Date of Judgement:
24 January, 1995
Petitioner :Dr. Fredie Ardeshir Mehta
Respondent :Union Of India
This case dealt with whether deferred payment by a director to the company on purchase of flat can be interpreted as an indirect loan. The court while quashing the prosecution proceedings stated that the indirect loan means granting loan to director through one or more intermediaries.
Section 295 of Companies Act, 1956(Section 185 of Companies Act, 2013) prohibits a company from granting loan to director directly or indirectly without the prior approval of Central Government.
- The petitioners purchased a flat for an employee who was also a whole time director for a sum of rupees 1,84,000. The director was allowed to exercise the option to purchase the flat during his employment or within 12 months.
- An agreement was entered into between the company and the director whereby a sum of 92000 rupees, being half the amount, was paid by the director and the other half was agreed to be paid in three equal instalments.
- The board of directors passed a resolution approving transfer of flat to the director on the payment of yearly instalments and the balance sheet for the year which ended 31st March, 1979 reported the amount due from directors as ‘Unsecured Sundry Debtors’.
- In 1980, the director paid the balance amount along with interest. In December 1981, on inspection by the office of Regional Director, the officer stated that the company had not complied with Section 49, Section 297 and Section 301 of the Companies Act, 1956.
- In November 1982, a notice was addressed to the petitioners stating that the balance amount paid and the interest amounted to loan and prior approval of the Central Government was required.
- The counsel for the petitioners contended that the financial accommodation was deferred payment and did not amount to loan and therefore the provisions of Section 295 did not apply to them.
- The Registrar of Companies initiated proceedings against the petitioner in the court of Additional Chief Metropolitan, Bombay. It was stated that the amount due from the petitioner was not on account of business activities of the company and therefore the part payment amounted to contravention of Section 295(1)(a) which is punishable under Section 295(4) of the Companies Act, 1956.
- The petitioner filed writ petition to quash the prosecution proceedings on the ground that payment of amount in instalments or defer payment does not amount to indirect loan.
- Whether the proceedings against the company are tenable?
- Does defer payment by the director to company amount to indirect loan?
- The court while clarifying whether debt is a loan, cited the case of Suradindu Sekhar v. Lalit Mohan Mazumdar whereby the court opined that ‘every loan is a debt but every debt is not a loan’
- Further, emphasis was laid on Laxmi Co. v.C.I.T, wherein it was held that the amount due as a result of goods supplied on credit is a debt and cannot be regarded as loan.
- The counsel for the respondents contended that the company had indirectly given loan to the director by permitting him to defer payment which resulted in contravention of provisions of Section 295 of Companies Act, 1956.
- It was noted that the debt arose not out of advance of money but on the sale of a flat. Thus, the financial accommodation was in the nature of debt and did not amount to loan.
- The court elucidated that the Section 295 refers to indirect loan to a director through the agency of one or more intermediaries.
- The court quashed the prosecution initiated against the petitioners under Section 295 and the Bombay High Court concluded that the debt cannot be treated as loan.
The Bombay High Court held that indirect loan is to be construed as giving loan to director through agency of one or more intermediaries. The court further that the sale of flat on deferred payment is a debt and does not amount to granting loan.
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- Can debt by director be treated as indirect loan?
- Which Section deals with prohibition on granting loan to director?