Informative note on provisions of Section 180 of the Companies Act, 2013 Index 1. Text of the relevant Section 180 of the Companies Act, 2013 - Page 2-3 2. Our Briefings I. Short Introduction - Page 4 II. Applicability - Page 4 III. Important Notes for understanding of the statute - Page 5-6 IV. Actions to be taken By Companies (Private & Public Ltd) - Page 7 By Banks/ Financial Institutions - Page 8 V. Annexure Draft of Special Resolution under Section 180(1)(a) - Page 9 Draft of Special Resolution under Section 180(1)(c) - Page 10 Created on 21 st May, 2014 by Ms. Shweta Gokarn- ACS 30393 Contact Details: csshwetagokarn@gmail.com +91 9920 999 686
Restrictions on powers of Board Under section 180 of the Companies Act, 2013 Below mentioned is the Section 180 of the Companies Act, 2013 as it is, for your reference. Our briefings on the same are noted below this Section for your understanding. Restrictions on the power of Board 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; 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; d) to remit, or give time for the repayment of, any debt due from a director Page 2
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; 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. 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 authorise 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. Page 3
Our Briefings: Introduction Section 180 of the Companies Act, 2013 corresponds to section 293 of the companies Act, 1956. This section is covered under notification which was issued by Ministry of Corporate Affairs on 12 th September, 2013 and the said section has been brought into effect from 12 th September 2013. Applicability Section 180 is applicable on all Companies either private Companies or public Companies. The provisions are applicable with effect from 12 th September, 2013. Page 4
Important Notes and explanations wrt Section 180 - The new section 180 (Section 293 of the earlier Act) pertains to powers of the Board of Directors which can be exercised only at a general meeting by way of special resolution to be passed for the purpose. Section 293(1)(d) pertained to borrowing powers of the companies i.e. the amount upto which the companies could borrow was laid down in the ordinary resolution which was approved by the members in the general meeting. - Companies are allowed to borrow any sums of monies upto the paid up share capital and free reserves of the company. However any borrowal in excess of the combination of these two limits i.e. paid up share capital and free reserves, will require approval of the members in the general meeting by way of Special Resolution. Under old Companies Act, 1956, the resolution passed in the general meeting in this regard, was not necessarily be Special Resolution. - Earlier Section 293 of the Companies Act, 1956 was applicable only to public companies i.e. private limited companies were exempted from this requirement and therefore they could borrow any sums of money upto any limit without the need of seeking any approval from the members of the company. - Now Section 180 is applicable to all companies i.e. public as well as private. So now onwards even private companies have to seek the approval of their members if they are intending to borrow monies in excess of their paid up share capital and free reserves. - A combined reading of the above section implies that it has become necessary for private companies to obtain approval of their members by way of special resolution passed at the general meeting that the company is allowed to borrow monies in excess of the paid up share capital and free reserves of the company, specifying thereby the maximum amount upto which monies could be borrowed by the company. - Initially there was lot of confusion in the industry whether such Special resolutions will be required for the loans taken or borrowings made, securities/ charges created by Company (Private as well as Public) before implementation of this Section. Ministry of Corporate Affairs vide its Circular No. 04/2014 dated 25 th March, 2014 clarified that the resolutions passed under Section 293 of the Companies Act, 1956 prior to 12 th September, 2013 with reference to borrowings and/ or creation of Security on assets of Company will be treated as sufficient compliance of requirements of Section 180 of the Companies Act, 2013 for a period of one year from the date of notification of Section 180 i.e. from one year from 12 th September, 2013. Page 5
Considering this clarification issued by Ministry of Corporate Affairs, all working and active private companies will be required to pass the necessary special resolutions in this regard. - Further in case of Public Limited Company, if the Company has already passed an ordinary resolution in a general meeting in this regards before commencement of this rule, however if the resolution was ordinary or no any specific amount was mentioned with respect to borrowing limits in the resolution, then such Public Limited Company is also required to pass Special Resolutions specifying the exact amount upto which Board of Directors are authorized to borrow and/or create a security on assets of Company. Page 6
1. Actions to be taken By Companies:- Private Limited Company: 1) Check if the Company has any borrowings/ security created which is beyond the prescribed limits of Section 180 of the Companies Act, 2013. 2) If yes, then call a meeting of members of the Company and pass necessary Special Resolution. 3) File the Certified Copies of such special resolutions with Registrar of Companies in E- Form MGT-14 within 30 days from the date of passing of such resolutions. 4) Submit the Certified Copies of such special resolutions with your lender Bank/ Financial Institution. Public Limited Company: 5) Check, if the Company has any borrowings/ security created which is beyond the prescribed limits of Section 180 of the Companies Act, 2013. 1) If yes, then check whether the resolutions passed then, were Ordinary or Special. Further also check, if the specific amount upto which Board can borrow/ create security has been mentioned in the resolution passed. 2) If the resolutions passed earlier i.e. before commencement of this rule (before 12 th September, 2013) were Special Resolutions and specific amount upto which Board can borrow has been mentioned in the Special Resolution then no need to pass any further resolution. 3) However, in either of the cases i.e. if the earlier resolutions were Ordinary resolutions or if the earlier resolutions were Special but no specific amount was mentioned, then Company should call a general meeting of its members by giving proper notice and pass necessary Special resolutions. 4) File the Certified Copies of such special resolutions with Registrar of Companies in E- Form MGT-14 within 30 days from the date of passing of such resolutions. 5) Submit the Certified Copies of such special resolutions with your lender Bank/ Financial Institution. Page 7
By Banks / Financial Institutions (Lenders):- It is evident that Banks or Financial Institutions need to be more vigilant while giving loans to the Private as well as Public Limited Companies. One need to ensure that the Borrower Company is complying with the provisions of this section with respect to the limits prescribed and has taken necessary approval in the form of Special Resolution from Shareholders in a General Meeting where the credit facility is exceeding the prescribed limits. In case, where the loan amount is within the prescribed limits, Banks should ask for a Certified Copies of two resolutions, viz:- 1. Resolution passed in the Board meeting authorizing the Board members to borrow such amount which is within the limits as prescribed in Section 180 (1)(c) on behalf of the Company 2. Resolution passed in the Board meeting under Section 180(1)(a) authorizing Board to create a security/ Charge on assets of Company. And where the borrowings are going beyond the prescribed limits, apart from CTC of Board resolution, Banks should also insist for Certified Copy of a Special Resolutions (Drafts Annexed) passed at the general meeting of the members of Company. Further the lending Bank can also ask for Certified Copies of such Special resolutions in case of its existing Corporate Borrowers. Enclosure 1. Draft of Special Resolution under Section 180(1)(a) 2. Draft of Special Resolution under Section 180(1)(c) ************************ Disclaimer: The contents provided in this note are meant for information only. They should not to be construed as canvassing or soliciting work. The material contained in this article is general information and does not amount to advice on any particular matter. The application and impact of laws can vary widely based on the specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions or inaccuracies in information contained in this article. The information contained in this article should not be used as a substitute for consultation with professional or other competent advisers. You are advised to seek appropriate professional advice before acting on the basis of any information contained herein. Page 8
Annexure Draft of Special Resolution to be passed in General Meeting of the Members under Section 180(1)(a) RESOLVED that pursuant to Section 180 (1) (a) and other applicable provisions, if any, of the Companies Act, 2013, consent of the Company be and is hereby given to the Board of Directors of the Company (hereinafter referred to as the Board which term shall be deemed to include any Committee thereof) to create such charges, mortgages and hypothecations in addition to the existing charges, mortgages and hypothecations created by the Company, on such movable and immovable properties, both present and future, and in such manner as the Board may deem fit, together with power to take over the substantial assets of the Company in certain events in favour of banks/financial institutions, other investing agencies and trustees for the holders of debentures/ bonds/other instruments to secure rupee/foreign currency loans and/or the issue of debentures whether partly/fully convertible or non-convertible and/or securities linked to equity shares and/or rupee/ foreign currency convertible bonds and/or bonds with share warrants attached (hereinafter collectively referred to as Loans ) provided that the total amount of Loans together with interest thereon, additional interest, compound interest, liquidated damages, commitment charges, premia on pre-payment or on redemption, costs, charges, expenses and all other monies payable by the Company in respect of the said Loans, shall not, at any time exceed Rs. (Rupees ). RESOLVED FURTHER that for the purpose of giving effect to this resolution, the Board or any Committee thereof be and is hereby authorized to finalize, settle and execute such documents /deeds / writings / papers / agreements as may be required and to do all such acts, deeds,matters and things, as it may in its absolute discretion deem necessary, proper or desirable and to settle any question, difficulty or doubt that may arise in regard to creating mortgage / charge as aforesaid. Page 9
Draft of Special Resolution to be passed in General Meeting of the Members under Section 180(1)(c) RESOLVED THAT pursuant to the provisions of Section 180(1)(C) of Companies Act, 2013 or any amendment or modifications thereof, the Board of Directors of the Company be and is hereby authorised to borrow from time to time all such sums of monies as they may deem necessary for the purpose of business of the Company notwithstanding that monies to be borrowed together with the monies already borrowed by the Company may exceed the aggregate of the Paid-up-capital of the Company and its free reserves i.e. to say reserves not set apart for any specific purpose (apart from temporary loans as defined in the said provisions of the Act) obtained from the Company Bankers in the ordinary course of business provided that the total amount upto which monies to be borrowed by the Board of Directors shall not exceed the aggregate of Rs. and the paid-up-capital and free reserves of the Company. Page 10