Under the provision of companies Act, 1956, there were no restrictions on the board of directors of private companies regarding borrowings for the purpose of business of the company. However, Board of directors of Public companies were required to seek approval of shareholders by way of ordinary resolution in case of fresh loans to be taken exceed paid up capital and free reserves. Companies Act, 2013, has been enacted to increase the objective of corporate governance and more involvement of shareholders in the core business of the company.
Section 180 of the companies act, 2013, restricts the power of board of directors. Board can exercise some powers only with the consent of the company by a special resolution.
Section 180 (1) : This section states that 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 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.
Comments : 1) If we analyse the definition of Substantially the whole of the undertaking, we come to an conclusion that if a company sell, lease or otherwise dispose of 4% (20*20%) of the net worth of the company or an undertaking which generates 4% of total income of the company, the board of directors would require consent from shareholders by way of special resolution.
2) Earlier as per Section 180(1)(c) stated the limit as paid up capital and free reserves which now has been substituted by Paid up capital, free reserves and Securities premium. This has been Substituted by the Companies (Amendment) Act, 2017 which is effective from 9th February 2018.
Section 180 (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.
Section 180(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.
Section 180(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.
Section 180(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.
EXCEPTION TO SECTION 180 :
In the year 2015, notification came on 5th june which stated that this section shall not apply to private companies. Further on 4th January 2017, Specified IFSC public company would also not be required to comply with this section, unless the article of the company provides otherwise.
From the above law, we may see that companies act, 2013 is more stringent compared with 1956 act. This will make a company comply more for a sale, investment, borrowing any amount.
Anand Acharya – Proprietor, Anand Acharya & Associates –
Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. The observations of the author are personal views and the authors do not take responsibility for the same and this cannot be quoted before any authority without the written permission of the Author.