talatam subash 15 December 2019

Diversion of cash collection in company to individual account for meeting expenses

when a company went into NPA with the bank, the bank block the company's accounts.

now to pay to employees, vendors, etc the company opened a current account in the name of one employee and started depositing cash in that account and started making expenses pertaining to the company through that third party account.

will this be considered as valid transaction or will it be considered as embazelment of funds

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3 Replies

K Rajasekharan (Advocate) 16 December 2019

The operation of company's accounts through the bank account of a private individual, who has full authority to handle his account in whatever manner he wants, is nothing but an unlawful appropriation. Even if it works and works well, it is not the due procedure in which a company should work. The transfer of amount due to a company to an individual is violative of the law governing a company.

G.L.N. Prasad (Retired employee.) 16 December 2019

It may depend on circumstances and facts in the case, paying salaries or wages to the workforce may not amount to the diversification of funds according to my knowledge. If the amounts are diverted to personal use and to deprive the lender, with an intention to cheat him then that may amount to illegality. If the employee is from HRD and when the amount transferred was wages/salaries with strict instructions as such, company may have to pass such resolutions specifying the name of the person, purpose, on dealing of such funds and controls. Generally, when a company is a defaulter in one bank, the other bank may not accept to open such accounts. (To be honest, I am not able to understand the need for opening the account with a bank only for the purpose of payment of wages/salaries whereas the cash can be entrusted to Accounts officer for disbursement of salaries, I presume the account is needed for encashing the cheques received by the company, and I do not know how a bank can credit the proceeds of a cheque in the name of company to a personal account of employee)

Sankaranarayanan (Advocate) 20 December 2019

It is wrong manner..... You said it is under NPA ? what action taken by bank? Hope your company has legal adviser... better to discuss with them and follow