Sec 3 (1)(iii) Definition of Private Limited Company and Sec 58A of Companies Act

Hello Everyone !!

Recently I came across an interesting question as to whether private limited company can accept corporate deposits?

The matter is interesting especially in the light of the fact that, Sec 3(1)(iii) that defines 'Private Ltd Company' expressly prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives. On the Other hand, Sec 58A that provides for invitation for the purpose of acceptance of deposits by company, defines the term 'deposit' as not to include, inter alia any amount received by a company from any other company. This definition is given in Rule.2(b) of Companies ( Acceptance of Deposits ) Rules, 1975 and is 'exhaustive' in nature. The question is, whether in the absence of definition of 'deposit' in Companies Act, 1956, is it possible to interpret Sec 3 (iii)(d) in the light of 'deposit' as defined in Sec 2(b) of Companies ( Acceptance of Deposits ) Rules, 1975.

My Opinion on the above query is as follows:

Sec3 deals with definitions of company. Sec 3 (1)(iii) which defines 'private company' was amended by Companies (Amendment) Act, 2000 w.e.f 13-12-2000 to include an additional condition i.e clause (d) which reads as follows:

'(d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives:'

In view of this specific ammendment, private ltd company can neither ' invite' nor 'accept' any deposit from persons other than its members, directors or relatives. Thus, in other words it can accept the deposit only from the above persons ( hereinafter referred to as 'specified persons').

Sec58A read with Companies ( Acceptance of Deposits ) Rules, 1975 lays down certain conditions to be complied before accepting deposits. Following points are relevant in this matter:

• Sec 58A is not applicable to all 'deposits'. Rule 2 (b) gives exhaustive definition of the word 'deposit' as it uses the word 'means'. It however excludes certain payments received by the company. Such exclusions include, inter alia,

(iv) any amount received by a company from other company

(ix) any amount received by a private company from a person who at the time of the
receipt of the amount, was a director, relative of director or member..

• Sec 58A (1) empowers Central Government to frame rules as regards invitation or acceptance by the company of deposits from the public or from its members.

It is the cardinal principle of law that, whenever there is ambiguity and more than one interpretation is possible, attempt should be made to interpret the law in an harmonised manner and the interpretation that would render some of the words redundant should be avoided.

Two views are possible in this case:

First View: Companies Act does not contain definition of 'deposit'. However, aforementioned Rules dealing with invitation or acceptance of deposits contains a specific definition. The definition can therefore be used while interpreting provisions of Sec 3 (1)(iii)(d). Since in the said definition amount received by a company from other company is excluded, a private limited company can accept the deposits from other company.

Second View: In view of specific prohibition in sec 3, private ltd company can not be permitted to accept deposits from persons other than specified persons.

I support the second view for the following reasons:

Sec 58A(1) does not expressly provide that, it is not applicable to private company. However the aforementioned exclusions from the definition of the term 'deposit' clearly indicate the intention of the legislature.

As per sec 58A(1), rules can be framed for acceptance of deposits from 'public' or 'members'. However, amount received by a private company from its members, directors or relatives are not to be treated as deposits at all. Since, this is the only source a Private limited company can accept deposits from, a view is possible that Sec 58A does not apply to Private Company.

First view, according to me is grossly erroneous. If we accept the first view, then it will make the condition imposed in Sec3(1)(iii)(d) absolutely redundant.This is certainly not the intention of legislature especially in the light of the fact that, Sec 58A was inserted by Companies ( Amendment) Act, 1974 ( w.e.f 01-02-1975), whereas the additional prohibition is inserted recently, in the year 2000. In the absence of such amendment to Sec 3 (1)(iii), Private limited companies were earlier in a position to accept deposits from public and hence Sec 58A was applicable to them in respect of deposits accepted from persons other than members, directors, relatives or other companies. But now the impact of amendment is that, private limited companies are absolutely barred from inviting or accepting deposits from persons other than specified persons and hence Sec 58A is not applicable to Private companies.


Thus in my opinion,

(1) Private limited companies cannot invite or accept corporate deposits except from companies which are its members

(2) Provisions of Sec 58A and Companies ( Acceptance of Deposits ) Rules, 1975 are not applicable to Private Limited Companies after the ammendment in sec 3 w.e.f. 13-12-2000.

Hope the above discussion will clarify the legal position.

- Mandar Telang.