The article is written by Adv. Siddhant Jain

The case of Sreedevi Digital Systems Pvt Ltd v. Bhagyanagar Services Pvt Ltd delves into a legal dispute concerning the classification of payments made under a Memorandum of Understanding (MOU) for the allotment of shares. The key issue in this case revolves around whether amounts received by the respondent company before 1st April 2014 can be treated as “deposits” under the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014. This case sheds light on the non-retroactive application of the Companies Act, 2013, and the implications of MCA General Circular No. 05/2015, which clarifies the treatment of pre-2014 amounts in relation to deposit. The case ultimately explores the non-retroactivity of the Companies Act, 2013, and the obligations of parties under MOUs.regulations.

Sreedevi Digital Systems Pvt. Ltd. V. Bhagyanagar Services Pvt Ltd

Background

• The petitioner had entered into a Memorandum of Understanding (MOU) with the respondent company on 2nd September 2013 for the allotment of shares. Between September 2013 and March 2014, the petitioner transferred an amount of ₹1,88,98,287 to the respondent.
• The petitioner claimed that this amount was received as share application money, while the respondent argued that it was not in compliance with the terms of the MOU, and hence, no shares were issued. The petitioner then sought to classify this amount as a “deposit” under the Companies Act, 2013.

Issue

Whether the amounts received by the respondent company from the petitioner before 1st April 2014 can be treated as “deposits” under the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014.

Legal Provisions Involved:

1. Companies Act, 2013: Section 2(31) defines “deposit” under the Act, which came into force on 1st April 2014.
2. Companies (Acceptance of Deposits) Rules, 2014: These rules also came into force on 1st April 2014 and clarify the treatment of amounts received by companies.
3. MCA General Circular No. 05/2015 (30th March 2015): This circular clarifies that amounts received by private companies before 1st April 2014 shall not be treated as deposits under the Companies Act, 2013, provided the amounts are disclosed in the financial statements.

Petitioner’s Argument:

• The petitioner contended that the amount paid should be treated as share application money, and since shares were not allotted, it should be considered a deposit under Section 73(4) of the Companies Act, 2013. They further argued that the Companies (Acceptance of Deposits) Rules, 2014 apply to this case, and therefore, the amount should be refunded with interest.

Respondent’s Argument:

• The respondent opposed the claim, arguing that the amounts were received before 1st April 2014, and thus the Companies (Acceptance of Deposits) Rules, 2014 do not apply. They highlighted that the petitioner had failed to bring in ₹3 crores as required under the MOU, and therefore, no shares were issued.
• The respondent also pointed out that the petitioner’s balance sheet for the financial year ending 31st March 2018 classified the amount as a “long-term loan and advance” rather than share application money or deposit, indicating contradictory statements by the petitioner.

Tribunal’s Findings:

1. Applicability of the Companies Act, 2013: The tribunal noted that the definition of “deposit” under Section 2(31) of the Companies Act, 2013 came into force on 1st April 2014. Therefore, the provisions of the Act cannot be applied retrospectively to amounts received before that date.
2. MCA General Circular No. 05/2015: The tribunal relied heavily on the MCA General Circular No. 05/2015, which states that amounts received by private companies prior to 1st April 2014 shall not be treated as deposits under the Companies Act, 2013 or the Companies (Acceptance of Deposits) Rules, 2014, as long as these amounts are properly disclosed in the financial statements for the financial year commencing on or after 1st April 2014.
3. Classification of Amounts: The tribunal emphasized that the amounts received by the respondent company from the petitioner between September 2013 and March 2014 were received as part of share application money and therefore cannot be treated as deposits under the Companies Act, 2013.
4. MOU Non-compliance: The tribunal also observed that the petitioner did not fulfil its obligation under the MOU, specifically the requirement to bring ₹3 crores before the issuance of shares. Consequently, the non-issuance of shares was attributed to the petitioner’s breach of the MOU.
5. Contradiction in Petitioner’s Position: The tribunal pointed out that in the petitioner’s financial statements for the financial year ending March 2018, the amount in question was classified as a long-term loan and advance. This contradicted the petitioner’s claim that the amount should be treated as share application money or deposit.

Conclusion:

• The tribunal concluded that the Companies (Acceptance of Deposits) Rules, 2014 do not apply to the amount in question since it was received before 1st April 2014. As such, the amount cannot be classified as a deposit under the Companies Act, 2013. The petitioner’s application was dismissed with the liberty to explore other legal remedies for recovering the amount.

1. Non-Retroactivity of Companies Act, 2013: Section 2(31) of the Companies Act, 2013, which defines “deposit,” cannot be applied retrospectively to transactions that occurred before 1st April 2014.
2. MCA General Circular No. 05/2015: Amounts received by private companies before 1st April 2014 are not treated as deposits, provided they are disclosed in financial statements for the financial year commencing after 1st April 2014.
3. Importance of Fulfilling MOU Terms: Parties to an MOU must adhere to the conditions laid out in the agreement. Failure to do so can affect the issuance of shares or the classification of payments.
4. Classification in Financial Statements: How amounts are classified in financial statements plays a crucial role in determining their legal treatment in disputes. Contradictions in classification can weaken a party’s case.

Siddhant Jain

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