Deposits made by a company with other companies are not loans within the meaning of section 370 of the Companies Act, 1956, unless there is a specific provision to that effect.

Headnote:
COMPANIES ACT - LOANS AND DEPOSITS - DISTINCTION - SECTION 370 - INTERPRETATION - DEPOSITS NOT LOANS - NO VIOLATION OF SECTION 370.
Fact of the Case:

The appellant company had deposited certain amounts with various independent companies as fixed deposits for six months. The company showed these deposits in its balance sheets under the heading "Loans and Advances" with the sub-heading "Deposits with Joint-Stock Companies." The company had not obtained prior approval from the Central Government for these deposits, which exceeded 30% of its subscribed capital and free reserves. A show cause notice was issued to the company under sections 370 and 371(1)(a) of the Companies Act, 1956, for exceeding the 30% limit prescribed under section 370(1)(a) without obtaining prior approval. A criminal complaint was also filed against the company for violating section 370(1)(a) of the Companies Act.
Finding of the Court:

The court held that the deposits made by the company were not loans within the meaning of section 370 of the Companies Act, 1956. The court distinguished between loans and deposits, holding that a loan is an advance of money at the instance and for the benefit of the borrower, while a deposit is a delivery of money at the instance and for the benefit of the depositor. The court also noted that section 370 does not define "loan" to include deposits and that section 371, which prescribes penal consequences for non-compliance with section 370, requires a strict interpretation.
Issues: Whether the deposits made by the company were loans within the meaning of section 370 of the Companies Act, 1956.
Ratio Decidendi: The court held that the deposits made by the company were not loans within the meaning of section 370 of the Companies Act, 1956. The court distinguished between loans and deposits, holding that a loan is an advance of money at the instance and for the benefit of the borrower, while a deposit is a delivery of money at the instance and for the benefit of the depositor. The court also noted that section 370 does not define "loan" to include deposits and that section 371, which prescribes penal consequences for non-compliance with section 370, requires a strict interpretation.
Final Decision: The court made the rule absolute in terms of prayer (a) of the petition, quashing the impugned complaint and summons and restraining the respondents from proceeding with the complaint.

JUDGMENT - MANOHAR SUJATA V., 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 Nos. 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.

3. 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.”

4. For the period ending 31st October 1980 the company had so deposited a sum of Rs. 50,000/- 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.

5. 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)(a) 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.

6. 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.

7. 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.

8. The petitioners have filed the present writ petition praying that the impugned complaint and the impugned summons be quashed and set aside and respondents Nos. 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 contention 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.

9. 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) XX XX XX XX

and anybody corporate, unless the mak

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