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Meaning of the ‘Undertaking’ (comment – which is not defined under the Act 2013)

For the purpose of interpreting the term ‘undertaking’, we shall look into the following case laws under the erstwhile section 293(1)(a) of the Companies Act 1956 [Section 180(1)(a) of the Companies Act 2013]:

1. Yallamma Cotton, Wollen & Silk Mills Co. Ltd., In re [1970] 40 Comp. Cas. 466 (Mys.)

The word ‘undertaking’ as occurring in section 293 (1)(a) of the Companies Act 1956 Act [Corresponding to Section 180(1)(a) of the 2013 Act] is not in its real meaning anything which may be described as a tangible piece of property like land, machinery or the equipment; it is in actual effect an activity of man which in commercial or business parlance means an activity engaged in with a view to earn profit. Property, movable or immovable, used in the course of or for the purpose of such business can more accurately be described as the tools of business or undertakings, i.e., things or articles which are necessarily to be used to keep the undertaking going or to assist the carrying on of the activities leading to the earning of profit.

2. International Cotton Corpn. (P.) Ltd. V. Bank of Maharashtra [1970] 40 Comp. Cas. 1154 (Mys.)

The word ‘Undertaking’ has been defined as ‘any business or any work or project which one engages in or attempts as an enterprise analogous to business or trade’. The business or undertaking of the Company must be distinguished from the properties belonging to the company.

Further digging more, the definition of ‘undertaking’, under section 2 of The Monopolies and Restrictive Trade Practice Act, 1956 is :

“undertaking” means an enterprise which is, or has been, or is proposed to be, engaged in the production, storage, supply, distribution, acquisition or control of articles or goods, or the provision of services, of any kind, either directly or through one or more of its units or divisions, whether such unit or division is located at the same place where the undertaking is located or at a different place or at different places.

Explanation I : In this clause, –

(a) “article” includes a new article and “service” includes a new service;

(b) “unit” of “division”, in relation to an undertaking includes, –

(i) a plant or factory established for the production, storage, supply, distribution, acquisition or control of any article or goods;

(ii) any branch or office established for the provision of any service.

Explanation II : For the purposes of this clause, a body corporate, which is, or has been, engaged only in the business of acquiring holding, underwriting or dealing with shares, debentures or other securities of any other body corporate shall be deemed to be an undertaking

Explanation III : For the removal of doubts, it is hereby declared that an investment company shall be deemed, for the purposes of this Act, to be an undertaking;

Furthermore, the expression “otherwise dispose of” should be read in wider sense and cover all the modes of disposing of a property of the company.

Hence, we can conclude that the Companies Act 2013 provides the quantitative conditions for the undertaking, to understand the meaning of ‘undertaking’ one has to see the case laws and judgements passed and accordingly one can comply with the section 180 (1)(a) of the Companies Act 2013.

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Extract of Section 180 of Companies Act, 2013

Restrictions on Powers of Board

Notified Date of Section: 12/09/2013

180. (1) The Board of Directors of a company shall exercise the following powers only with the consent of the company by a special resolution, namely:—

(a) to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings.

Explanation.—For the purposes of this clause,—

(i) “undertaking” shall mean an undertaking in which the investment of the company exceeds twenty per cent. of its net worth as per the audited balance sheet of the preceding financial year or an undertaking which generates twenty per cent. of the total income of the company during the previous financial year;

(ii) the expression “substantially the whole of the undertaking” in any financial year shall mean twenty per cent. or more of the value of the undertaking as per the audited balance sheet of the preceding financial year;

(b) to invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation;

(c) to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its 3[paid-up share capital, free reserves and securities premium, 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;

(d) to remit, or give time for the repayment of, any debt due from a director.

(2) Every special resolution passed by the company in general meeting in relation to the exercise of the powers referred to in clause (c) of sub-section (1) shall specify the total amount up to which monies may be borrowed by the Board of Directors.

(3) Nothing contained in clause (a) of sub-section (1) shall affect—

(a) the title of a buyer or other person who buys or takes on lease any property, investment or undertaking as is referred to in that clause, in good faith; or

(b) the sale or lease of any property of the company where the ordinary business of the company consists of, or comprises, such selling or leasing.

(4) Any special resolution passed by the company consenting to the transaction as is referred to in clause (a) of sub-section (1) may stipulate such conditions as may be specified in such resolution, including conditions regarding the use, disposal or investment of the sale proceeds which may result from the transactions:

Provided that this sub-section shall not be deemed to authorise the company to effect any reduction in its capital except in accordance with the provisions contained in this Act.

(5) No debt incurred by the company in excess of the limit imposed by clause (c) of sub-section (1) shall be valid or effectual, unless the lender proves that he advanced the loan in good faith and without knowledge that the limit imposed by that clause had been exceeded.

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