Pennwalt India Ltd. And Others v. The Registrar Of Companies And Others

Sujata V. Manohar, J.:— The appellants are the original petitioners. The first petitioner company is a company registered under the Companies Act, 1956 and carries on business, inter alia as general engineers and contractors. Petitioners No. 2 and 3 are directors of the first Petitioner company.

2. During the years ending on 31st October 1980, 31st October 1981 and 31st October 1982 the company had deposited with various independent and reputed public Limited Companies certain amounts as fixed deposits for six months, except in the case of one deposit which was for a period of 1 year. All these amounts were repaid on maturity and the interest on these amounts was also received by the company. The amounts so deposited by the company have been shown in the balance-sheets of the company for the relevant periods on the assets side under the general heading “loans and advances”. Under this heading on the assets side of the balance sheet the amounts of the deposits are shown under the sub heading “Deposits with joint Stock Companies.”

3. For the period ending 31st October 1980 the company had so deposited a sum of Rs. 50,00,000/- with various independent companies. For the period ending on the 31st October 1981 the company had so deposited a sum of Rs. 76,00,000/- and for the period ending on the 31st October 1982 the company had so deposited a sum of Rs. 35,00,000/- in various joint stock companies. The particulars of these investments are set out in Exhibit ‘C’ to the petition. The deposits are with companies such as National Organic Chemical Industries Limited, Tata Oil Mills, Mahindra & Mahindra Limited. The Indian Hotels Company Limited and other reputed and independent companies. The amount of deposits in the aggregate exceeds 30 per cent of the subscribed capital of the appellant company and its free reserves.

4. The Company received a show cause notice dated 12-6-1984 from the Office of the Registrar of Companies under sections 370 and 371(1) of the Companies Act, 1956 for exceeding the 30% limit prescribed under section 370(1)(a) of the Companies Act, 1956 without obtaining prior approval of the Central Government. Under this notice the Company and its Directors were called upon to show cause why penal provisions under section 371(1) of the Companies Act, 1956 should not be invoked against them.

5. By its reply dated 6th July 1984 the Company replied to the show cause notice by pointing out that section 370 of the Companies Act has no application because the Company had not advanced any loans as contemplated under section 370 of the Companies Act. It submitted that section 370 does not apply to deposits made by the Company.

6. Thereafter at the instance of respondent No. 3 a criminal complaint has been filed by Respondent No. 1 dated 24-7-1984, in the Court of the Additional Chief Metropolitan Magistrate, Esplanade Court, Bombay praying that process be issued to the petitioners for violating section 370(1)(a) of the Companies Act, 1956. Pursuant thereto summons has been issued on the petitioners and other directors of the 1st petitioner company.

7. The petitioners have filed the present writ petition praying that the impugned complaint and the impugned summons be quashed and set aside and respondents No. 1 to 4 be restrained from proceeding with the said complaint. The petition was dismissed by a learned single Judge of this Court at the stage of admission. The present appeal has been filed from the order of dismissal. By consent of the parties we have gone into the merits of the contentions raised in the petition itself and we propose to dispose of the matter on merits so that there is now no need to send the petition before the trial Court for a decision.

8. The relevant provisions of section 370 of the Companies Act, 1956 are as follows:

“370. (1) No company (hereinafter in this section referred to as “the lending company”) shall—

a) make any loan to, or

b) xxxxxxxx

any body corporate, unless the making of such loan, the giving of such guarantee or the provision of such security has been previously authorised by a special resolution of the lending company.

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Provided further that the aggregate of the loans made to all bodies corporate shall not exceed without the prior approval of the Central Government—

(a) thirty percent of the aggregate of the subscribed capital of the lending company and its free reserves where all such other bodies corporate are not under the same management as the lending company;

9. The relevant provisions of section 371 of the Companies Act, 1956 are as follows:

“371. (1) Every person who is a party to any contravention of section 369 or section 370 excluding sub-section (IC) or (ID), or section 370-A including in particular any to whom the loan is made, or in whose interest the guarantee is given or the security is provided, shall be punishable with fine which may extend to five thousand rupees or with simple imprisonment for a term which may extend to six months.”

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10. Under the second proviso to section 370 of the Companies Act, the aggregate of the loans made by a company to all bodies corporate shall not exceed, without the prior approval of the Central Government, thirty per cent of the aggregate of the subscribed capital of the lending company and its free reserves where all such other bodies corporate are not under the same management as the lending company. The only question which arises in the present case is whether the deposits made by the petitioner (appellant) company are to be considered as loans given by it to the other companies. The petitioner company has not obtained approval of the Central Government. If the deposits in question are covered by Section 370, the Company would be liable to penalties as prescribed under section 371 of the Companies Act. If deposits are not to be construed as loans under section 370, there would be no violation of the provisions of the section.

11. The dividing line between a loan and a deposit is undoubtedly thin. The two however, are not synonymous. For example, under the old Indian Limitation Act, 1908 Article 59 in the First Schedule to the said Act dealt with “money lent under an agreement that it shall be payable on demand”. The period of limitation was three years from the time when the loan was made. Article 60 dealt with “money deposited under an agreement that it shall be payable on demand…..” and the period of limitation was three years from the date when the demand was made. The limitation Act, therefore, made a distinction between money lent and money deposited.

12. Under the Companies Act, 1956 itself there are provisions which would suggest that loans are not considered as exactly equivalent to deposits. For example under section 58-A which deals with deposits, the explanation provides as follows:

“For the purposes of this section “deposit” means any deposit of money with, and includes any amount borrowed by, a company but shall not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India”.

13. This section therefore, contains an express provision which includes in the term “deposit”, monies borrowed by a company also. If a deposit and a loan were synonymous there would be no need for such a provision. Similarly under section 227(1-A)(d) it is provided that auditor shall inter alia inquire “whether loans and advances made by the company have been shown as deposits”. These provisions indicate that it may not be possible to interchange the terms “loan” and “deposit” under Companies Act unless there is an express provision to that effect or the context makes it clear that the terms are interchangeable.

14. It is undoubtedly true that both in the case of a loan and in the case of a deposit there is a relationship of a debtor and a creditor between the party giving money and the party receiving money. But in the case of a deposit the delivery of money is usually at the instance of the giver and it is for the benefit of the person who deposits the money the benefit normally being earning of interest from a party who customarily accepts deposits. Deposits could also be for safe-keeping or as a security for the performance of an obligation undertaken by the depositor. In the case of a loan however, it is the borrower at whose instance and for whose needs the money is advanced. The borrowing is primarily for the benefit of the borrower although the person who lends the money may also stand to gain thereby by earning interest on the amount lent. Ordinarily though not always in case of a deposit it is the depositor who is the prime-mover while in case of a loan it is the borrower who is the prime-mover. The other more important distinction is in relation to the obligation to return the amount so received. In the case of a deposit which is payable on demand the deposit would become payable when a demand is made. In the case of a loan however, the obligation to repay the amount arises immediately on receipt of the loan. It is possible that in case of deposits which are for a fixed period or loans which are for a fixed period the point of repayment may arise in a different manner. But by and large the transaction of a loan and the transaction of making a deposit are not always considered identicalal.

15. In the case of Ram Ratan Gupta v. Director of Enforcement Foreign Exchange Regulation reported in AIR 1966 SC 495 the Supreme Court was required to deal with the provisions of section 4(1) of the Foreign Exchange Regulation Act, 1947 under which there was a prohibition, inter alia, on borrowing or lending any foreign exchange except as specified therein. The appellant Ram Ratan had deposited unspent foreign exchange allotted to him in bank accounts. He received payments from the accounts even after his return to India. He was charged with contravening section 4(1) and section 4(3). The Supreme Court held that he had not contravened section 4(1). (He was held to have contravened section 4(3),). The Supreme Court made a distinction between a loan and a deposit. It said, “it is settled law that the relationship between a banker and a customer qua moneys deposited in the bank is that of a debtor and creditor. Though, ordinarily a deposit of an amount in the current account of a bank creates a debt it does not necessarily involve a contract of loan. The question whether a deposit amounts to a loan depends upon the terms of the contract under which the deposit in made.”

16. In the case of Suleman Haji Ahmed Umer v. Haji Abdulla Haji Rahimutulla reported in 42 Bom. L.R 971 the Privy Council made a distinction between a deposit and a loan for the purpose of the India Limitation Act, 1908. The Privy Council relied upon its own earlier ruling in the case of Nawab Major Sir Mohammad Akbar Khan v. Attar Singh (38 Bom. L.R 739) where it had observed that there was a distinction between a loan and a deposit. It said “it should be remembered that the two terms are not mutually exclusive. A deposit of money is not confined to a bailment of specific currency to be returned in specie. As in the case of a deposit with a banker it does not necessarily involve the creation of a trust, but may involve only the creation of the relation of debtor and creditor, a loan under conditions: The distinction which is perhaps the most obvious is that the deposit not for a fixed term does not seem to impose an immediate obligation on the depositee to seek out the depositor and repay him. He is to keep the money till asked for it. A demand by the depositor would, therefore, seem to be a normal condition of the obligation of the depositee to repay.”

17. Mr. Nilkanth, learned advocate for the respondents placed some emphasis on the sentence “the two terms are not mutually exclusive”. He submitted that a loan includes a deposit. This submission cannot be accepted. The Privy Council was refering to the fact that both these transactions involved bailment of money. It went on to distinguish the two for the purpose of Limitation Act on the basis of the mode of repayment. The Privy Council's observations cannot be read to mean that a loan would include a deposit. The Privy Council observed that certain features are common between the two transactions while certain features are not. In some cases a deposit, for example with a bank, may amount to a loan with conditions. The Privy Council went on to say that the two transactions were distinct. The Supreme Court in the case of Ramratan Gupta (Supra) considered even a bank deposit as distinct from a loan. It is therefore, clear that “loan” and “deposit” are not identical in meaning and cannot always be interchanged. Some loans may be deposits and deposits may be loans. But all are not deposits or vice versa.

18. A single Judge of the Rajasthan High Court however, in the case of Totalal v. The State reported in AIR 1963 Raj. 6 held that for the purposes of section 295 of the Companies Act no distinction could be made between a loan and a deposit because in both cases there is a relationship of debtor and creditor; though such a distinction might be material for the purposes of limitation. In our view however, the fact that both transactions create the relationship of a debtor and a creditor is not enough to equate a loan with a deposit. Nor would it be correct to make a distinction between the two only for the purpose of calculating the period of limitation. The natures of the two are somewhat different and that is the reason why a distinction is made between the two for the purpose of calculating the period of limitation. If the two transactions were identical there would be no need to prescribe different periods of limitation.

19. In the present case the amounts were deposited with well known independent companies. There is nothing to show that these deposits were in fact loans or amounts lent by the petitioner and borrowed by these companies. They must therefore be considered as deposits. There is no provision under section 370 of the Companies Act which prescribes that a loan includes a deposit for the purposes of that section. Section 371 lays down penal consequences for not complying with the provisions of section 370. It was therefore, absolutely necessary that if deposits were also to be included in loans for the purposes of section 370 it should have been clearly so specified. Bearing in mind that non-compliance with section 370 involves criminal prosecution and penal consequences, section 370 cannot be given an interpretation wider than that warranted by the actual words used in that section. Without any provision to that effect, the word “loan” as used in section 370 cannot be given a wider interpretation to include deposits.

20. It was contended by Mr. Nilakanth that the petitioner company had itself treated the deposits in question as loans because these amounts are shown in the balance sheets under the heading “Loans and Advances”. Since the form of a balance sheet is prescribed under Schedule VI to the Companies Act, 1956, the amounts in question are required to be shown under the heading “Loans and Advances” on the assets side. The sub-heading however, clearly describes the amounts as “deposits with Joint Stock Companies”. The balance sheets therefore, do not assist the Respondents. In the premises the rule is made absolute in terms of prayer (a) of the petition. In the circumstances there will be no order as to costs.

Rule made absolute.