Section 180 | Companies Act 2013 | Meaning of Term Undertaking

WHAT IS MEANING OF TERM ‘UNDERTAKING’
UNDER THE SECTION 180 OF THE COMPANIES ACT 2013

The Companies Act 2013, imposes some restrictions on the general powers of Board. Pursuant to section 180 of the Companies Act 2013, the Act specify the powers which Board can exercise only through approval of shareholders by Special Resolution.

The article emphasis on the term ‘undertaking’ used under the section 180 (1)(a) of the Companies Act 2013.

The Quote of the above said clause of the section 180 :

“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”.

The term ‘undertaking’ is crucial and requires the approval of members through special resolution at the however pursuant to section 110 of the Act read with the Rule 22(16)(i) of the Companies (Management and Administration) Rules, 2014 the postal ballot need to be passed for the “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.” So we can conclude that only for sale of undertaking the company need to pass the special resolution through postal ballot.

For any transaction to be consider as the ‘undertaking’ under the Act 2013, the transaction has to pass the test i.e.

A) Numeric Condition given under the Section 180(1)(a) of the Companies Act 2013

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

PART – A Numeric Condition given under the Section 180(1)(a) of the Companies Act 2013

As per explanation under Section 180 (1) (a) of the Act, undertaking means :

(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.

Following two criteria to be complied under section 180 (1)(a) :

(i) there should be an “undertaking”

(2) and there should be the sell, lease or otherwise dispose of undertaking

(3) Numeric condition i.e.,  invested more than 20% of its net worth or generate 20% of total income of the company during the previous financial year.

However, under section 180 (1)(a), the act only specify the numeric condition to be fulfilled but have not define the ‘Undertaking’.

PART-B Meaning of the ‘Undertaking’ (comment – which is not define 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.

Illustration

A company where only the properties belonging to the company have been dealt with by the board of directors under the deeds of hypothecation and mortgage in favour of the bank, no part of the undertaking of the company should be considered to be disposed of in favour of the bank.  Here, if the company mortgages the whole or substantially the whole of its undertaking for obtaining loans or financial assistance, it need not comply with the section 180(1)(a) of the Companies Act 2013, as the ‘business’ or ‘undertaking’ of the company must be distinguished from the ‘properties’ belonging to the company. (Ref. International Cotton Corpn. (P.) Ltd. V. Bank of Maharashtra [1970] 40 Comp. Cas. 1154 (Mys.)

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 Act 2013. 

Disclaimer : The views presented are in personal & in generic form and not as a legal advice, further it has nothing to do with where I am employed.