Article explains Meaning of Ordinary Course of Business, Provisions under the Companies Act, 2013 in Tabular format in which the term ‘Ordinary Course of Business’ is used, Ordinary Course of Business w.r.t, Section 180 of the Companies Act, 2013, Ordinary Course of Business w.r.t, Section 188 of the Companies Act, 2013 and Use of Ordinary Course of Business in CSAS-1 Auditing Standard on Audit Engagement.

Meaning of Ordinary Course of Business

The Companies Act, 2013 uses the term “Ordinary Course of Business” many times, however it does not define the said term.

The ordinary meaning of the expression ‘in the ordinary course of business in dictionaries is part of doing regular business; the regular or customary condition or course of things; as things usually happen.

Many Dictionaries define the term as part of doing regular business; the regular or customary condition or course of things; as things usually happen. According to the Black’s law Dictionary it means the normal routine in managing a trade or business.

Provisions under Companies Act, 2013 in which term ‘Ordinary Course of Business’ is used

Following table depicts the provisions of the Companies Act, 2013 in which the term “Ordinary Course of Business” is used-

Provisions under the Companies Act, 2013   Particular

Clause (a) of Sub- Section (3) of Section 67

Section 67 of the Companies Act, 2013 deals with Restriction on purchase by company or giving of loans by it for purchase of its shares. 

Clause (a) of Sub- Section (3) of Section 67 the Companies Act, 2013 provides that nothing in sub-section (2) shall apply to—

the lending of money by a banking company in the ordinary course of its business;

Second proviso of clause (g) of the Sub-Section (3) of Section 117

Section 117 of the Companies Act, 2013 deals with Resolutions and Agreements to be Filed 

Second proviso of clause (g) of the Sub-Section (3) of Section 117 of the Companies Act, 2013 provides that nothing contained in clause (g) shall apply to a banking company in respect of a resolution passed to grant loans, or give guarantee or provide security in respect of loans under clause (f) of sub-section (3) of section 179 in the ordinary course of its business.

Note: Clause (g) of the Sub-Section (3) of Section 117 – Resolutions passed in pursuance of sub-section (3) of section 179 needs to be filed with Registrar in MGT-14.

Second proviso of Sub-Section (3) of Section 179

Section 179 of the Companies Act, 2013 deals with Powers of Board. 

Second proviso of Sub-Section (3) of Section 179 of the Companies Act, 2013 provides 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 withdraw able by cheque, draft, order or otherwise, or the placing of monies on deposit by a banking company with another banking company on such conditions as the Board may prescribe, shall not be deemed to be a borrowing of monies or, as the case may be, a making of loans by a banking company within the meaning of this Section. 

Clause (c) of Sub-Section (1) of Section 180

Section 180 of the Companies Act, 2013 deals with restrictions on powers of Board. 

Clause (c) of Sub-Section (1) of Section 180 of the Companies Act, 2013 provides that the the Board of Directors of a company shall exercise the following powers

[ 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] only with the consent of the company by a special resolution.

Clause (b) of Sub-section (3) of the Section 185

Section 185 of the Companies Act, 2013 deals with loan to Directors, etc. 

Clause (b) of Sub-section (3) of the Section 185 of the Companies Act, 2013 provides that Section 185 shall not be applicable to a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the rate of prevailing yield of one year, three years, five years or ten years Government security closest to the tenor of the loan.

Clause (a) of Sub-section (11) of the Section 186

Section 186 of the Companies Act, 2013 deals with 2 concepts. Sub-section 1 deals with layers of investment companies while other provisions talks about loan, guarantee, security and investment to any person or other body corporate. 

Clause (a) of Sub-section (11) of the Section 186 of the Companies Act, 2013 provides that nothing contained in Section 186, except sub-section (1), shall apply to any loan made, any guarantee given or any security provided or any investment made by a banking company, or an insurance company, or a housing finance company in the ordinary course of its business, or a company established with the object of and engaged in the business of financing industrial enterprises, or of providing infrastructural facilities.

Forth proviso of Sub-section (1) of Section 188

Section 188 of the Companies Act, 2013 deals with related party transactions. 

Forth proviso of Sub-section (1) of Section 188 of the Companies Act, 2013 provides that Section 188 (1) shall apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not on an arm‘s length basis.

Clause (b) of Sub-section (5) of Section 189

Section 189 of the Companies Act, 2013 deals with register of contracts or arrangements in which directors are interested. It provides that every company shall keep one or more registers giving separately the particulars of all contracts or arrangements to which sub-section (2) of section 184 or section 188 applies, in  Form MBP – 4 after entering the particulars, such register or registers shall be placed before the next meeting of the Board and signed by all the directors present at the meeting. 

Clause (b) of Sub-section (5) of Section 189 of the Companies Act, 2013 provides that nothing shall apply to any contract or arrangement by a banking company for the collection of bills in the ordinary course of its business.

Section 329

Section 329 of the Companies Act, 2013 deals with transfers not in good faith to be void. 

Any transfer of property, movable or immovable, or any delivery of goods, made by a company, not being a transfer or delivery made in the ordinary course of its business or in favour of a purchaser or encumbrancer in good faith and for valuable consideration, if made within a period of one year before the presentation of a petition for winding up by the Tribunal under this Act shall be void against the Company Liquidator.

Clause (a) of Sub-section (1) of Section 336

Section 336 of the Companies Act, 2013 deals with offences by Officers of Companies in Liquidation. 

If any person, who is or has been an officer of a company which, at the time of the commission of the alleged offence, is being wound up,  by the Tribunal under this Act or which is subsequently ordered to be wound up by the Tribunal under this Act does not, to the best of his knowledge and belief, fully and truly disclose to the Company Liquidator all the property, movable and immovable, of the company, and how and to whom and for what consideration and when the company disposed of any part thereof, except such part as has been disposed of in the ordinary course of the business of the company.

Now, my discussion on the term “Ordinary Course of Business” will be limited w.r.t, two section i.e, section 180 and section 188 of the Companies Act, 2013.

Term “Ordinary Course of Business” w.r.t, Section 180 of Companies Act, 2013:

Section 180 of the Companies Act, 2013 deals with restrictions on powers of Board. 

Clause (c) of Sub-Section (1) of Section 180 of the Companies Act, 2013 provides that the the Board of Directors of a company shall exercise the following powers [ 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] only with the consent of the company by a special resolution.

Observation: If a Company avails temporary loans in its ordinary course of business, it will not fall with the mischief of Section 180 of the Companies Act, 2013. This does not mean when the Company avails such loans for the first time after its incorporation, it would not be considered as happening in the ordinary course of business. Thus, in order to be construed as happening in the ordinary course of business, it is not necessary to establish any series of transactions or transactions of any particular period of time.

Term “Ordinary Course of Business” w.r.t, Section 188 of  Companies Act, 2013:

Section 188 will not be applicable if a transaction is in the ordinary course of business and at arm’s length price.

To decide whether an activity which is carried on by the business is in the ‘ordinary course of business’, the following factors may be considered (as per guidance note issued by ICSI)-

a). Whether the activity is covered in the objects clause of the Memorandum of Association

b). Whether the activity is in furtherance of the business

c). Whether the activity is normal or otherwise routine for the particular business (i.e. activities like advertising, staff training, etc.)

d). Whether the activity is repetitive/frequent

e). Whether the income, if any, earned from such activity/transaction is treated as business income in the company’s books of account

f). Whether the transactions are common in the particular industry

g). Whether there is any historical practice to conduct such activities

h). The financial scale of the activity with regard to the operations of the business.

I). Revenue generated by the activity

j). Resources committed to the activity 

  • In the case of M/s. Bharti Televentures Ltd. V. Addl./Jt. Commissioner of Income Tax it was held that the Memorandum and Articles of Association is not conclusive for deciding whether an activity is in the ordinary course of business of the company.
  • In the case of Seksaria Biswan Sugar Factory v. Commissioner of Income Tax the Hon’ble High Court decided that the amount lent by the company to a third party will not be in the ordinary course of business. The Court observed that just because an activity is included in the Memorandum of Association, the activity does not become an activity per se in the ordinary course of business of the company.
  • In the case of Commissioner of Income Tax and Excess Profits the assessee had entered into agency agreements for exploitation of these three films in question. It was held that entering into such agency agreements for acquiring films was a part of the assessee’s business and the agreements in question having been entered into by the assessee in the ordinary course of business, cancellation of those agreements was also a part of the assessee’s business and was resorted to in order to adjust the relation between the assessee and the producer of those films.

The Memorandum of Association of the company should be referred to for ascertaining whether the activity is covered in the objects clause therein. This is not a conclusive test but will assist in determining whether a transaction is in the ordinary course of business or not. The Audit Committee may decide whether a particular transaction is in the ordinary course of business and such decision will be based on the policy on transactions with related parties, if any. The company’s policy on transactions with related parties should specify the parameters to guide the Audit Committee on whether a transaction is in the ordinary course of business or not. Apart from such a policy, a company may formulate guidelines approved by the Audit Committee and the Board of Directors on transactions with related parties. In such cases, the company can enter into transactions based on the approved guidelines and every transaction need not be placed before the Audit Committee for determining whether the same is in the ordinary course of business or not. In case the company does not have an Audit Committee, the decision as to whether a transaction is in the ordinary course of business or not will be taken by the Board.

The term ‘ordinary course of business’ has, however, not been defined in the Act and the government also has ruled out defining the term which is used in the Companies Act, 2013 several times. So, boards are left to their different interpretations of the term, thus creating confusion. The lack of definition or framework leaves a lot to the discretion of the board and the audit committee in particular. Given the sensitivity and potential conflict of interest in related-party transactions, you need have a guiding pillar around which the board can take the decision to add fairness and neutrality to the decisions. Regulation 23 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 provides that the listed entity shall formulate a policy on materiality of related party transactions and on dealing with related party transactions including clear threshold limits duly approved by the board of directors and such policy shall be reviewed by the board of directors at least once every three years and updated accordingly.

So it is advisable for the company to define the term “Ordinary Course of Business” in the policy either through a framework or through a negative/ exemption list.

Use of Ordinary Course of Business in CSAS-1 Auditing Standard on Audit Engagement:

CSAS-1 Auditing Standard on Audit Engagement issued by ICSI also uses the term “Ordinary Course of Business” but it does not define. It provides that the Auditor shall not have any substantial conflict of interest with the Auditee. Any conflict of interest, other than substantial conflict of interest, must be disclosed by the Auditor before accepting the Audit Engagement or as soon as the Auditor becomes aware of the same, as the case may be.

SUBSTANTIAL CONFLICT OF INTEREST MEANS

The term “ordinary course of business” has not been defined. An assessment of whether a transaction is in “ordinary course of business” can be subjective and may vary on case-to case basis.

(Any query and suggestion kindly contact the author at: sandy673711@gmail.com or +918077133617)

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. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, I assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not professional advice and is subject to change without notice. I assume no responsibility for the consequences of the use of such information.

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