Introduction
The Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014 distinguish between amounts that qualify as “deposits” and those that are specifically excluded from the definition of deposits. One such exclusion relates to amounts raised through the issue of secured Non-Convertible Debentures (NCDs).
A practical question arises where debentures are issued before the charge over the underlying assets is registered under Section 77 of the Companies Act, 2013. During this interim period, can the debentures be regarded as unsecured and consequently be treated as deposits?
Can this be resolved by applying the “Literal Rule of Interpretation” and Rule of Harmonious Construction”! Let’s deep dive more into this!
A literal reading of the relevant provisions indicates that delay in registration of charge does not alter the secured character of the debentures for the purpose of the Deposit Rules
Let us understand the Statutory Framework
Rule 2(1) C (ix) of the Companies (Acceptance of Deposits) Rules, 2014 excludes from the definition of “deposit” any amount raised by the issue of secured Non-Convertible Debentures, provided they are secured by a charge on the company’s assets. The Rule focuses on the nature of the debentures, namely that they are secured by identifiable movable or immovable assets.
Section 77 of the Companies Act, 2013 requires every company creating a charge on its property or assets to register the particulars of such charge with the Registrar of Companies within the prescribed time. The provision imposes a statutory obligation to register the charge and prescribes consequences for non-registration.
The question here is whether registration under Section 77 is itself a condition for determining whether the debentures are “secured” under Rule 2(1) C (ix)?
Definition of Registered and that of Secured as per The Law Lexicon a Legal Dictionary
- “Registered” means entered, recorded or enrolled in a register.
- “Secured” means made safe, protected, assured or guaranteed, particularly by the provision of security for payment of a debt or performance of an obligation.
Let’s first apply the Literal Rule of interpretation
The literal rule of interpretation requires that statutory provisions be interpreted according to their ordinary and natural meaning. Courts should neither add words that the legislature has omitted nor read into the statute conditions that do not exist.
Applying this principle, Rule 2(1)(c)(ix) merely requires that the debentures be secured by a charge on the company’s assets. The Rule does not state that the charge must already be registered under Section 77 before the exclusion from the definition of deposit becomes available.
Had the legislature intended registration to be a mandatory precondition, it could have expressly provided that only “registered charges” or “charges registered under Section 77” would qualify. The absence of such language is significant. Under the literal rule, courts cannot introduce such a requirement through interpretation.
Therefore, where the parties have created security over specified assets and the company is in the process of complying with the registration requirements under Section 77, the debentures continue to retain their secured character for the purposes of Rule 2(1)(c)(ix).
Let’s now take this one more step ahead by applying Rule of Harmonious Construction
The principle of harmonious construction requires that statutory provisions dealing with the same subject be interpreted in a manner that allows each to operate within its own field without rendering the other redundant.
Rule 2(1)(c)(ix) determines whether a borrowing qualifies as a “deposit.”
Section 77 regulates the procedure for registration of charges and prescribes the consequences of non-registration.
These provisions perform different functions and do not conflict with one another. Rule 2(1)(c)(ix) does not deal with registration, while Section 77 does not classify borrowings as deposits.
Therefore, harmony between the two provisions is achieved by allowing each to perform its own statutory role. Reading the registration requirement of Section 77 into Rule 2(1)(c)(ix) would unnecessarily merge two distinct statutory schemes and would deprive each provision of its independent purpose.
Can it be said that there is Distinction Between Creation of Charge and Registration of Charge?
A distinction must be drawn between the creation of a charge and its registration.
Creation of a charge is a contractual and legal act whereby the company agrees to provide specified assets as security for repayment of the debentures. Registration under Section 77 is a statutory compliance mechanism that records the charge with the Registrar of Companies and protects the interests of creditors and other stakeholders.
The Deposit Rules are concerned with whether the borrowing is secured by assets. Section 77, on the other hand, governs the procedural requirement of registration and the consequences of failure to register. Conflating these two concepts would amount to reading additional words into Rule 2(1)(c)(ix), contrary to the literal rule of interpretation.
Accordingly, a temporary delay in registration should not change the essential nature of a debenture that is otherwise issued against adequate security.
Let’s compart it with Section 77(3)
The Companies Act itself demonstrates that registration has different consequences depending on the statutory context.
Section 77(3) specifically provides that, in the event of insolvency or liquidation, a charge that is not duly registered shall not be considered by the liquidator or any other creditor. Consequently, for
the purposes of insolvency proceedings and distribution of assets under the Insolvency and Bankruptcy Code, 2016, an unregistered charge may effectively lose its priority, and the creditor may be treated as unsecured. This consequence exists because the statute expressly provides for it.
However, Rule 2(1)(c)(ix) contains no similar provision stating that an unregistered charge will cause secured debentures to become deposits. The legislature has consciously prescribed a consequence for non-registration in one context while remaining silent in another. Under the literal rule, such silence cannot be filled by judicial interpretation.
Therefore, although an unregistered charge may have adverse consequences in insolvency proceedings, those consequences should not automatically extend to the interpretation of the Deposit Rules.
Can it be said that Legislative Intent reflected in the Statutory Scheme?
The object of excluding secured NCDs from the definition of deposits is to distinguish secured capital market borrowings from unsecured public deposits. Where investors receive the benefit of security over the company’s assets, the transaction possesses characteristics materially different from an unsecured deposit.
Treating secured debentures as deposits merely because registration is pending would produce impractical results. A company that has executed all security documents and initiated registration could suddenly be regarded as having accepted deposits for a temporary administrative delay, despite there being no change in the commercial substance of the transaction. Such an interpretation would impose a consequence not contemplated by the statutory language.
It is relevant at this stage to also distinguish the expressions “secured” and “registered”, which, in their ordinary legal sense as per The Law Lexicon a Legal Dictionary. While the expression “secured” denotes made safe, protected, assured or guaranteed, particularly by the provision of security for payment of a debt or performance of an obligation, the expression “registered” denotes means entered, recorded or enrolled in a register. The purpose of this distinction, however, is not to adopt the dictionary meanings of these expressions in isolation or to substitute them for the statutory scheme. Rather, the purpose is to demonstrate that the concepts of creation of security and registration of such security are not inherently synonymous. Accordingly, the expression “secured” in Rule 2(1)(c)(ix) and the requirement of registration under Section 77 must be understood in their respective statutory contexts, without automatically reading the requirement of a “registered charge” into a provision which merely refers to “secured” debentures.
Interpretative Takeaway
Applying the literal rule of interpretation, Rule 2(1)(c)(ix) excludes secured Non-Convertible Debentures from the definition of deposits so long as they are secured by the company’s assets. The Rule does not make registration of the charge under Section 77 a condition precedent for claiming the exclusion.
Section 77 serves a distinct purpose by prescribing registration requirements and consequences for non-registration. Those consequences are expressly relevant in contexts such as insolvency and liquidation under Section 77(3), where an unregistered charge may lose priority. However, the Companies (Acceptance of Deposits) Rules do not incorporate that consequence into the definition of deposits.
Accordingly, during the interim period between the issuance of secured Non-Convertible Debentures and registration of the charge, the debentures should continue to be regarded as secured for the purposes of Rule 2(1)(c)(ix) and should not be treated as deposits merely because the charge registration is pending. Any contrary interpretation would amount to adding words to the statute, contrary to the settled principles of the literal rule of interpretation.
Concluding Remarks
A plain reading of Rule 2(1)(c)(ix) indicates that the test is whether the debentures are secured, not whether the charge has already been registered. Section 77 undoubtedly mandates registration and prescribes consequences for non-compliance, but it does not state that a pending registration converts a secured borrowing into a deposit.
If Parliament intended registration to be a precondition for the exclusion, it could have expressly said so. Reading such a requirement into the Rule would amount to judicial legislation rather than statutory interpretation.
The Real Question
The more intriguing question, therefore, is not whether a pending registration makes a secured debenture a deposit, but whether a consequence expressly confined to Section 77 can ever be imported into an entirely different statutory framework in the absence of clear legislative intent!
Following judicial pronouncements provide additional perspective on the principles of literal interpretation and harmonious construction. While each decision arises from its own factual context, they collectively assist in understanding how courts approach statutory interpretation and invite further analysis of the issue.
- Unity Small Finance Bank Ltd. v. Sripatham Venkatasubramanian Ramkumar
The decision in Unity Small Finance Bank Ltd. v. Sripatham Venkatasubramanian Ramkumar demonstrates that the NCLAT did not treat non-registration under Section 77 as the sole determinant of whether a security interest existed. Rather, it examined whether there was an underlying transaction creating the security interest. This supports the distinction between the creation of security and the registration of that security, a distinction equally relevant while interpreting Rule 2(1)(c)(ix) of the Companies (Acceptance of Deposits) Rules, 2014.
- Padma Sundara Rao v. State of Tamil Nadu (2002) 3 SCC 533 (Constitution Bench)
In Padma Sundara Rao v. State of Tamil Nadu, the Supreme Court held that where the statutory language is plain and unambiguous, courts cannot read words into the provision or supply a casus omissus. Applying this principle, Rule 2(1)(c)(ix) cannot be interpreted as requiring a “registered charge” when the Rule itself merely refers to “secured debentures”.
- J.K. Cotton Spinning & Weaving Mills Co. Ltd. v. State of Uttar Pradesh
Applying the principle of harmonious construction laid down in J.K. Cotton Spinning & Weaving Mills Co. Ltd. v. State of Uttar Pradesh, Rule 2(1)(c)(ix) of the Companies (Acceptance of Deposits) Rules, 2014 and Section 77 of the Companies Act, 2013 should be interpreted in a manner that allows both provisions to operate independently. Rule 2(1)(c)(ix) determines whether a borrowing qualifies as a deposit, whereas Section 77 governs the statutory requirement of registration of charges. Since both provisions operate in different fields, the registration requirement under Section 77 should not be imported into Rule 2(1)(c)(ix) unless expressly provided by the legislature.
Article is written by Mr. Aditya Totla – Senior Manager