The article is written by Adv. Siddhant Jain

Introduction

This article examines the Nitin Rekhan v. Union of India & Ors. case, decided by the Delhi High Court in July 2022, which revolved around a dispute concerning the non-allotment of shares and the classification of a payment as a “deposit” under company law. The petitioner sought legal action against a private company for failing to allot shares after receiving ₹40,00,000 in 2010 and for not paying interest on the amount when it was returned in 2018. The petitioner argued that the money should be treated as a deposit under the Companies Act, 2013, and demanded penal interest. However, the court ruled that the 2013 Act could not be applied retrospectively to transactions predating April 1, 2014, and dismissed the petition, citing that the payment did not constitute a deposit under the Companies Act, 1956. The case highlights the significance of transitional provisions in corporate law and clarifies the legal obligations concerning pre-2014 financial transactions.

Court: High Court of Delhi
Date of Judgment: July 15, 2022

Presiding Judge: Hon’ble Mr. Justice Chandra Dhari Singh

Background:

The case involves a dispute between the petitioner, Nitin Rekhan, and a private company (Respondent No. 3), over the non-allotment of shares and the alleged non-payment of interest on the share application money. The petitioner invoked the jurisdiction of the Delhi High Court under Article 226 of the Constitution, seeking directions to prosecute the company under Sections 73 and 76A of the Companies Act, 2013.

Facts of the Case:

1. Investment and Non-allotment of Shares:
   • On December 27, 2010, the petitioner paid ₹40,00,000 to the directors of Respondent No. 3 for the issuance of shares. The payment was made into the company’s account maintained with Karnataka Bank Limited.
   • The company failed to allot the promised shares and subsequently returned the principal amount on February 9, 2018, without paying any interest accrued on the amount.
2. Complaint to Registrar of Companies (ROC):
   • The petitioner filed an online complaint with the Registrar of Companies (Respondent No. 2) on December 11, 2018, alleging non-compliance with the Companies (Acceptance of Deposits) Rules, 2014, and seeking recovery of interest on the amount paid.
   • The ROC issued a show-cause notice to the company on May 14, 2019, but no further action was taken, and the complaint status remained “under examination.”
3. Legal Proceedings:
   • The petitioner filed a private complaint under Section 200 of the Code of Criminal Procedure before the Special Judge, Dwarka Courts, Delhi, against Respondent No. 3 and others.
   • Through this writ petition, the petitioner sought directions to prosecute Respondent No. 3 under Sections 73 and 76A of the Companies Act, 2013.

Legal Issues:

1. Whether the Companies Act, 2013, and the Companies (Acceptance of Deposit) Rules, 2014 apply to the share application money paid by the petitioner in 2010.
2. Whether the amount paid by the petitioner can be treated as a ‘deposit’ under the Companies Act, 2013, thus attracting penal interest provisions.

Key Provisions Involved:

• Companies Act, 1956 and Companies Act, 2013:
  • Section 73 and 76A of the Companies Act, 2013: These sections pertain to the acceptance of deposits by companies and the penalties for contravention.
  • Section 2(31) of the Companies Act, 2013: Defines “deposit” as including any receipt of money by way of deposit or loan.
  • Companies (Acceptance of Deposits) Rules, 2014: Rules governing the acceptance of deposits by companies and the conditions for repayment and interest.
• Companies (Acceptance of Deposits) Rules, 1975:
  • Rule 2(b)(vii): Excludes certain amounts, including share application money pending allotment, from the definition of “deposit.”

Arguments Presented:

Petitioner’s Argument:

• The petitioner argued that the amount paid for share allotment qualifies as a ‘deposit’ under the Companies Act, 2013, because the company failed to allot shares or repay the interest accrued on the amount.
• Cited Section 2(31) of the Companies Act, 2013, and Rule 2(1)(c) of the Companies (Acceptance of Deposit) Rules, 2014, to support the claim that the money should be treated as a deposit and that the company violated the law by not repaying interest.

Respondents’ Argument:

• The respondents argued that the money in question was given in 2010 and falls under the Companies Act, 1956, and the Companies (Acceptance of Deposits) Rules, 1975, not under the Companies Act, 2013.
• Cited Rule 2(b)(vii) of the Companies (Acceptance of Deposits) Rules, 1975, which states that share application money pending allotment is excluded from the definition of “deposit.”
• The General Circular No. 05/2015 issued by the Ministry of Corporate Affairs clarified that amounts received by private companies before April 1, 2014, shall not be treated as deposits under the Companies Act, 2013, provided they were disclosed in the financial statement.

Court’s Analysis and Judgment:

1. Applicability of the Companies Act, 2013:
   • The court noted that the Companies Act, 2013, and the Companies (Acceptance of Deposits) Rules, 2014, came into force on April 1, 2014. The share application money was received by the company in 2010, before the commencement of the 2013 Act.
   • Therefore, the 2013 Act and its rules do not apply retrospectively to this transaction, and the case should be governed by the Companies Act, 1956, and the Companies (Acceptance of Deposits) Rules, 1975.
2. Definition of ‘Deposit’ Under Companies Act, 1956:
   • Rule 2(b)(vii) of the Companies (Acceptance of Deposits) Rules, 1975, excludes any amount received by way of subscriptions to shares pending allotment from the definition of “deposit.”
   • The court also considered General Circular No. 05/2015, which clarified that amounts received by private companies before April 1, 2014, are not treated as deposits under the Companies Act, 2013.
3. Conclusion:
   • Since the amount in question was received by the company before April 1, 2014, it does not qualify as a “deposit” under the Companies Act, 2013.
   • Consequently, the company is not liable to pay penal interest as per the Companies Act, 2013.
   • The court dismissed the writ petition, stating that no cause of action arose against the Ministry of Corporate Affairs and Registrar of Companies for adjudication in this matter.

Key Takeaways:

• Non-Retroactive Application of Law:
  The Companies Act, 2013, and its rules cannot be applied retrospectively to transactions made before April 1, 2014.
• Treatment of Share Application Money:
  Share application money received by a private company before April 1, 2014, is not considered a “deposit” under the Companies Act, 2013, as long as it was disclosed in the financial statement as per the 2014 rules.
• General Circular No. 05/2015:
  Clarifies that amounts received by private companies before April 1, 2014, fall under the Companies Act, 1956, and are not subject to the deposit-related provisions of the Companies Act, 2013.

Implications:

This case highlights the importance of understanding the transitional provisions between different company law regimes. It clarifies that financial transactions conducted before the enactment of the Companies Act, 2013, are governed by the earlier Companies Act, 1956, and the associated rules. This has significant implications for companies and investors in determining the legal obligations regarding deposits and the applicable penalties.

Siddhant Jain

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