Company Cannot Cite Its Own Companies Act Breach To Defeat Insolvency Plea Over Unpaid Deposits: NCLAT

The National Company Law Appellate Tribunal (NCLAT)at New Delhi has held that a company cannot evade repayment of deposits by relying on its own violation of the Companies Act, while allowing an appeal against rejection of an insolvency petition.

A coram of Chairperson Justice Ashok Bhushan and Technical Member Barun Mitra observed that the company was attempting to take advantage of its own wrongdoing in accepting deposits, which is impermissible in law.

“..the respondent company is trying to take benefit of its breach in accepting deposits. No one can be allowed to take benefit of its own wrong.” it held

The borrowers claimed that between 2015 and 2017 they had extended short-term business loans to Power Pack Steel Industries Pvt Ltd, aggregating Rs 1.57 crore, along with interest of Rs 16.02 lakh. It was stated that the company had paid interest through bank transfers after deducting tax at source.

According to the borrowers, despite repeated demands made in March 2018, the principal amount was not repaid. They, therefore, filed an insolvency petition before the NCLT, Cuttack.

The company admitted receipt of the amounts and payment of interest, but contended that the sums were advance payments for supply of finished steel rounds pursuant to verbal orders and not financial debt. It further argued that as a private company, it could not accept deposits from unrelated individuals under Section 73(1) of the Companies Act, 2013, and therefore no default had occurred.

Accepting this contention, the NCLT rejected the insolvency application, holding that the transaction was void and the claim was unenforceable. Aggrieved, the borrowers preferred the appeal before the NCLAT.

The appellate tribunal noted that the sole basis for rejection of the insolvency application by the NCLT was Section 73(1) of the Companies Act.

Section 73(1) of the Companies Act prohibits a company from accepting deposits from the public, except in the manner and subject to the conditions prescribed under the Act.

The tribunal pointed out that the Companies Act does not completely prohibit acceptance of deposits by companies but regulates the manner in which deposits may be accepted, with Section 76 permitting acceptance by certain companies and Section 76A prescribing punishment for contravention of Sections 73 and 76.

“..the acceptance of deposits by companies has to be in accordance with the procedure prescribed and any company which accepts the deposits in contravention of the provision of Section 73 and Section 76 or Rules made thereunder or company fails to repay the deposits, it is liable to be punished under Section 76A. “It said.

It further held that the company was “shielding itself” from liability to repay the amounts by invoking Section 73.

“...Adjudicating Authority committed error in holding the deposit contrary to the provisions of the Companies Act even without referring to Section 76 of the Companies Act where acceptance of deposit from public by certain company is as admitted fact.” it added

Accordingly, the appeal was allowed. The order of the NCLT was set aside, and the NCLT was directed to admit the insolvency petition and pass consequential orders within four weeks.

For Appellants: Advocates Sonal Shah and Kushagra Sha

For Respondents: Advocates Saswat K Acharaya and Subham Agarwal