Does MCA Circulars Constitute Law?
Sumit Binani
Dear Professional Colleagues
I am forwarding an interesting email received from a learned and highly respected professional Dr K R Chandratre in the wake of a recent MCA Circular issuing clarification on loans to employees and applicability of the provisions of Sec 186.
I am sure you shall find it an interesting read
Best Wishes
Sumit Binani
9830810003
Excerpts from Email of Dr Chandratre
"MCA’s Circular referred to above is an interesting instance of how Companies Act is being twisted, wrenched and misinterpreted by the executive fiat in the name of “interpretation” or “helping the corporate” to mitigate the harsh and impractical provisions of the Act. Instead of overhauling the Act and Rules, the MCA has been indulging in remaking and rewriting it on its own and creating a big mess. Everything that is happening about the Companies Act 2013 is a big mockery of legislation and bringing shame to the country.
The provisions of section 186 of the Companies Act 2013 apply, among other things, to (directly or indirectly) giving any loan to any person or other body corporate. The word ‘person’ in this provision includes individuals (it is defined in the General Clauses Act) and hence the provisions of this section are applicable to loans given by a company to any individuals (including employees of the company) and the company must comply with the requirements under this section. One of the requirements is that under subsection (7), no loan shall be given under this section at a rate of interest lower than the prevailing yield of one year, three year, five year or ten year Government Security closest to the tenor of the loan. It is therefore clear that under the statutory provision, a company giving loans to its employees must comply with this requirement also.
Now, the MCA Circular says that loans and/or advances made by the companies to their employees, other than the managing or whole time directors (which is governed by section 185) are not governed by the requirements of section 186 of the Companies Act, 2013. This clarification will, however, be applicable if such loans/advances to employees are in accordance with service conditions applicable to employees and are also in accordance with remuneration policy, in cases where such policy is required to be formulated.
The Circular thus rewrites subsection (7) by adding in it a ‘proviso’. Basically, the question is can MCA issue such a circular and if any company takes benefit of it, will it and its directors, KMP’s and independent directors be protected from the accusation of contravention of section 186(7), if a court strikes down the circular (which I am sure will do)? Let us have brief overview of the legal position in this regard.
Circulars issued by the Central Government under the Companies Act 1956 or 2013 do not constitute ‘law’ as these circulars are not in the nature of rules or regulation which the Central Government has the authority to frame under the Act; but the government has no authority to issue circulars. As to the legal status of ‘circulars’ issued by MCA, what the Supreme Court has held in Bhagwati Developers v Peerless General Finance and Investment Co Ltd 2005 AIR SCW 4067 is worth taking note of. Confirming the Calcutta High Court’s view the Supreme Court held that the Circular dated 6 September 1994 (advising that unlisted companies should not issue bonus shares out of revaluation reserve) does not have any mandatory effect as the circulars issued by the MCA are merely advisory in character. The Supreme Court observed:
“We are also in agreement with the observation, in the impugned Judgment, to the effect that the Circular dated 6th September, 1994 does not have any mandatory effect. These Circulars are merely advisory in character.”
In several cases the Supreme Court dealt with the question of binding nature of the circulars issued by the CBDT under the Income Tax Act and by CBEC under the Central Excise Act. In Commissioner of Customs v Indian Oil Corpn. Ltd. AIR 2004 SC 2799, the Supreme Court held that “This Court has, in a series of decisions, held that circulars issued under Section 119 of the Income-tax Act, 1961 and 37-B of Central Excise Act are binding on the Revenue.” In this case, Ruma Pal J. said: “Although a circular by Central Board of Excise and Customs is not binding on a Court or an assessee, it is not open to the Revenue to raise the contention that is contrary to a binding circular by the Board. When a circular remains in operation, the Revenue is bound by it and cannot be allowed to plead that it is not valid nor that it is contrary to the terms of the statute. … the Department cannot be permitted to take a stand contrary to the instructions issued by the Board.” The Constitution Bench of the Supreme Court has held in Collector of Central Excise, Vadodara v. Dhiren Chemical Industries AIR 2002 SC 453, the Supreme Court said : "We need to make it clear that, regardless of the interpretation that we have placed on the said phrase, if there are circulars which have been issued by the Central Board of Excise and Customs which place a different interpretation upon the said phrase, that interpretation will be binding upon the Revenue". In Glaxo SmithKline Pharmaceuticals Ltd v Union of India AIR 2014 SC 410, it was held that it is well settled that if a departmental circular provides an interpretation which runs contrary to the provisions of the law, such interpretation cannot bind the court.
Be that as it may, we are concerned with the penal consequences if a court tomorrow says that not complying with subsection (7) in respect of loans to employees is a contravention and hence an offence. Will directors KMPs and officers be protected by the court?
As to the binding nature of the circulars issued by the Central Government under the Companies Act, it was held by the Kerala High Court in Harrisons and Crossfield (India) Ltd v Registrar of Companies (1980) 50 Comp Cas 426 (Ker) that the directors of the company were entitled to rely on the advice given by the circular, as honest and reasonable men, even if the same was not legally correct (since) they had only chosen to follow the path indicated by the Company Law Board, a high authority in the hierarchy of company law administration, and for that they should not be penalized. The same appears to be the ratio of the Calcutta High Court decision in Sudhir Kumar Seal v Asstt. Registrar of Companies (1979) 49 Comp Cas 462 (Cal). In that case, the company and its directors were prosecuted for not laying annual accounts within the period stipulated under the Act as they were laid at an adjourned annual general meeting which took place beyond the period limit. The Calcutta High Court relieved the directors of the charges on the ground that they had acted in accordance with the advice given by the Department under its Circular No. 35/9/72-CL. III, dated February 2, 1974 held that the prosecution was misconceived as the company had acted in accordance with the advice given by Ministry of Law, Justice and Company Affairs in the above circular that in case the annual accounts of a company are not ready for laying at the annual general meeting it is open to the company concerned to adjourn the said annual general meeting to a subsequent date by an appropriate resolution and the accounts may be laid at the adjourned annual general meeting.
With best regards
CS Dr K R Chandratre"
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