A subsisting deposit default can block a new transaction
Section 186(8) of the Companies Act, 2013 bars a company subject to the provision from giving a loan or guarantee, providing security or making an acquisition while default in repayment of an accepted deposit or payment of its interest subsists. The provision covers deposits accepted before or after commencement. For acquisitions, read the prohibition in its section 186 context, including acquisition of securities of another body corporate under subsection (2). This guide assumes an ordinary operating company unless stated otherwise.
Read the applicable text: India Code: Companies Act, 2013, sections 2(31) and 186.
Build a legal deposit list before counting arrears
Section 2(31) defines deposit broadly with prescribed exclusions. Build the list from the deposit register, agreements, bank records and exceptions; apply the applicable Companies (Acceptance of Deposits) Rules, 2014 and amendments for classification. A general ledger label is not decisive. In particular, verify the prescribed exclusions for qualifying bank borrowing and other amounts before treating a financing default as a deposit default. Conversely, a late trade invoice does not establish a deposit default merely because it is overdue. Have legal and finance resolve borderline receipts and document any valid revised maturity or applicable order.
Test principal and interest independently
For each deposit, preserve the amount due, the effective due date, payment instructions and evidence that discharge occurred. Interest alone can keep the restriction in place. A payment instruction, a reserve balance or a draft extension is not enough to evidence cure. If a remittance is rejected, investigate whether the obligation has actually been discharged and confirm the status before releasing the new transaction.
Separate clearance from approval and execution
Section 186(2) limits, subsection (3) member approval where required, subsection (5) Board and public financial institution requirements where applicable, and subsection (7) loan rate are distinct screens. Passing them does not cure an arrear. The wholly owned subsidiary and joint venture proviso to subsection (3) concerns that subsection, not the independent bar in subsection (8). Apply subsection (11) only after identifying its actual entity or transaction exemption; it preserves subsection (1). Do not use the exemption merely because the counterparty is in the same group.
Capture evidence on the execution date
Run the check when approving a proposal and again before the legally operative giving, provision or acquisition. Record the date and time, unresolved items, reviewer and actual instrument or cash event. For a drawdown, renewal or increase, determine if a fresh giving or provision is involved under the facts; send exceptions for review. Curing an arrear permits a fresh review from that point and does not by itself repair a transaction completed during default.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Interest still overdue
An accepted deposit matures with ₹20 lakh principal and ₹1.2 lakh interest. The company discharges principal and ₹1 lakh interest. ₹20,000 remains overdue, so a proposed covered loan remains blocked on the assumptions.
Illustrative example 2: Headroom does not release a loan
Assume the applicable section 186(2) limit is ₹80 lakh and existing covered exposure is ₹58 lakh. A proposed ₹12 lakh loan would leave ₹10 lakh of headroom. With a ₹5,000 subsisting deposit interest default, the company still cannot give the loan.
Illustrative example 3: Partial cure across two deposits
Deposit A has ₹3 lakh overdue principal and deposit B has ₹18,000 overdue interest. Paying A's ₹3 lakh leaves ₹18,000 outstanding. Hold the proposed guarantee until a verified cure and fresh check.
Illustrative example 4: Three different payment dates
A deposit is due on 1 October 2026 and actually discharged on 8 October 2026. An execution review on 5 October is three calendar days before discharge and occurs during default. A fresh review on 9 October is one day after discharge; other approvals still need confirmation.
Illustrative example 5: A balance without matured arrears
Opening deposit principal is ₹12 lakh. The company fully discharges ₹5 lakh due this month together with applicable interest. The closing ₹7 lakh principal balance is due next month. On these facts, overdue principal is nil; confirm no overdue interest remains before clearance.
Illustrative example 6: One failed payment in a batch
Treasury instructs ₹9 lakh of payments against overdue deposits. ₹7.75 lakh is applied and ₹1.25 lakh is returned unpaid. With no other cure, ₹1.25 lakh is still overdue and the covered securities acquisition cannot proceed.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Classify the company and proposal | Entity and section 186 coverage memo |
| 2 | Check subsection (11) precisely | Applicable entity or investment exception |
| 3 | Reconcile the deposit population | Register, general ledger and receipt review |
| 4 | Confirm repayment dates | Agreements, orders and approved changes |
| 5 | Calculate interest separately | Deposit-by-deposit arrears schedule |
| 6 | Confirm effective discharge | Bank settlement, payee or registrar evidence |
| 7 | Resolve rejected or disputed payments | Returns and resolution records |
| 8 | Check other section 186 gates | Limit, consent, approvals and loan pricing file |
| 9 | Refresh status just before execution | Dated treasury release sign-off |
| 10 | Archive final instrument and register entry | Execution evidence and applicable register |
Sixteen practitioner FAQs
1. Is there a minimum arrears amount under section 186(8)?
The subsection does not state a de minimis threshold.
2. Does it cover an interest-only default?
Yes. A company can be blocked even if it has repaid principal in full.
3. Does an unexpired deposit cause the same bar?
The test is subsisting default, so a balance not yet due is different from overdue principal or interest.
4. Do deposits accepted before the 2013 Act always fall outside this test?
No. Section 186(8) expressly refers to deposits accepted before or after commencement.
5. Can a special resolution override the restriction?
The section 186(3) resolution answers a separate approval question; it is not a cure for the default.
6. What if the borrower is a wholly owned subsidiary?
The subsection (3) proviso alone does not remove the subsection (8) restriction.
7. Do guarantees with no cash outflow matter?
Yes. Giving a covered guarantee is expressly within the prohibition.
8. Do ordinary bank repayment defaults automatically fall under section 186(8)?
The rule concerns deposits and their interest; classify the bank liability and test other applicable provisions separately.
9. Does an unpaid supplier invoice establish the bar?
No. Determine whether a legally classified deposit liability is actually involved.
10. Does proof of an attempted electronic transfer establish cure?
Obtain evidence of effective discharge, especially if the transaction was rejected or returned.
11. Can treasury rely on a month-end certificate for a later transaction?
Refresh it before execution to catch defaults arising between the two dates.
12. Does the provision void every past guarantee automatically?
It bars new giving or provision during default. Analyse any historical transaction and potential consequences separately.
13. Does an increase to an existing guarantee need another check?
Determine whether the increase involves a fresh giving of a guarantee; do not rely on the date of the original instrument.
14. What if a deposit holder agrees to change the due date?
Confirm that the change is legally effective and supported before recalculating arrears.
15. What if the only apparent arrear is disputed?
Preserve the basis, contract and payment record and obtain a legal conclusion before releasing the transaction.
16. Can a company clear a queued transaction after paying all arrears?
Run a new status and approval check after effective discharge; keep the execution evidence.
Official sources
India Code: Companies Act, 2013, sections 2(31) and 186
Gazetted Companies (Acceptance of Deposits) Rules, 2014, rule 2(1)(c)