Restriction on Powers of the Board – Section 180 of the Companies Act 2013

INSIGHT INTO RESTRICTION ON POWERS OF THE BOARD AFTER 11^TH SEPTEMBER 2013 – SECTION 180:

The Companies Act, 2013 was passed by Lok Sabha in August, 2013 and 98 Sections were made applicable from 12.09.2013. This Act poses certain critical challenges before the Companies in their daily functioning. One among them is Section 180 of the Companies Act, 2013 for borrowing funds over & above a certain limit and creation of charge on assets made applicable with effect from 12.09.2013.

The objective of this analysis is to provide insight of Section 180 of the Companies Act, 2013 and precautions to be adopted by the companies.

Position under Companies Act, 1956:

Section 293 under the Companies Act, 1956 corresponded with Section 180 of the Companies Act, 2013 and it mandated passing of ordinary resolution in the General Meeting of the Company. However, the said Section was not applicable to the Private Company. The said section stands repealed upon applicability of new section 180.

Provisions under section 180:

Parties Covered:

This section is a wider Section and covers transactions with all the parties, whether related or not.

Transactions covered:

This section places restrictions on the powers of the Board to do the following transactions:

Sale or disposal of undertaking

Investment of money received as compensation under merger or amalgamation

Borrowing money in excess of aggregate of paid-up share capital and free reserves

Remittance or giving time for repayment of debt due from Director

Thus, where any of the above transactions are entered into by the Company and they exceed the threshold limits provided in the Section, the prior consent of members by way of special resolution is required.

Nature of transactions:

Sale or disposal of undertaking [Sub-section (1)(a)]

Sale of an undertaking or substantially the whole of the undertaking is covered in this Section. The disposal of any property of the Company can also fall under the purview of this Section. The term disposal may include transactions of mortgage, hypothecation, lease etc. as they amount to transfer of certain rights in the property.

The term ‘undertaking’ is defined as an undertaking in which the investment of the company exceeds 20% of its net worth or an undertaking which generates 20% of the total income of the company during the previous financial year. Where the company owns more than one undertaking, it also covers whole or substantially the whole of the undertaking. Similarly, ‘substantially the whole’ means 20% or more than 20% of the value of the said undertaking.

While this definition specifies criteria of what qualifies as an undertaking, the word ‘undertaking’ is not defined per se. Thus, judicial interpretation needs to be relied upon to decide what qualifies as an undertaking.

The subsidiary company need not be an undertaking of the holding company and hence disposal of investment in the shares of subsidiary does not fall under this section.

Investment of money received as compensation under merger or amalgamation [Sub-section (1)(b)]

Prior special resolution for investment of money in any manner than in trust securities received under any merger or amalgamation is required. The term merger or amalgamation covers restructurings in other corporate structures like Limited Liability Partnership. However, this marks a slight deviation from the provision of Companies Act, 1956 as that provision basically dealt with the compensation received pursuant to acquisition of property of the undertaking.

Borrowing money in excess of aggregate of paid-up share capital and free reserves [Sub-section (1)(c)]

Borrowing money where the money to be borrowed, together with the money already borrowed by the company exceeds the paid up capital and free reserves of the Company as per the last audited balance sheet of the Company shall fall under the purview of this Section.

The free reserves, as defined under Section 2 (43) of the Act, are those reserves which are available for payment as dividend. For ascertaining the limit, the temporary loans taken from the bankers in the ordinary course of business shall not be counted. Temporary loans are the loans repayable on demand or within six months from the date of loan including cash credit, discounting of bills. However, it specifically excludes the loans taken for capital expenditure regardless of the tenure.

Remittance or giving time for repayment of debt due from Director [Sub-section (1)(d)]

Any extension of tenure of loans already given to director will fall in the purview of this Section. Debt due from Director is a term wide enough to include any money due from the Directors in any capacity. Waiver of loan granted to director may also require approval under this section.

The earlier exemption of loan or advance made by banking company to its Director in the ordinary course of its business is not expressly provided.

Restrictions:

Prior Special resolution of the members is to be passed in the general meeting [or by way of postal ballot for transaction related to sale or disposal of undertaking as specified in Section 110 and corresponding draft Rule 7.20(16)] to grant authority to the Board. The special resolution for borrowing shall specify the limit up to which the borrowings can be made by the Board of Directors including existing borrowings.

Effects of no prior approval of shareholders taken:

If it is found that power has been exercised by the Board without obtaining prior approval of the members by special resolution, the Directors may be made personally liable for damages to the lender if it is proved that they have given implied guarantee of their authority to borrow.

The debt in excess of the borrowing limit shall be enforceable provided the lender has advanced the loan in good faith & is proved that the borrowed money has been utilised for the business purposes of the Company.

When the sale or disposal of undertaking is made without the authority of general resolution, the title of the buyer in good faith shall not be affected and he shall get good title of the property.

Transitional position for Public Companies:

The public companies and private companies which are subsidiaries of public companies to whom the Section 293 of the Companies Act, 1956 applied and which have duly passed the resolutions under the said section need not pass fresh resolutions as their earlier resolutions will remain in force by virtue of Section 645 of the Companies Act, 1956 read with definition of previous company law of Section 2 (67).

Compliance’s & filing:

Form 23 is required to be filed to deliver a copy of the special resolution passed under this Section to the Registrar of Companies.

Contravention & penalties:

As the Section does not provide any specific penalty for contravention, as per Section 450, of the Companies Act, 2013 the Company and every officer involved shall be subjected to a fine up to Rs. 10,000/- and in case the offense continues, additional fine of up to Rs. 1,000/- for every day.

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