The local authority loans act was enacted by the legislature on 28th February 1914 with an aim to regulate the grant of loans to Local authorities. Before this legislation there were no such rules which dealt with regulation of loans forwarded to local authorities. The act thus was made to keep a check on such local authorities. The law extends to whole of India. However, states can have their own laws to regulate grant of loans to local authorities and the act shall also not apply to states which before 1st November 1956 were included in Part B states.
Section 2 of the act defines the term “local authority” which under the act means a person who has power to control and manage the local or municipal funds or any other authority which can imposes taxes of any form within a given jurisdiction.
Section 3 of the act states circumstances as to when local authorities can borrow funds. The funds so borrowed shall be given on security as provided under the act. A local authority can borrow funds firstly, to carry out certain authorized work necessary to be undertaken and completed secondly, to carry out relief works in case of outbreak of an epidemic such as famine, earthquake, or a disease. The section also provides for repayment of money in accordance with law, it further states that the local authority shall not fix period of repayment exceeding the period already fixed by law. It also provides the maximum limit to which local authority can borrow. Local authority can only borrow a sum of rupees twenty five lakhs at the maximum and not more than that, however no such restriction is levied on appropriate government (central or state government) under the act. That the legislation restricts the local authority to borrow money on any other account apart from the ones listed under the act. Section 3 sub clause 2 sub sub clause (b) further restricts issuance of promissory notes or bills for a period more than twelve months.
The power of government to make rules with respect to loans given to local authorities is given under section 4 of the act. The rules so made shall be consistent to the provisions of the act. The rules so made shall be with respect to the nature of security on which money is borrowed; the reason for seeking loan; nature and the manner in which funds are borrowed; nature of application through which funds are borrowed; the loans which are sought from a private individual and not from local authority; the nature of work carried out through the loan so taken; the time within which the funds are to be refunded; the interest charged on such loan; proper maintenance of accounts and log books. All such rules made shall be published in official gazette by the government and shall have similar effect to the rules made under the Act. Every rule made under the act by appropriate government shall be tabled before both houses of parliament after whose assent the rules so made shall come into effect. Incase the rules so made are not agreed upon by both or any house of the parliament it shall be amended. In case if no consensus the rule shall have no effect at all as laid in section 4 sub clause (4) of the act.
A loan so advanced to local authority by appropriate government or any other person is not repaid, the funds on security rendered at time of advancement of loan by local authority shall be attached. No other person apart from an officer appointed shall deal with the attached funds and will act on behalf of the borrowers by taking necessary steps. In case a property is attached twice the previous funds shall be cleared first.
The act thus keeps a check on local authorities who can ask for loans only in certain reasonable circumstances. The principle on which the act is made is stated in section 7 which prohibits the local authorities to take loan on frivolous grounds
by Vibhuti Nakta