Deposits and Registration of Charges — Practice

Question 1

State whether each is a deposit: (a) ₹50 lakh received by Alpha Ltd from Beta Ltd; (b) ₹20 lakh from a director's brother, Alpha being a public company; (c) ₹80 lakh loan from a scheduled bank; (d) ₹10 lakh security deposit from an employee whose annual salary is ₹8 lakh.

Accepted Answer

Item (a) is not a deposit. Any amount received by a company from any other company is expressly excluded, so an inter-corporate deposit falls outside the definition however it is described, the rationale being that a company lending is presumed capable of protecting itself. Item (b) is a deposit. The exclusion for amounts received from a relative of a director applies only in the case of a private company, and Alpha is a public company, so money from a director's brother is caught; had Alpha been private, the exclusion would apply only if the relative furnished a written declaration that the amount was not being given out of funds acquired by borrowing or accepting loans or deposits from others, and the company disclosed the details in the Board's report. Item (c) is not a deposit, amounts received as a loan or facility from any banking company being excluded, along with loans from public financial institutions, insurance companies and scheduled banks. Item (d) is a deposit. The exclusion covers an amount received from an employee under a contract of employment in the nature of a non-interest bearing security deposit, but only up to the employee's annual salary; here 10 lakh exceeds the annual salary of 8 lakh, so the exclusion does not cover the receipt and the whole amount is treated as a deposit.

Question 2

A company receives ₹3 crore as share application money on 1 May. Allotment has not been made by 30 August and no refund has been given. Advise on the character of the money and the date from which it changes.

Accepted Answer

Money received towards subscription to securities, including share application money or advance towards allotment, is excluded from the definition of deposit while it remains pending allotment. The exclusion is conditional rather than permanent, and both limbs of the condition have failed here. Securities must be allotted within sixty days from the date of receipt, which from 1 May expired on 30 June, and nothing was allotted. Where the securities are not so allotted, the money must be refunded within fifteen days from the expiry of the sixty days, that is by 15 July, and no refund has been made. The consequence is that the amount is treated as a deposit from the expiry of those fifteen days, so from 16 July the 3 crore is a deposit and every provision governing deposits applies to it, including the conditions on acceptance which the company will not have satisfied. The practical significance is severe: a company that has taken application money and simply held it finds itself, without any further act on its part, to have accepted deposits in contravention of the Act, exposed to penalty and to the obligation to repay. The provision exists to stop share application money being used as an indefinite source of unsecured funding outside the deposit regime.

Question 3

A company receives ₹2 crore as an advance for supply of machinery. Fourteen months later nothing has been supplied. Separately, it holds ₹40 lakh advanced for a service it is not licensed to provide, and the advance became refundable on 1 March. Advise on both.

Accepted Answer

An amount 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 is excluded from the definition of deposit, but the exclusion is conditional on the advance being appropriated against supply of the goods or provision of the services within a period of three hundred and sixty-five days from the date of acceptance. Fourteen months is beyond that period, so the 2 crore ceases to be excluded and is treated as a deposit, unless the amount has become subject to any proceeding before any court or authority, in which case the period does not run. The second amount is governed by a distinct rule addressing a different mischief. Where an advance is received for the supply of goods or provision of services and the company does not have the necessary permission or approval, wherever required, to deal in the goods or services, and the advance accordingly becomes refundable, the amount is deemed to be a deposit after fifteen days from the date on which it became due for refund. Here it became due on 1 March, so it is deemed a deposit from 16 March. The two rules together prevent a company from characterising as trade advances what are in substance unsecured borrowings, whether by never performing or by taking money for something it was never permitted to supply.

Question 4

A private company proposes to accept ₹5 crore of deposits from its members. Set out the conditions under section 73, and state what it must do about the deposit repayment reserve and about security.

Accepted Answer

A company may accept deposits from its members on passing a resolution in general meeting and subject to prescribed conditions. It must issue a circular to its 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 accepted by the company. It must file a copy of that circular along with the prescribed statement with the Registrar within thirty days before the date of issue. It must certify that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of the Act, or in payment of interest on such deposits, and where a default has occurred, that it has made good the default and a period of five years has elapsed since. On the deposit repayment reserve, the company must deposit, on or before the thirtieth day of April each year, a sum of not less than twenty per cent of the amount of its deposits maturing during the following financial year, in a separate bank account called the deposit repayment reserve account with a scheduled bank, and that sum may not be used for any purpose other than repayment of deposits. On security, the company must provide security if any for the due repayment of the amount of deposits and interest, and where security is provided must create a charge on the property or assets of the company having a value not less than the amount of the deposits secured; where no security is provided the deposits are termed unsecured deposits and must be so quoted in every circular, form, advertisement or document. Specified private companies may accept deposits from members with relief from some of these conditions where the prescribed criteria are met.

Question 5

Determine whether each may accept deposits from the public: (a) a public company with net worth ₹120 crore and turnover ₹200 crore; (b) a public company with net worth ₹40 crore and turnover ₹600 crore; (c) a private company with net worth ₹500 crore. State the additional requirements for those that qualify.

Accepted Answer

Only an eligible company may accept deposits from persons other than its members, and 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. The two tests are alternatives, not cumulative, which is the point most often misread. Company (a) qualifies on net worth of 120 crore, notwithstanding that its turnover is below 500 crore. Company (b) qualifies on turnover of 600 crore, notwithstanding that its net worth is below 100 crore. Company (c) does not qualify at all and can never do so on these figures, because the eligibility gateway requires a public company, and a private company may accept deposits from its members only, however large it is. For those that qualify, the additional requirements are substantial. The company must obtain the prior consent of the company in general meeting by means of a special resolution and file that resolution with the Registrar before making any invitation to the public. It must 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. It must comply with the deposit insurance requirement, and where secured deposits are accepted must create a charge on its assets within the prescribed period.

Question 6

A company creates a charge on 4 January 2026 and applies for registration on 20 February 2026. Advise. Set out the full extension regime for charges created on or after 2 November 2018 and contrast it with the earlier regime.

Accepted Answer

The charge was created on 4 January 2026, so the thirty-day period under section 77 expired on 3 February 2026, and the application on 20 February is outside it. Registration is not lost, but it now requires the Registrar to allow it under the extension provisions. For a charge created on or after 2 November 2018, the Registrar may on an application allow registration within a further period of sixty days after the initial thirty days, on payment of such advalorem fees as may be prescribed; and if it is not registered within that further period, the Registrar may allow registration within a further period of sixty days after that, again on payment of advalorem fees. The application here falls within the first sixty-day extension, seventeen days into it, so registration may be allowed on payment of advalorem fees, and the company should apply with the prescribed declaration. The earlier regime, applicable to charges created before 2 November 2018, ran differently and is examined on the contrast: registration could be allowed within a further period of three hundred days from creation, and if not registered within that period, within six months from 2 November 2018 on payment of additional fees. The two regimes therefore differ both in length and in the fee basis, additional fees under the old and advalorem fees under the new, and a candidate must first fix the date of creation before choosing between them.

Question 7

A bank lends ₹10 crore against a charge on a company's factory. The charge is never registered. The company goes into liquidation. Advise the bank on its position, and explain why the Act adopts this particular sanction rather than avoiding the debt.

Accepted Answer

The bank's debt survives in full but its security is worthless in the liquidation. Section 77 provides that 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 by any other creditor, unless it is duly registered and a certificate of registration has been given by the Registrar. The section is equally clear that this does not prejudice any contract or obligation for the repayment of the money secured. So the bank remains entitled to the 10 crore as a debt, but it ranks in the winding up as an unsecured creditor alongside the general body of creditors instead of taking priority over them against the factory, which in practice is usually the difference between substantial recovery and very little. The sanction is drawn this way because of what registration is for. The register exists so that a prospective lender can discover, before advancing money, what has already been pledged, since a charge leaves no physical trace on the property and only the company knows of it. A chargeholder who fails to register has withheld from the world precisely the information the system depends on, and the proportionate response is to deny that chargeholder the priority the register was designed to protect, not to relieve the company of a debt it genuinely owes. Note also that had the company failed to register, the bank as the person in whose favour the charge was created could itself have applied, recovering the fees from the company.

Question 8

A company neglects to register a charge created in favour of a lender. State what the lender may do, the procedure that follows, and the lender's right to recover costs.

Accepted Answer

Where a company fails to register a charge within the period of thirty days, the person in whose favour the charge is created may apply to the Registrar for registration of the charge along with the instrument creating it, in the prescribed form and on payment of the prescribed fees. The provision exists because the consequences of non-registration fall on the chargeholder rather than on the company, and it would be unjust to leave the chargeholder's priority dependent on the diligence of the very party whose assets are charged. On such an application the Registrar gives notice to the company about the application, allowing it a period within which to show cause, and unless the company itself registers the charge or shows sufficient cause why the charge should not be registered, the Registrar may allow registration on payment of the prescribed fees. Where registration is effected on the application of the person in whose favour the charge is created, that person is entitled to recover from the company the amount of any fees or additional fees paid to the Registrar for the purpose of registration. The practical advice to any secured lender follows directly: do not rely on the borrower to register, diarise the thirty-day date at the time the security is executed, and if nothing has happened by then, apply yourself and bill the company for the cost.

Question 9

A company repays a secured loan in full on 10 June. State its obligation, the time limits, and the procedure the Registrar follows on receiving intimation.

Accepted Answer

A company must give intimation to the Registrar of the payment or satisfaction in full of any charge registered under the Act, within a period of thirty days from the date of such payment or satisfaction, so from 10 June the intimation is due by 9 July. Where the company fails to do so within that period, the Registrar may on an application by the company allow the intimation to be made within a further period of three hundred days from the date of the payment or satisfaction, on payment of such additional fees as may be prescribed. On receiving the intimation, the Registrar's procedure depends on whether the chargeholder has consented. Where the intimation is accompanied by a letter of the holder of the charge stating that the charge has been paid or satisfied in full, the Registrar orders that a memorandum of satisfaction be entered in the register of charges without further inquiry. Where it is not so accompanied, the Registrar causes a notice to be sent to the holder of the charge calling upon him to show cause within a time not exceeding fourteen days as to why payment or satisfaction in full should not be recorded as intimated to the Registrar. If no cause is shown, the Registrar orders that a memorandum of satisfaction be entered in the register and informs the company; if cause is shown, the Registrar records a note to that effect and informs the company accordingly. Recording satisfaction matters commercially, because until it is recorded the register continues to show the assets as encumbered.

Question 10

State who may inspect the register of charges kept by the Registrar and the register kept by the company, on what terms, and what a registered charge deems a purchaser to know.

Accepted Answer

The Registrar keeps a register of charges in respect of every company, containing particulars of the charges registered, and that register is open to inspection by any person on payment of the prescribed fees. There is no restriction on who may search it, which is essential to its purpose, since a prospective lender or purchaser who has no relationship with the company yet must be able to discover what is charged before deciding to deal. Every company additionally keeps at its registered office a register of charges in the prescribed form and manner, including all charges and floating charges affecting any property or assets of the company or any of its undertakings, together with a copy of the instrument creating each charge. That register and the instruments are open to inspection during business hours, subject to such reasonable restrictions as the company may by its articles impose, by any member or creditor of the company without fees, and by any other person on payment of the prescribed fees. On the effect of registration, where a charge is registered any person acquiring the property, assets or undertaking of the company, or any share or interest in it, is deemed to have notice of the charge from the date of such registration. This is the doctrine of constructive notice applied to charges, and it is what makes the register effective: the burden of searching falls on the person acquiring an interest rather than on the chargeholder to warn them.

Question 11

A company accepts deposits and fails to repay them on maturity. Evidence emerges that the directors knew at the time of acceptance that the company could not repay. Advise on the depositors' remedies and the officers' liability.

Accepted Answer

Two layers of consequence arise. On the ordinary footing, where a company fails to repay a deposit or part of it or any interest due, the depositor concerned may apply to the Tribunal for an order directing the company to pay the sum due or for any loss or damage incurred by him as a result of the non-payment, and the Tribunal may make such order as it thinks fit. In addition to the payment, the company is punishable with a fine within the prescribed range and every officer of the company who is in default is liable to punishment. The second layer engages on these facts because of what the directors knew. Where it is proved that the deposits were accepted with intent to defraud the depositors or for any fraudulent purpose, every officer of the company who was responsible for the acceptance is personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by the depositors, and is in addition liable for fraud under section 447. The words without any limitation of liability are the operative ones: the corporate veil is set aside by statute, and the officers' personal assets are exposed to the whole of the depositors' loss rather than to any capped penalty. Any suit, proceedings or other action may be taken by any person, group of persons or any association of persons who have incurred loss as a result of the failure.

Question 12

A bank sanctioning a term loan stipulates that the promoters must bring in ₹5 crore of unsecured loan. Is that amount a deposit? State the conditions on which the exclusion depends.

Accepted Answer

It is not a deposit, provided the exclusion's conditions are satisfied. Amounts brought in by the promoters themselves or by their relatives by way of unsecured loan are excluded from the definition of deposit where three conditions hold. The loan must be brought in pursuance of the stipulation imposed by the lending financial institution or bank on the promoters to contribute such finance, so a voluntary promoter loan does not qualify and the stipulation must be traceable to the lender's sanction terms. The loan must be provided by the promoters themselves or by their relatives, or by both. And the exemption is available only until the loans of the financial institution or bank are repaid, and not thereafter, so once the bank's loan is discharged the promoter money ceases to enjoy the exclusion and must either be repaid or brought within the deposit regime. The exclusion exists because such a loan is not commercial lending to the company at all but a form of promoter contribution required by the bank as evidence of the promoters' own commitment to the project, and treating it as a deposit would make it impossible for promoters to comply with an ordinary sanction condition without triggering the whole deposit apparatus.

Question 13

A director lends ₹30 lakh to her company, having herself borrowed ₹20 lakh of that amount from a bank. State whether the exclusion applies, and the conditions attached to it.

Accepted Answer

The exclusion does not apply on these facts, at least as to the borrowed portion, and prudently the company should treat the receipt as a deposit unless the position is corrected. Amounts received from a person who at the time of receipt was a director of the company, or from a relative of a director in the case of a private company, are excluded from the definition of deposit, but only if the person from whom the money is received furnishes to the company at the time of giving the money a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others. Here 20 lakh of the 30 lakh has been acquired by the director borrowing from a bank, so a truthful declaration in the required terms cannot be given in respect of the whole amount, and the exclusion fails to that extent. The condition exists to prevent a director being used as a conduit: without it a company barred from taking public deposits could have a director borrow from the public and on-lend, defeating the entire regime. Two further requirements attach to the exclusion. The company must disclose the details of the money so accepted in the Board's report. And the relative limb is available only to private companies, so in a public company only the director's own money qualifies.

Question 14

Define a charge under the Companies Act, 2013 and explain why registration is required at all, given that the parties themselves know of it. Must a charge over property outside India be registered?

Accepted Answer

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 parties to a charge naturally know of it, and that is precisely the problem the registration requirement addresses: everyone else does not. A lender considering advancing money against a company's factory cannot discover by inspecting the factory whether it is already pledged, because a charge leaves no physical trace and no entry on any title the lender can readily search. The company knows, and has every incentive not to volunteer it. Registration solves this by putting every charge on a public file open to inspection by any person on payment of fees, so that a prospective lender or purchaser can discover the position before committing rather than after. It is reinforced by deemed notice, since any person acquiring the property or any share or interest in it is deemed to have notice of a registered charge from the date of registration. On the territorial question, the duty to register applies to 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; and the charge must be registered whether it is created within or outside India. So a charge created abroad over property abroad by an Indian company is registrable in India, because the register describes the encumbrances on that company's assets wherever they are.

Question 15

Alpha Private Ltd holds: ₹1 crore from a director with a proper declaration; ₹60 lakh from the director's wife with a proper declaration; ₹2 crore of share application money received 90 days ago, unallotted and unrefunded; ₹50 lakh of commercial paper proceeds. Identify which amounts are deposits and state the total.

Accepted Answer

Take each in turn. The 1 crore from a director is not a deposit, amounts received from a person who at the time of receipt was a director being excluded where that person furnishes the prescribed written declaration that the money is not out of funds acquired by borrowing or accepting loans or deposits from others; the declaration is stated to be proper, and the company must disclose the details in the Board's report. The 60 lakh from the director's wife is also not a deposit, because Alpha is a private company and the exclusion extends to a relative of a director in the case of a private company; had Alpha been a public company this amount would have been a deposit, which is the distinction the question is testing. The 2 crore of share application money is a deposit. The exclusion for money received towards subscription to securities applies only while allotment is pending within the permitted period, and here ninety days have elapsed: allotment did not occur within sixty days and no refund was made within the further fifteen days, so the amount has been treated as a deposit from the expiry of those fifteen days, that is from the seventy-sixth day. The 50 lakh of commercial paper proceeds is not a deposit, amounts received against issue of commercial paper or any other instruments issued in accordance with the Reserve Bank of India guidelines being excluded. The total treated as deposits is therefore 2 crore.

Practice — Deposits and Registration of Charges

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