Section 180: Restrictions on Powers of Board

Ministry of Corporate Affairs, Government of India has published a circular with clarification with regard to Section 180 of the Companies Act, 2013.

The MCA acknowledged of receiving many representations regarding various difficulties arising out of implementation of Section 180 of the Act with reference to borrowings and/or creation of security, based on the basis of ordinary resolution.

The Ministry clarified that the resolution passed under Section 293 of the Companies Act, 1956 prior to 12/09/2013 with reference to borrowings (subject to the limits prescribed) and/or creation of security on assets of the company will be regarded as sufficient compliance of the requirements of Section 180 of the Companies Act, 2013 for a period of one year from the date of notification of Section 180 of the Act.

As per General Circular No. 04/2014 issued by MCA on 25/03/2014 clearly explain in the circular that the company has passed a ordinary resolution before 12/09/2013 so it can use borrowing funds till 11/09/2014 and immediately after this date the company has passed a special resolution in General meeting for continues using these funds in the future.

Thus, need of special resolution for the decision or borrow money (funds) which exceeding the paid up capital and free reserves of the company.

Further, borrowing powers now require approval by shareholders and applicable to both Public and Private Limited Companies, i.e., All companies covered u/s 180 of the Companies Act, 2013.

Corresponding Provisions of the Companies Act, 1956: Section 293

This section shall be read with Section 221 of the Companies Act, 2013.

Exercise of power without consent of members is exercise of powers beyond the authority of the Board and is ultra vires. And if the Board of Directors borrows in excess of the limits and without consent of members by Special Resolution, then the debt incurred by the Company shall not be valid or effectual. Since no specific penalty or punishment is prescribed for contravention of the Section, general penalty prescribed under Section 450 of the Act is applicable.

In Re.: United Spirits Limited, 2015(2) AKR 243

The sale of an undertaking is covered u/s 293(1)(a) of the Companies Act, 1956 upto 11/09/2013 and with effect from 12/09/2013 u/s 180(1)(a) and sub-section (49 of the Companies Act, 2013, which speaks of the restrictions of the powers of the Board. Therefore, in terms of Section 180 of the Companies Act, 2013 the approval of the BOD is required. In case a sale of an undertaking required the approval of the Honorable High Court, then such a condition would exist in Section 180. However, Section 180 does not provide for any approval by the High Court. Therefore, the Scheme of Demerger does not require the approval of the High Court u/s 180. In a Scheme of Demerger, Regional Director (Ministry of Corporate Affairs) objected that the Scheme of Demerger was only a high-off by way of a slump sale.

Reference:

According to Companies Act, 2013

Section 180: 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.

(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 and free reserves, 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; Restrictions on powers of Board.

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

(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.

(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.

(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.

(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.

(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.

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