is not a deposit for these purposes.
Amounts received towards subscription to securities, including share application money or advance towards allotment, pending allotment. But this exclusion has a condition that is examined: if the securities are not allotted within sixty days from receipt and the money is not refunded within fifteen days thereafter, it is treated as a deposit from the expiry of fifteen days.
Amounts received from a director of the company, or from a relative of a director in the case of a private company, provided the person furnishes a written declaration that the amount is not being given out of funds acquired by borrowing or accepting loans or deposits from others, and the company discloses the details in the Board's report.
Amounts raised by the issue of secured bonds or debentures, or by unsecured listed non-convertible debentures issued and listed in accordance with SEBI regulations.
Amounts received from an employee not exceeding his annual salary, under a contract of employment, in the nature of non-interest bearing security deposit.
Amounts received in the course of, or for the purposes of, the business of the company as an advance for the supply of goods or provision of services, provided the advance is appropriated against supply within three hundred and sixty-five days; as an advance in connection with consideration for an immovable property under an agreement; as security deposit for the performance of a contract; as advance under long-term projects for supply of capital goods.
Where any such advance becomes refundable because the company does not have the necessary permission or approval to deal in the goods or services, the amount is deemed to be a deposit after fifteen days from the date it became due for refund.
Amounts brought in by promoters by way of unsecured loan in pursuance of a stipulation of a financial institution or bank, provided the loan is brought in pursuance of the stipulation and subsists only until the loans of the financial institution or bank are repaid.
Acceptance of deposits from members — section 73
A company may accept deposits from its members by passing a resolution in general meeting and subject to conditions:
- issue of a circular to members showing the financial position of the company, the credit rating obtained, the total number of depositors and the amount due towards deposits in respect of any previous deposits;
- filing a copy of the circular with the Registrar within thirty days before the date of issue;
- depositing not less than twenty per cent of the amount of deposits maturing during the following financial year in a deposit repayment reserve account with a scheduled bank, on or before the thirtieth day of April each year;
- certifying that the company has not committed any default in the repayment of deposits accepted before or after the commencement of the Act, or in payment of interest;
- providing security for the deposits, and where security is provided, creating a charge on the company's assets of value not less than the amount of deposits secured. Where no security is provided, the deposits are termed unsecured deposits and must be so quoted in every circular, advertisement or document.
A private company may accept deposits from its members without complying with some of these conditions where it satisfies prescribed criteria, and the exemption route is available to specified private companies.
Acceptance of deposits from the public — section 76
Only an eligible company may accept deposits from persons other than its members. An eligible company is a public company having:
- a net worth of not less than one hundred crore rupees, or
- a turnover of not less than five hundred crore rupees,
and which has obtained the prior consent of the company in general meeting by means of a special resolution and filed the resolution with the Registrar before making any invitation.
An eligible company accepting deposits from the public must additionally obtain a credit rating from a recognised credit rating agency, obtained every year during the tenure of the deposits, and file a copy with the Registrar along with the return of deposits.
Deposit insurance and the creation of a charge on assets where secured deposits are accepted are further requirements under the rules.
Repayment and default
Where a company fails to repay a deposit or part of it, or the interest, the depositor may apply to the Tribunal for an order directing the company to pay the sum due or for any loss or damage incurred.
Where a company accepts deposits and fails to repay, in addition to the payment the company is punishable with a fine and every officer in default is liable. Where it is proved that the deposits were accepted with intent to defraud the depositors or for any fraudulent purpose, every officer responsible is personally liable, without limitation of liability, for all losses or damages incurred by the depositors, and is liable for fraud under section 447.
Charges
What a charge is and why registration matters
A charge means an interest or lien created on the property or assets of a company or any of its undertakings or both as security, and includes a mortgage.
The reason for registration is the reason for the whole chapter. A lender advancing money against a company's factory needs to know whether that factory is already pledged to someone else. The company knows; the lender does not, and cannot find out by inspecting the property, since a charge leaves no physical trace. Registration puts every charge on a public file that anyone may search, so that a prospective lender can discover the position before lending rather than after.
That is why the sanction for non-registration is what it is: an unregistered charge is not void between the company and the chargeholder, but it is not taken into account by the liquidator or any other creditor, which destroys exactly the priority the chargeholder was bargaining for.
Duty to register — section 77
Every company creating a charge on its property or assets or any of its undertakings, whether tangible or otherwise, and situated in or outside India, must register the particulars of the charge with the Registrar within thirty days of its creation.
Charges must be registered whether created within or outside India, and whether the property charged is situated in or outside India.
Extended periods
The Registrar may, on an application by the company, allow registration within a further period:
- for charges created before 2 November 2018: within a further period of three hundred days, and if not registered within that period, within six months from 2 November 2018, on payment of additional fees;
- for charges created on or after 2 November 2018: within a further period of sixty days after the initial thirty days, on payment of advalorem fees; and if not registered within that period, within a further period of sixty days on payment of advalorem fees.
The dates matter and are examined precisely, because the two regimes run different periods.
Who may register
If the company does not register within thirty days, the person in whose favour the charge is created may apply to the Registrar for registration, and the Registrar may allow it within the prescribed period on payment of prescribed fees.
Where registration is effected on the chargeholder's application, the Registrar gives notice to the company, and the company is entitled to recover from the chargeholder the amount of any fees or additional fees paid.
Certificate of registration
The Registrar issues a certificate of registration of charge, which is conclusive evidence that the requirements as to registration have been complied with.
Consequence of non-registration — section 77(3)
No charge created by a company shall be taken into account by the liquidator appointed under the Act or the Insolvency and Bankruptcy Code, 2016, or any other creditor, unless it is duly registered and a certificate of registration has been given.
The provision does not prejudice any contract or obligation for the repayment of the money secured. So the debt survives in full; only the security fails as against the liquidator and other creditors.
The practical consequence is that the chargeholder becomes an unsecured creditor in the winding up, ranking with the general body of creditors instead of taking priority over them, which is usually the difference between substantial recovery and very little.
Modification and satisfaction
The modification of a charge is registered in the same manner and within the same periods as its creation.
Satisfaction. A company must give intimation to the Registrar of the payment or satisfaction in full of any charge registered, within thirty days from the date of such payment or satisfaction. The Registrar may on application allow intimation within a further period of three hundred days on payment of additional fees.
On receiving intimation, the Registrar gives notice to the holder of the charge calling for a show cause within fourteen days why payment or satisfaction should not be recorded, unless the intimation is accompanied by the chargeholder's consent, in which case the memorandum of satisfaction is entered directly.
Register and inspection
Register of charges kept by the Registrar. The Registrar keeps a register of charges in respect of every company, containing particulars of the charges registered. It is open to inspection by any person on payment of fees.
Register of charges kept by the company. Every company keeps at its registered office a register of charges, including all charges and floating charges affecting any property or assets of the company, together with a copy of the instrument creating each charge. The register and the instruments are open to inspection by any member or creditor without fees and by any other person on payment of fees, during business hours and subject to reasonable restrictions imposed by the articles.
Notice of the charge
Where a charge is registered, any person acquiring the property or any share or interest in it is deemed to have notice of the charge from the date of registration.
This is the doctrine of constructive notice applied to charges, and it is what makes the register effective. A purchaser cannot say they did not know of a registered charge, so the burden of searching falls on the person acquiring an interest rather than on the chargeholder to warn them.
Punishment for false statements
Where any person wilfully furnishes false or incorrect information or knowingly suppresses any material information required to be registered under these provisions, he is liable for fraud under section 447.
