11.1.16 Section 226 of Companies Ordinance, 1984

Enquiry:

We write with reference to the caption subject pertaining to the area of Security Deposits received by a corporate under section 226 of the Companies Ordinance, 1984.

Section 226 – Securities and deposits, etc.: No company, and no officer or agent of a company, shall receive or utilize any money received as security or deposit, except in accordance with a contract in writing; and all moneys so received shall be kept or deposited by the company or the officer or agent concerned, as the case may be, in a special account with a scheduled bank;

Provided that this section shall not apply where the money received is in the nature of an advance payment for goods to be delivered or sold to an agent, dealer or sub-agent in accordance with a contract in writing.

We request for your attention and clarification to certain queries on the subject matter which are as follows:

(i)    What kinds of Security Deposits come under this section and should they be treated as short-term or long-term?

(ii)    Is it necessary to deposit the amount in a current account or a savings account? Is there any mandatory requirement?

(iii)    If the amount is deposited in a current account then can a company make a lien on that security deposit against its loan? And if it is allowed can the company return the charge amount?

We would greatly appreciate your views on the above queries.

Opinion:

The securities or deposits other than those in the nature of advance payment for goods received in accordance with a contract in writing may fall under the purview of this section. These securities and deposits may be treated as either short-term or long-term depending upon the terms of the contract. The statute has not explicitly stipulated the type of account in which these securities or deposits are required to be kept. The only mandatory statutory requirement pertaining to these securities or deposits stipulated in the Companies Ordinance, 1984 is that they are required to be kept in a special account with a scheduled bank.

However it has been observed that usually prior to receipt of securities or deposits, parties to the contract unequivocally provide for in the contracts that the security or deposit is not required to be kept in a special account according to the provisions of Section 226 of the Companies Ordinance, 1984. These contracts also usually grant permission to the recipient of such kind of securities or deposits for utilization thereof either with or without compliance of conditions precedent.

With regard to your third query relating to lien on securities deposits, the Committee is of the view that the question of lien does not arise if the amount is to be kept in a separate bank account unless there is a specific approval in writing.

(October 8, 2005)