Section 180 of Companies Act, 2013: Corporate Powers & Limits

Exploring Section 180 of The Companies Act, 2013: A Thorough Analysis of Corporate Powers and Limits

In the realm of Corporate Governance, regulations play a pivotal role in ensuring transparency, accountability and protection of shareholder interests. One such regulation is Section 180 of the Companies Act, 2013 which imposes restrictions on the powers of the Board of Directors regarding significant transactions involving the Company’s undertakings.

Background :

The Companies Act, 2013 was enacted to replace the erstwhile Companies Act,1956 aiming to modernize corporate governance practices in India.

One of the key changes introduced by the Companies Act,2013 was the replacement of Section 293 of the Companies Act,1956 with Section 180 of the Companies Act,2013.

Section 180 of the Companies Act, 2013 deals with “Restrictions on Powers of Board”. Section 180 specifically deals with limitations on the powers of the Board of Directors to protect the interests of the Company and its Stakeholders.

Objective :

The primary objective of Section 180 is to ensure that the decisions of paramount importance such as selling, leasing or disposing of a significant portion of the Company’s assets or undertakings, are not taken unilaterally by the Board of Directors. Instead such decisions should undergo scrutiny and receive approval from the shareholders as they hold a direct interest in the Company’s significant transactions.

Let’s delve into a detailed analysis of  Section 180 of the Companies Act,2013 starting with the Bare Act Language

Bare Act Language

108. Restrictions on Powers of Board

(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;

 Analysis:

Section 180 (1) (a) of the Companies Act, 2013 stipulates that if a Company intends to sell, lease or dispose of its entire business or a significant part thereof or if the Company possesses multiple businesses and wishes to sell, lease or dispose of the entire or substantial portion of any such business, it must obtain prior shareholders’ approval through a Special Resolution.

⇒ Understanding the Term “Undertaking”

At the heart of Section 180 of the Companies Act, 2013 lies the concept of an “Undertaking”. The term “Undertaking” as explained is crucial for determining the applicability of this provision. In layman term an Undertaking refer to a significant portion of the Company’s Operations or Assets.

The term “Undertaking “  has been categorized on both Investment and Income Criteria as per the explanation provided  within Section 180 (1) (a) of the Companies Act,2013 and is given below in the following table :

Purpose	Explanation
“Undertaking “	Shall mean an Undertaking in which –
Investment Criteria	An Undertaking where the investment of the Company exceeds TWENTY per cent of its Net Worth as per the audited balance sheet of the preceding Financial Year
Income Criteria	An undertaking which generates TWENTY per cent of the Total Income of the Company during the previous financial year.

Explanation to Section 180 (1) (a) provides only specific numerical data to define what qualifies as an “Undertaking”. However this explanation fell short as it does not explicitly specify whether ‘Undertaking’ should be strictly construed to encompass only entire businesses, divisions  or units on a going concern basis or if it should be interpreted liberally to include individual assets that meet the numerical criteria.

The definition of the term “Undertaking” has not been defined in the Act. The term requires a qualitative analysis of what constitutes an Undertaking and in the absence of qualitative definition of Undertaking one needs to refer the case laws to determine the same

Legal Interpretations

I. Yallamma Cotton , Woollen & Silk Mills Co. Ltd Vs. Official Liquidator

• • Undertaking is an activity engaged in with a view to earn profit and the properties movable or immovable described as tools of the Undertaking for the purpose of business.

II. Rustom Cavasjee Cooper Vs. Union of India

• • An Undertaking means the entire organisation itself including the entire business operation with all its rights, liabilities and assets. It’s like a complete package that includes everything needed for the business to operate smoothly. The entire business of the going concern is embraced within the term ‘undertaking’.

III. International Cotton Corporation Ltd Vs. Bank of Maharashtra

• • Undertaking means any business or any work or project which one engages in or attempts an enterprise analogous to business or trade.
  • The business or undertaking must be distinguished from the properties belonging to the Company.

 IV. Brooke Bond India Ltd Vs. U.B. Limited

[Whether Sale of Shares constitutes ‘Undertaking’]

• • The sale of shares, whatever be their number, even if it amounts to a transfer of the controlling interest of a Company cannot be equated to the sale of any part of the ‘undertaking’ so as to come within the mischief of Section 293 (1) (a) [now Section 180 (1)(a) of the Companies Act,2013] Examples of Undertaking

Let’s explore some examples of Undertakings that could be considered as significant for a Company:

A. Manufacturing Plant or Factory

A manufacturing plant or factory where the company produces its goods can be a significant undertaking. It typically involves substantial investment in machinery, equipment and infrastructure.

If the investment in the factory exceeds Twenty per cent of the Company’s Net worth as per the Audited Balance Sheet of the preceding Financial Year or if it generates Twenty per cent of the Company’s total Income during the previous financial year, it would qualify as an Undertaking under Section 180.

E.g. ABC Manufacturers Ltd operates a manufacturing plant where it produces its flagship product. If the investment in the plant exceeds 20 % of ABC Manufacturers Ltd net worth as per the audited balance sheet of the preceding financial year or if it contributes 20 % of the Company’s total income during the previous financial year, it would be considered as an Undertaking under Section 180.

B. Research and Development Division (R & D Division)

An R&D division focused on developing new products or improving existing ones can be crucial for a company’s innovation and growth.

If the R&D division requires substantial investment and generates a significant portion of the Company’s income, it would qualify as an Undertaking.

E.g. ABC Pharmaceuticals Ltd has a dedicated R&D division responsible for developing new drugs. If the investment in the R&D division exceeds 20 % of ABC Pharmaceuticals net worth as per the audited balance sheet of the preceding financial year or if it contributes 20 % of the Company’s total income during the previous financial year through the development of patented drugs, it would be considered as undertaking for the purpose of Section 180.

C. Distribution Network

A distribution network comprising warehouses, logistics, infrastructure and transportation vehicles plays a vital role in delivering products to customers efficiently. If the Company has made a substantial investment in its distribution network or if it generates a significant portion of the Company’s income it could qualify as an Undertaking.

E.g. XYZ Electricals Ltd has invested heavily in establishing a nationwide distribution network to reach customers across the country. If the investment in the distribution network exceeds twenty per cent of XYZ Electricals Ltd net worth or if it contributes twenty per cent of the Company’s total income through efficient distribution channels, it would be considered as an Undertaking.

D. Software Development Division

In today’s digital age, companies often have in-house software development divisions responsible for creating and maintaining software products or platforms. If the software development division requires significant investment and generates a substantial portion of the Company’s income, it could be considered as an Undertaking.

E.g. ABC Software Solutions Ltd has a dedicated division for developing custom software solutions for clients. If the investment in the software development division exceeds twenty per cent of ABC Software Solutions Ltd net worth or if it contributes twenty per cent of the Company’s total income through software licensing and service contracts, it would be considered as an Undertaking.

Table outlining different scenarios regarding whether a unit qualifies as an undertaking and whether Special Resolution is required under Section 180 of the Companies Act, 2013.

Scenario	Investment in Unit	Income Generated by Unit	Does unit Qualify as Undertaking?	Is Special Resolution required?
1.	Investment < 20% of Net Worth of Audited Balance Sheet of preceding Financial Year	Income < 20% of Total Income of the Company during the previous financial year	No	No
2.	Investment ≥20% of Net Worth of Audited Balance Sheet of preceding Financial Year	Income < 20% of Total Income of the Company during the previous financial year	Yes	Yes
3.	Investment <20% of Net Worth of Audited Balance Sheet of preceding Financial Year	Income ≥ 20% of Total Income of the Company during the previous financial year	Yes	Yes
4.	Investment >20% of Net Worth of Audited Balance Sheet of preceding Financial Year	Income >20% of Total Income of the Company during the previous financial year	Yes	Yes

⇒ Understanding the Term “Substantially the Whole of the Undertaking”

In situations where a Company owns more than one undertaking, the provision extends to cover the sale, lease or disposal of the entire or substantially the entire undertaking of any of those undertakings.

The expression “Substantially the Whole of the Undertaking” represented in a table below:

Term	Definition
Substantially the Whole of the Undertaking	Twenty per cent or more of the value of the undertaking as per the audited balance sheet of the preceding financial year.

Example:

Let’s say a Company ABC Ltd., operates two manufacturing plants (Undertaking A and Undertaking B). In the previous financial year, undertaking A was valued at Rs. 1 Crore and Undertaking B was valued at Rs. 80 Lakhs. If ABC Ltd. Intends to sell Undertaking A for Rs. 18 Lakhs, it would not require a special resolution because the sale value is less than twenty per cent of the total value of the Undertakings (Rs. 20 Lakhs).

However if ABC Ltd. wants to sell Undertaking B for Rs. 20 Lakhs, it would trigger the requirement for a special resolution because the sale value exceeds twenty per cent of the total value of the Company Undertaking.(Rs. 16 Lakhs)

The table below illustrating different scenarios and the requirement of Special Resolution for the above expression:

Scenario	Value of Undertaking (in `)	Value of Portion to be Sold/Leased/ Disposed (in `)	Substantial Value of the Whole Undertaking [≥20 % of the Value of the Undertaking (in `)	Special Resolution required
1.	2 Crores	50 Lakhs	Yes	Yes
2.	3 Crores	40 Lakhs	No	No
3.	1.5 Crores	30 Lakhs	Yes	Yes
4.	2.5 Crores	60 Lakhs	Yes	Yes
5.	4 Crores	70 Lakhs	Yes	Yes

–

Unit Identif-ication	Investment in Unit	Income Generated by Unit	Does Unit qualify as Undertaking?	Value of Undertaking [20% Test]	Value of Substantial part of the Undertaking [20 % Test with Value of Undertaking	Is it the Substantially the Whole of Undertaking	Is Special Resolution require for Sale , Lease or Disposal of Substantial Part of the Undertaking
Unit A	Rs. 25 Crs. (25 % of Networth)	Rs. 15 Crs. (30% of Total Income)	Yes	Rs. 60 Crs.	Rs. 12 Crs. (20% of ` 60 Crs.)	Yes	Yes
Unit B	Rs. 18 Crs. (18 % of Networth)	Rs. 12 Crs. (24% of Total Income)	Yes	Rs. 40 Crs.	Rs. 8 Crs. (20% of ` 40 Crs.)	Yes	Yes
Unit C	Rs. 35 Crs (35 % of Networth)	Rs. 3 Crs (6% of Total Income)	Yes	Rs. 80 Crs	Rs. 10 Crs. (12.5% of ` 80 Crores)	No	No
Unit D	Rs. 10 Crs. ( 10 % of Networth)	Rs. 20 Crores (10% of Total Income)	No	N/A	N/A	N/A	N/A

Special Provision under Section 110 of the Companies Act, 2013 [Postal Ballot]

Pursuant to Clause (a) of Sub-section (1) of Section 110 the following item of business must be transacted only by means of voting through a Postal Ballot:

(i) Sale of the whole or substantially the whole of an Undertaking of a Company as specified under sub-clause (a) of sub-section (1) of Section 180.

Thus Postal Ballot is required only for the Sale of the whole or substantially the whole of an Undertaking.

Note: Postal Ballot is not required for leasing or otherwise disposing of the undertaking.

Exception: One Person Companies (OPC’s) and Companies up to 200 members are not required to use a postal ballot for any business transactions under Section 110.

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

Analysis:

This clause stipulates that if the Board of the Company wants to invest the Compensation received from a Merger or Amalgamation in securities other than Trust Securities, it must get the prior approval of Shareholders through a Special Resolution.

If the investment of such Compensation is to be made in Trust securities, this approval (i.e. Shareholders approval) is not necessary, implying the Board can do so without a Special Resolution.

The provision restricts the discretionary powers of the Board of Directors concerning investment of compensation received from mergers or amalgamations. It ensures that such significant financial decisions are subject to the scrutiny and approval of the Company’s Shareholders through a Special Resolution. This helps protect shareholder interests and promotes transparency and accountability in corporate governance.

Here Trust Securities should be understood in their common financial sense, which typically include safe, trustee held securities i.e. to say Government Securities

The following table clarifies the conditions under which a special resolution is necessary, adhering to the literal interpretation of this Clause:

S.No.	Classification of Investment	Investment Type	Special Resolution required	Explanation
1.	Investment in Trust Securities	Government Bonds	No	Trust Securities do not require Special Resolution.
2.	Investment in Non-Trust Securities	High-Risk Stock Portfolio	Yes	Non-Trust Securities require prior Shareholder approval through a Special Resolution.

E.g.

ABC Ltd. merges into DEF Ltd. As part of the merger agreement DEF Ltd compensates ABC Ltd with a total of `15 Crores. This compensation is divided into Rs. 10 Crores in Cash and ` 5 Crores in equity shares of DEF Ltd. Post-merger the Board of Directors of ABC Ltd faces the critical task of deciding to invest the amount of this compensation effectively.

Investment Options and Decisions:

1) Investment in Trust Securities (Cash Compensation)

The Board of Directors initially considers investing the Rs. 10 Crores cash compensation in Government Bonds which are classified as Trust Securities. According to Section 180 (1) (b) of the Companies Act, 2013 investment in Trust Securities does not require a special resolution. Consequently the Board can proceed with this investment without seeking approval from the Shareholders.

2) Investment in Non-Trust Securities (Cash Compensation)

Alternatively the Board explores the option of investing Rs. 10 Crores in a high risk tech start-up. High risk investments fall outside the category of Trust Securities. Therefore the Board must secure shareholder approval through a Special Resolution.

(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 and 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;

Analysis:

This provision stipulates that the Board of Directors of a Company cannot borrow beyond a certain limit without the prior approval of Shareholders through Special Resolution.

The borrowing limit is defined as the aggregate of the Company’s Paid Up Share Capital, Free Reserves and Securities Premium. However the temporary loans obtained from the Company’s Bankers in the ordinary course of business are excluded from this limit.

1. Authority required for Borrowing :

The Board of Directors require the consent of Shareholders of the Company by a Special Resolution to borrow money if the total amount to be borrowed, together with the money already borrowed exceeds the aggregate of:

• Paid Up Share Capital
• Free Reserves
• Securities Premium

2. Exclusions :

 Temporary Loans from the Company’s Bankers in the ordinary course of business are excluded from this requirement.

♦ Definition of Temporary Loans

 Temporary Loans refer to loans repayable on demand or within six months from the date of the loan including:

> Short term loans

> Cash Credit Arrangements

> Discounting of Bills

> Issue of other short term loans of a seasonal character

♦ Exclusion from Temporary Loans

 Loans raised for the purpose of Financial Expenditure of a Capital nature are not considered as Temporary Loans.

3. Banking Companies

For Banking Companies, deposits accepted from the Public in the ordinary course of business are not considered as Borrowing under this Clause.

Steps for Determining the Borrowing Limits

Step	Description	Formula
I	Determine Eligible Borrowings	Eligible Borrowings= Existing Long Term Loans+ Proposed Borrowings+ Temporary Loans for Capital Expenditure
II	Calculate Aggregate Limits	Aggregate Limits=Paid-Up Share Capital +Free Reserves + Securities Premium
III	Check if Special Resolution is required	Special Resolution is Required if Eligible Borrowings> Aggregate Limits

Example 1:

Paid Up Share Capital: Rs. 10, 00,000.00

Free Reserves: Rs. 500,000.00

Securities Premium: Rs. 300,000.00

Existing Long Term Loans:

Business Term Loan: Rs. 15, 00,000.00

Temporary Loans

• Working Capital Loans : Rs. 100,000.00
• Cash Credit (CC): Rs. 50,000.00
• Bills Discounting : Rs. 20,000.00
• Seasonal Line of Credit: Rs. 30,000.00
• Capital Expenditure Loan: Rs. 50,000.00

 Proposed Borrowings

• Equipment Loan : Rs. 200,000.00

Step	Description	Calculation (in `)	Result
I	Determine Eligible Borrowings	15,00,000.00+200,000.00+50,000.00	17,50,000.00
II	Calculate Aggregate Limits	10,00,000.00+500,000.00+300,000.00	18,00,000.00
III	Check if Special Resolution is required	17,50,000<18,00,000.00	Not required

Example 2:

Paid Up Share Capital: Rs. 15, 00,000.00

Free Reserves: Rs. 500,000.00

Securities Premium: Rs. 300,000.00

Existing Long Term Loans:

Project Loan: Rs. 20, 00,000.00

Temporary Loans

• Working Capital Loans : Rs. 150,000.00
• Cash Credit (CC): Rs. 70,000.00
• Bills Discounting : Rs. 30,000.00
• Seasonal Line of Credit: Rs.  40,000.00
• Capital Expenditure Loan: Rs. 200,000.00

 Proposed Borrowings

• Business Term Loan : Rs. 800,000.00

Step	Description	Calculation (in `)	Result
I	Determine Eligible Borrowings	20,00,000.00+ 800,000.00+ 200,000.00	30,00,000.00
II	Calculate Aggregate Limits	15,00,000.00+ 500,000.00+ 300,000.00	23,00,000.00
III	Check if Special Resolution is required	30,00,000>23,00,000.00	Special Resolution is required

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

Analysis:

This provision restricts the Board of Directors from unilaterally deciding to forgive (remit) or extend the repayment period for any debt that a director has borrowed from the Company.

Such decisions require the approval of the Shareholders through a Special Resolution.

The provision aims to ensure transparency and prevent potential conflicts of interest. Directors being in positions of power, should not misuse their authority to benefit themselves at the expense of the Company.

Example 1: Debt Remission

ABC Ltd. has a director Mr. X who owes the Company ` 50 Lakhs. Due to financial difficulties Mr. X requests the Board to remit (forgive) the debt.

The Board of Directors discusses the matter and cannot decide on this matter independently due to the restriction under Section 180 (1) (d) and acknowledges the conflict of interest. They must seek the consent of Shareholders and proposes a Special Resolution to be passed in the next General Meeting of members.

In the meeting the Board presents Mr. X’s financial resolution and reasons for the requested remission to the Shareholders.

If the Special Resolution passes, Mr. X’s debt is legally forgiven. If it fails Mr. X remains liable to repay the debt.

Example 2: Extension of Repayment period

XYZ Ltd. has a director, Ms. Y, who owes the Company ` 1 Crores, repayable within one year. Due to unforeseen circumstances, Ms. Y requests an extension of two years for repayment.

The Board reviews the request and decides to present it to the Shareholders for approval through a Special Resolution.

During the General Meeting of Members, the proposal is discussed highlighting Ms. Y’s repayment plan and the reasons for the extension request.

If the Special Resolution is approved by a 75% majority, the repayment period is extended as requested. If not the original repayment terms remain.

Analysis of Different Scenarios

Scenario 1: Where Special Resolution fails

⇒ If the Shareholders do not approve the Special Resolution, the Director must adhere to the original terms of the debt agreement. This failure might indicate Shareholder’s concern over the director’s financial responsibility or the Company’s financial health.

 Scenario 2: Where Special Resolution is not favourable for Minority Shareholders

⇒ Where Minority Shareholders believe that the decision to remit or extend the debt is not in the Company’s best interest, they can raise their concerns during the General Meeting. This provision ensures that minority shareholders have a say in significant financial decisions.

Scenario 3: Impact on Company’s Financial Statements

⇒ The decisions to remit debt or extend repayment periods can have material impacts on the Company’s financial statements. Forgiving (Remitting) debt may result in write-off, affecting profitability and balance sheet strength. Extending repayment periods could affect cash flow projections and liquidity analysis.

(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.

Analysis:

Section 180 (2) of the Companies Act,2013 mandates that any special resolution passed by the Shareholders in a general meeting, regarding the exercise of borrowing powers in accordance with Section 180(1) (c) must specify the total amount to which the Board of Directors is authorized to borrow money.

Example 1: Company ABC Ltd.

Financial Position:

Paid Up Share Capital: Rs. 50 Crores

Free Reserves: Rs. 30 Crores

Securities Premium: Rs. 20 Crores

Total = Rs. 100 Crores

Current Borrowings: Rs. 90 Crores

Proposed Borrowings: Rs. 50 Crores

In the above example the Board proposes to borrow an additional Rs. 50 Crores, which would bring the total borrowings to Rs. 140 Crores which exceeds the threshold of Rs. 100 Crores a Special Resolution is required to be passed in general meeting authorizing the Board to borrow upto Rs. 140 Crores.

The resolution might state:

“RESOLVED THAT the Board of Directors be and is hereby authorized to borrow funds upto a maximum of ` 140 Crores over and above the Company’s paid up share capital, free reserves and securities premium.

(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 (1) (a) mandates that the Board must obtain the consent of the members of the Company in General Meeting before selling, leasing or otherwise disposing off the whole or substantially the whole of the Company’s undertaking.

However Section 180 (3) outlines specific exceptions to this requirement.

Exceptions to Section 180 (1) (a)

Clause (a) Protection of the Title of Buyer or Person taking on lease in good faith:

This Clause ensures that the title of a Buyer or Lessee who acquires property, investment or undertaking from the Company in good faith is protected, even if the Company did not follow the procedural requirement of obtaining consent from members in a general meeting.

This provision safeguards the interests of innocent third parties who acquire property or assets from the Company without knowledge of any irregularities or internal compliance issues, surrounding the transaction, ensuring that their interests are secure and maintaining confidence in commercial transactions.

By preserving the title of Buyers and Lessees who engages in transactions with the Company, this Clause promotes confidence and stability in commercial dealings. It encourages investment and business transactions by assuring buyers and lessees that their rights will be protected enhancing trust and facilitating smooth business operations.

Implications:

Companies must still try to follow the approval requirements, but if they accidentally don’t, it won’t affect the validity of transactions with the third parties who were unaware of the issue.

Example:

A Manufacturing Company inadvertently sells a major piece of machinery without obtaining necessary approval in general meeting. The buyer unaware of this requirement acquires the machinery. The buyer’s title to the machinery is protected.

Clause (b) Sale or Lease of Property as Ordinary Business

This Clause states that if a Company’s Ordinary business involves selling or leasing property, then such transactions do not require the consent of members in a general meeting.

This provision ensures that Companies engaged in such activities as part of their regular business operations can proceed without the need for additional approvals for each transaction.

By exempting routine property transactions from additional regulatory requirements the provision streamlines business operations and reduces administrative burdens on companies. It allows companies to efficiently conduct day to day activities without undue regulatory interference, facilitating smoother business processes.

Example:

(i) PQR Ltd. primarily operates as a real estate development company buying, selling and leasing properties as part of its core business activities. In this case the sale or lease of properties by the Company would be considered as part of its ordinary business.

Therefore, transactions involving the sale or lease of properties by the Company would not be subject to the restrictions imposed by clause (a) of sub-section (1) as long as they are conducted in the ordinary course of business.

(ii) ABC Ltd. a car rental Company regularly sells older vehicles as part of its business model. Each sale does not require Shareholder approval because selling vehicle is part of its ordinary business.

(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 authorize the company to effect any reduction in its capital except in accordance with the provisions contained in this Act.

Analysis:

Special Resolution Conditions

This provision states that any special resolution passed by the   Company consenting to a transaction involving the sale or disposal of the Company’s assets as referred to in Clause (a) of sub-section (1) of Section 180 may include the conditions specified in the resolution.

These conditions can govern how the proceeds from the transaction should be used, disposed of or invested.

Example:

XYZ Ltd. decides to sell a non-core business unit to streamline its business operations and focus on its core competencies. The sale of this business unit requires shareholders’ approval through a special resolution passed by the Company in a general meeting as mandated by Section 180 of the Companies Act.

During the general meeting, shareholders discuss and vote on the special resolution approving the sale of the business unit. As part of the resolution, shareholders stipulate conditions regarding the use of the proceeds generated from the sale. These conditions may include:

(i) Reinvesting a portion of the proceeds into the Company’s core business segments to drive growth and expansion.

(ii) Using another portion of the proceeds to pay off existing debts or liabilities, thereby strengthening the Company’s financial position.

(iii) Distributing a portion of the proceeds as dividends to the Shareholders, rewarding them for their investment in the Company.

By including these conditions in the Special Resolution, shareholders ensure that sale proceeds are utilized in a manner that maximizes shareholder value and aligns with the Company’s strategic objectives.

Capital Reduction Restriction

The proviso clarifies that while the Special Resolution can include various conditions, it does not give the Company the authority to reduce its capital.

The proviso under Section 180 (4) reinforces the principle that Capital Reduction is a distinct process governed by Section 66 of the Companies Act, 2013. This ensures that capital reduction which has profound implications for Creditors and Shareholders is subject to stringent oversight. It requires adherence to a structured process that includes approval by the National Company Law Tribunal (NCLT) ensuring protection for Creditors and Minority Shareholders.

Example:

If a Company PQR Ltd. decides to sell a major subsidiary. While the Special Resolution includes conditions for the utilization of the sale proceeds, the company wishes to return part of the proceeds to shareholders through a reduction in share capital. To do this, the Company must follow the detailed capital reduction procedures as set out in Section 66 including obtaining approval from the National Company Law Tribunal (NCLT) and adhering to other legal requirements.

(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.

Explanation :

This sub-section addresses the validity of debts incurred beyond the prescribed limits and the safeguards available to lenders.

Validity of Debt incurred by the Company: Debts incurred by the Company that exceed the borrowing limits specified in   Section 180 (1) (c) are not valid or enforceable unless certain conditions are met.

Lenders’ Protection: The debt remains valid if the lender can prove two things :

• The loan was advanced in good faith.
• The lender had no knowledge that the borrowing limit had been exceeded.

Interpretation:

This sub-section outlines that if a Company borrows more money than   it is allowed to without the required shareholder approval, the debt is not automatically valid. The burden of proof falls on the lender on show that they acted in good faith and were unaware that the Company had exceeded its borrowing limits.

Analysis:

• This provision protects the Company and its shareholders from unauthorized or excessive borrowing that could jeopardize the Company’s financial health.
• It also protects lenders who act in good faith, ensuring that they are not unfairly penalized for the Company’s internal compliance failures.

Good Faith and Knowledge:

Interpretation:

For the debt to be valid, the lender must demonstrate that they provided the loan with honest intentions and without the knowledge of the Company’s non-compliance with borrowing limits.

Analysis:

• This encourages lenders to conduct due diligence before advancing large loans to Companies, promoting transparency and accountability.
• It balances the interests of the company and its creditors, ensuring that lenders who genuinely did not know about the borrowing limits are not unduly harmed.

Examples:

1) Debt Validity in Good Faith

Scenario:

Company A has a borrowing limit of ` 50 Crores, as approved by its Shareholders. The Board without obtaining further approval borrows an additional  ` 20 Crores, exceeding the limit.

Lender’s Position:

If Lender ‘X’ advanced the loan in good faith and without knowledge that the Company had already exceeded its borrowing limit, the debt could still be considered valid. Lender ‘X’ would need to prove that they were unaware of the excess borrowing and acted in good faith.

Outcome:

Lender ‘X’ is protected and can enforce the debt, assuming they can provide evidence of their good faith and lack of knowledge about the limit being exceeded.

2) Debt Invalid due to Lack of Good Faith:

Scenario:

Company B has a borrowing limit of ` 100 Crores, as approved by its Shareholders. The Board borrows ` 30 Crores beyond this limit without Shareholder approval. Lender ‘Y’ knew about the limit and the excess borrowing but chose to advance the loan anyway.

Lender’s Position:

Since Lender ‘Y’ was unaware of the limit being exceeded and did not act in good faith, the debt would be considered invalid and unenforceable.

Outcome:

Company B is not obligated to repay the excess amount, protecting it from unauthorized financial obligations.

Exception

In case of Private Company – section 180 shall not apply – Notification dated 5th June, 2015.

In case of Specified IFSC Public Company – section 180 Shall apply in case of a Specified IFSC public company, unless the articles of the company provides otherwise – Notification Dated 4th January, 2017.

CONCLUSION:

Section 180 of the Companies Act, 2013 establishes crucial safeguards for significant corporate decisions involving borrowing, asset transactions and capital management. It ensures that such actions are subject to shareholder approval, protecting the Company’s financial health and shareholder interests. These provisions promote transparency, accountability and responsible corporate governance, balancing the needs of the Company with those of its stakeholders.

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