What will happen to share application money & unsecured loan outstanding as on 31.3.2014

Companies Act 2014 has placed numerous challenges before the Companies & Professionals. The most hitting part is settlement of outstanding share application money & unsecured loans on the last day of financial year 2013-14.  New Sections, affecting these two important aspects of business were notified from 1st April, 2014, putting most of the Companies in trouble.

Traditionally, small & medium size businesses in India are run through self finance. The most economical way of bringing the said finance into business by keeping the liquidity option open is either to bring it as share application money or unsecured loan. If the amount wish to be brought in was from borrowed fund, the share application money was a good route and if not from the borrowed fund then unsecured loan under exempted category was route. Both modes were carrying a flexibility in terms of no restriction on repayment terms or interest rate. To some extent bankers were also treating these funds as quasi capital.

Government of India have given just less than weeks time to businesses to realign with these funds in the Company by announcing the implementation of new CA 2013 effective from 1st April, only in last week of March.

It is unfortunate that all were treated equally. Thanks to Sahara & Saharashree who induced the government to bring in the restrictions on this mode of funding in small companies. I am not sure what representations were made the Industrial Associations to the Government on this important aspects of business. The said funds were already blocked in the Business and hardly any time is given to think over it as to how that should be align with the new law.

Further Final Chapter V Rule on  Acceptance of Deposit has withdrawn the exemption from Acceptance of Unsecured Loans from the members of the Company. Though the said rules is set to be effected from 1st April, the notification of it is awaited.

On this background it would be interesting to see if any way ahead is available to this situation;

Unsecured Loans received from Directors

Unsecured loans accepted from directors after complying with the old Section 58A provisions and rules made thereunder will continue to be unsecured loans on 1st day of April 2014. Since new rules continue to provide for the exemption, they will not hit by the definition of Deposit and will continue to be exempted Deposits. Usually the said loans don’t have any repayment period set, Company can enjoy the benefits out of it. I don’t find any sunset clause for these unsecured loans.

Share Application money Pending Allotment

New Deposit Rules provides that any amount received and held ( i.e. after 1st April, 2014) pursuant to an offer made in accordance with the provisions of the Act towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment is to be apportioned against allotment of securities within 60 days or to be refunded within next 15 days.

If company fails to do this entire such amount will be treated as deposit and will attract penalty & fine etc.

In my view share application money accepted under old act and pending for allotment on 1st day of April 2014 need not be required to be apportioned within 60 days or to be refunded within next 15 days under the provisions of the New Act. Since the said amount is not received and held pursuant to the offer made under new act.

Application of Section 74

Section 74 of the new Act requires the Companies to provide the details of outstanding deposits within 3 months and to repay the deposits within 1 year or due date which ever is earlier. Deposit Rules further clarifies that said deposits accepted by the Companies who are eligible companies now need not be repaid prematurely, if the existing deposits comply with the new act and rules.

Hence companies who have public deposits need to check  whether same are allowable under new act or not and accordingly can continue with the same for till its maturity.

Since this section uses the word “Deposits” accepted under old Act, I don’t see any requirement to repay the exempted deposits accepted under the old act ( like unsecured loan from Directors or their relatives or members) even though they are not exempted under the new act. It can continue till its due date and if there is no due date prescribed then it can continue forever.

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