The power to borrow monies is an inherent power with corporate entities for the purposes of company. This power is to be exercised in terms of provisions of Companies Act, 1956/2013 and Memorandum and Articles of Association of the company.
However, in case of companies registered under section 25 of the Companies Act, 1956 or section 8 of the Companies Act, 2013, there is a doubt whether such companies can borrow from the Bank under the provision of the Companies Act.
Relevant Provisions and Interpretation
The Companies Act, 1956 was repealed in 2013 on enactment of the Companies Act, 2013 on 29/08/2013. The provision of this act have been made applicable from different dates as notified and are applicable to companies incorporated under any previous companies law.
Companies or corporate entities in India are governed and regulated by the Companies law which has a historical background.
At present, companies are governed by the provisions of the Companies Act, 2013 (w.e.f. 29.08.2013) prior to which the Companies Act, 1956 was in force. The Companies Act, 1956 was amended several times prior to being substituted by the Companies Act, 2013. The provisions of which are effective from 30.08.2013 and other notified dates for various provisions. The said provisions apply to all companies incorporated in India including the Section 25/section 8 companies.
The Central Government may exempt such body corporate, incorporated by any Act for the time being in force by notification, specify in this behalf, subject to such exceptions, modifications or adaptation, as may be specified in the notification.
The following statutory provisions are relevant for analysing the borrowing by Section 8 companies:
Under Companies Act, 1956
|25||Power to dispense with ‘limited’ in name of charitable or other company|
|291||General powers of board|
|292||Certain powers to be exercised by board only at meeting|
|293||Restrictions on powers of board|
Under the Companies Act, 2013
|8||Formation of companies with charitable objects etc.||01.04.2014|
|179||Powers of board||01.04.2014|
|180||Restrictions on powers of board||12.09.2013|
The above provisions of 2013 Act correspond to the provisions of 1956 Act without much of difference,
a) Section 8 corresponds to section 25 of the Companies Act, 1956 and empowers the Central Government to register an association as limited company having charitable objects to promote commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment, etc., without adding to its name the words ‘Limited’, ‘Private Limited’. The profit or any income of the company shall be used for promoting the ‘objects of the company. Payment of dividend to members is prohibited. The Central Government shall issue license on such terms and conditions as shall be prescribed by it for registration of such companies and these companies shall be subject to certain exemptions and restrictions. In the event of any violation of conditions on which a licence is issued, the Central Government may revoke the licence and order the company, after giving a reasonable opportunity of being heard, to be wound up or amalgamated with another company having similar objects.
b) Section 179 corresponds to section 291 and 292 of the Companies Act, 1956 and provide that the Board of Directors shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do except those that are to be exercised or done by the company in general meeting. The clause further specifies the powers to be exercised by the Board of Directors on behalf of the company.
c) Section 180 corresponds to section 293 of the Companies Act, 1956 and seeks to provide for the powers of the Board of Director of a company to be exercised only with the consent of the company by a special resolution.
The borrower company which has been incorporated u/s 25 of the 1956 Act, for legal / practical purposes shall now be governed by section 8 of the 2013 Act. Also, for the purpose of powers and restrictions of powers of board, sections 179 and 180 of the 2013 Act shall be referred.
Section 8 Companies
According to section 8 of the 2013 Act, Central Government can allow association of persons to be registered as a limited or private limited company without addition of the words ‘limited’ or ‘private limited’ after their name as per the provisions of section 8. This shall be done as per rules prescribed and if it meets the following conditions:
a) has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object;
b) intends to apply its profits, if any, or other income in promoting its objects; and
c) intends to prohibit the payment of any dividend to its members.
For such companies, the memorandum and articles of such company can only be altered with the previous approval of Central Government. Earlier prior Central Government approval was required only for alteration of objects.
The basic features of section 8 companies, inter alia, include:
Powers of the Board
Subject to the provisions of the Act, the Board of Directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do. However, the Board cannot exercise any power or do any act or thing which is directed or required, whether by the Companies Act or any other Act or by the Memorandum or Articles of the company or otherwise, to be exercised or done by the company in general meeting.
In exercising the aforesaid powers or doing any of the aforesaid acts or things, the Board will be subject to the provisions contained in that behalf in the Companies Act or any other Act, or in the Memorandum or Articles of the company, or in any regulations not inconsistent therewith and duly made thereunder, including regulations made by the company in general meeting. Thus, the Board may exercise all powers of the company and can do all such acts and things that the company can do except those which ate specifically provided to be exercised or done by the company in a general meeting. But the exercise of such powers of the Board shall be in conformity with the provisions of the Companies Act or any other Act and Memorandum, Articles, and resolutions of the company passed general meeting.
As per sub-section (3) of section 179 of 2013 Act, the Board is empowered:
a) to make calls on shareholders in respect of money unpaid on their shares;
b) to authorise buy-back of securities under section 68;
c) to issue securities, including debentures, whether in or outside India;
d) to borrow monies;
e) to invest the funds of the company;
f) to grant loans or give guarantee or provide security in respect of loans;
g) to approve financial statement and the Board’s report;
h) to diversify the business of the company;
i) to approve amalgamation, merger or reconstruction;
j) to take over a company or-acquire a controlling or substantial stake in another company;
k)any other matter which may be prescribed
The power to ‘borrow monies’ is specific power given to the board under clause (d) above.
It is further provided that power to borrow money can be delegated. The board may, by a resolution passed at a meeting, delegate to any committee of directors, the managing director, the manager or any other principal officer of the company or in the case of a branch office of the company, the principal officer of the branch office, the power specified in clauses (d) to (f) on such conditions as it may specify.
So far as powers of Board are concerned , in respect of section 8 companies , following powers as stipulated in section 179(3) of the Companies Act, 2013, i.e.,
( d ) to borrow monies,
( e ) to invest the funds of the company, and
( f ) to grant loans or give guarantees or provide security in respect of loans ,
can be exercised or decidedly the Board of Directors by way of circulation (resolution by circulation ) instead of at a board meeting.[ Notification dated 5.6.2015 refers ]
Such section 8 companies should not have defaulted in filing its financial statement sunder section 137 or annual return under section 92 of the Companies Act, 2013 with the office of the Registrar of Companies. The compliances for a section 8 company are similar to that of any other company, subject to exceptions and exemptions granted by the Central Government .
The borrower company which may be a private limited company or public limited company registered under the Companies Act, 1956 is eligible to borrow monies through its board subject to provisions in Articles of Association of the Company.
Restrictions on Powers of Board
Section 180 of the 2013 Act provides for certain restrictions on a company to exercise certain powers only with the approval of shareholders in general meeting. In respect of borrowings sub-section (1), clause (c) provides that:
“to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital and free reserves, apart from temporary loans obtained from the company’s bankers in the ordinary course of business:
Provided that the acceptance by a banking company, in the ordinary course of its business, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise, shall not be deemed to be a borrowing of monies by the banking company within the meaning of this clause.
Explanation. – For the purposes of this clause, the expression “temporary loans” means loans repayable on demand or within six months from the date of the loan such as short-term, cash credit arrangements, the discounting of bills and the issue of other short-term loans of a seasonal character, but does not include loans raised for the purpose of financial expenditure of a capital nature.”
It may be noted that for the above clause borrowing does not include temporary loans (i.e., loans payable on demand r within six months but excluding loans for capital expenditure) obtained from the company’s bankers in the ordinary course of business.
The Companies Act does not expressly empower companies to borrow money. Therefore, most of the companies expressly provide for such borrowing powers in the Memorandum. In such cases, where Memorandum authorises the company to borrow, the Articles provide as to how and by whom these powers shall be exercised. It may also fix up the maximum amount which can be borrowed by the company. It may, however, be noted that a trading company has an inherent implied power to borrow even if the objects clause in the memorandum of association is silent on borrowings. But, in many instances it may be difficult to specify a company as clearly a trading company. As such, as a safety measure, it is usual for the companies to take the power to borrow through the memorandum of association.
Further, it may be noted that provisions of section 180 of 2013 Act do not apply to private limited companies (vide Notification No. GSR 464(E) dated 5.6.2015. The same exemption was available under 1956 Act.
Memorandum of Association
The Memorandum of Association of such companies generally contain power to exercise the following activities:
i) to receive money on deposit or loan from public and others in terms of the provisions of the Act
ii) to borrow or to raise loan from various sources
iii) to secure payment of money
iv) to mortgage, pledge or charge whole or part of property, assets, or revenues of company…………..
In view of the above, such companies are considered to have been authorized under the Companies Act, 1956/2013 to borrow monies from banks etc.
Articles of Association
Articles of Association of Section 8 companies generally authorize the company to borrow monies from the lenders. It may empower the company to borrow money from any person and to secure such payment.
On the basis of applicable statutory provisions of the Companies Act, 1956/2013 as discussed herein above, memorandum and articles of association of company, it can be interpreted that the borrower company, which is registered under Section 25/section 8 of Companies Act is authorized and eligible to borrow monies, loans and advances from lenders.