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Section 180 (1)(a): Selling or Disposal of Undertaking of a Company or Shares of Subsidiaries

Introduction:

A Company can sell the shares of Subsidiaries or sell an Undertaking of the company subject to section 180(1)a of Companies Act, 2013 and regulation 24 (5) and (6) of SEBI (Listing Obligation and Disclosure Requirements, 2015, in case of Listed Entity. The Board of Directors can dispose of the shares of Subsidiary Companies or undertaking without the approval of shareholders if it is not a material subsidiary and not an undertaking, as well as not a “substantially the whole of undertaking” as mentioned in the above said section and regulation.

Section 180(1)a of Companies Act, 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;

De-coding the Section:

This section imposes the restriction to the Board of Directors to Sell, Lease or Dispose of the whole or substantially the whole of the undertaking of the company or where the company holds more than one undertaking of the whole or substantially the whole of any of such undertakings, without passing Special Resolution in the meeting of Shareholders.

Which Subsidiaries are covered under the restriction?

The Subsidiaries which are getting covered under the regulation can be found out by using 2 steps:

Step 1: What is undertaking as per section 180(1)a?

  • Net-worth based test: This Section covers such Undertakings (Subsidiary Company) in which the Company’s (Holding Company) investment exceeds 20% (Must be more than 20% to get covered under the restriction) of its net worth as per the audited Balance Sheet of Preceding Year of the Company; Or
  • Income based test: An Undertaking (or Subsidiary Company) which generates 20% (Equal to 20% or more, of the revenue are being covered) of the Total income (Consolidated income) of the Company (Holding Company) during the previous financial year.

If any of the above-mentioned threshold is attained by the Subsidiary company or the undertaking which is getting sold or disposed then check whether the selling is as the whole or substantially the whole by using Step no.2. If whole of the undertaking is being sold, Special Resolution from the shareholders is mandatory.

Step 2: Whole or Substantially the whole?

Under explanation (ii), the expression “substantially the whole” is clarified as follows;

Whole means the whole of the undertaking (the compete undertaking or 100% of shares of subsidiary).

Substantially the whole means 20% or more of the value of Undertaking as provided in the audited Balance Sheet of the company (Subsidiary Company). Which means a Holding Company sells 20% or more of the total shares of the Subsidiary company, then it is considered as substantially the whole of the undertaking.

In case of a Factory or a Unit of a Company, if the value of selling part constitutes the value equal to or more than 20% (Value >= 20%) of the whole value of Undertaking. Then it’s covered under substantially the whole of undertaking.

Practical Example:

Case : A Company named A Ltd has a wholly owned Subsidiary called B Ltd. Now the Board of Directors of A Ltd wants to sell the shares constituting 45% in B Ltd to other Company named C Ltd. B Ltd constitutes 20% of Net worth and 22 % of Total Income of A Ltd as per previous year audited Balance Sheet. Whether the Special Resolution is required to pass under section 180(1)a to sell the shares of B Ltd?

Solution:

Analyze the situation using 2 step formulae.

Step: 1

Consideration of Undertaking: Whether B Ltd is covered?

Net-worth based test: Fail, as the B Ltd represents Net worth of not exceeding 20% in the Balance Sheet of A Ltd, it is not covered under This section.

Income based test: Pass, The Revenue of B Ltd represents 22% i.e., more than 20% of Total Revenue of the A Ltd

As the B Ltd is considered as undertaking, we have to move to step no.2

Step: 2

Considering whole or substantially the whole: Pass, as the value of Undertaking being sold represents more than 20% of the undertaking Value i.e., 45% of total share value of B Ltd, it is considered as substantially the whole of the undertaking.

As the selling or disposal satisfies the condition of Undertaking and the value of sale attains the substantially the whole of undertaking, A Ltd is required to pass Special Resolution by the Shareholders of the company.

Conclusion: As per the above discussed Analysis, a Unit or Company must be covered under the definition of Undertaking and also has to covered under substantially the whole of undertaking in terms of selling value. If the Selling Unit gets covered under the definition of Undertaking but the sale or disposal value is less then 20% of the value of the Unit or Company, then Special Resolution may not be required to be passed.

Understanding Section 180 (1)(a) is essential to ensure legal compliance when a company decides to sell or dispose of its undertaking or shares of subsidiaries. By following the two-step analysis outlined in this article, a company can ensure it meets the necessary criteria defined in the Companies Act. Nevertheless, it is always advisable to consult legal counsel to ensure full compliance and understanding of the nuances involved in these types of transactions.

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