Since the introduction of the Company’s Act Provisions and especially in the context of Sec. 180, 185 & 188 etc., ‘Ordinary course of business’ word becomes the matter of discussion. Like, as per section 188, if Company does the transaction on the arm’s length basis and in the nature of ordinary course of business then no approval required for transacting business specified under section 188.
Further, ‘Ordinary course of business’ term is no where defined in the Companies Act, 2013 (erstwhile 1956). In General, Ordinary course of business means usual and routine course of business, customs and practice of a certain business.
Let me throw my understanding on the subject:
In Company’s Memorandum of Association, there are two objects – Main Object and other is incidental or ancillary to its main object. Ancillary business means a business or non-trade activity that is not associated with the core activities of a firm though it is incidental to the main business of the Company. For example, provision of consultancy services by a manufacturing company, say, cement, is a business ancillary to its main business. In order to prove that business as incidental to the main business there should be some nexus between that business and the main business.
So, if Company is able to prove that Ancillary business is connected with main object of the Company, then it will come under the definition of Ordinary course of business.
But yes, certain transactions cannot be covered under ordinary course of business like corporate restructurings or acquisitions, transactions with offshore entities in jurisdictions with weak corporate laws.
Last but not the least, for assessment as to whether a transaction is in the ordinary course of business, it is very subjective and can vary on case to case basis along with giving consideration to nature of business. One should consider number of factors for such assessment like size and volume of transactions, arm’s length frequency, etc.
About the author: Dharmesh Vankar (Swami) is a qualified Company Secretary (ACS-42284), residing in Vadodara and currently working in Company Secretary Firm as senior team member. You can reach him at firstname.lastname@example.org or (M) 9558 930 408
Disclaimer: The entire content of this document is author’s own interpretation & personal view. This is only a knowledge sharing initiative and author do not intend to solicit any business or profession.