Section 180: Restriction on Power of Board

Introduction

Section 180 of Companies Act, 2013, part of chapter XII that deals with meetings and powers of boards, primarily lays down the provision with respect to restriction of power of board. Board of directors are of immense importance in working of a company and they are ones making decisions and stirring the company towards achieving its objectives and thus they of course have a lot of power. But for the interest of the company, power cannot be saturated in hands of few and thus there are restrictions to the power of boards, which the act, 2013 itself provides. This section lays down powers of boards, involving important actions, that will affect the company and shareholders. These powers are bestowed on the board by passing a special resolution so that all the members of the company are involved in decision making. This analysis would provide in depth knowledge about this section and provide a detailed understanding of the Board’s scope of powers.

Purpose of Section 180

The purpose of this section of the act, 2013 is as follows:

1.     The following powers can only be exercised by board with the consent of the company after passing a special resolution:

• To sell, lease or dispose of the whole or substantially the whole of any undertaking of the company. Here undertaking is one in which the investment of the company exceeds twenty percent of its net worth or one which generates twenty percent of the total income of the company. Nothing under this shall affect (1) title of the buyer or the person who leases any undertaking, investment or property (2) the sale or lease of any undertaking or property of the company where in the ordinary business of the company consists of such selling or leasing. A resolution passing such sale or lease may include such conditions on the use, disposal or investment of the sale proceeds of such transaction as required. Further it is important to note that such condition shall not include condition for any reduction in share capital except as provided under the act.
• The amount of compensation received by it as a result of any merger or amalgamation, as provided by this section must be invested in trust securities.
• To borrow money when the aggregate amount of borrowing (past and present) exceeds its aggregate paid up share capital, free reserve and securities premium apart from temporary loans obtained from companies’ bankers in the ordinary course of business. The following will not be included in this section, with respect to banking companies: (a) acceptance by a banking company of deposits of money from the public, repayable on demand or otherwise (b) withdrawable by cheque, demand draft etc.
• Also this section by way of explanation defines what will be considered temporary loans, as the loans repayable on demand or within six months from the date of the taking of such loan for example: short term, cash credit arrangements, and other short term nature of loans but they do not include loans raised for the purposes of financial nature.
• When a debt on a company is above the proposed limit of this section, then it will be valid and effectual only when the lender proves that he has advanced loan in good faith and without knowledge that the limit imposed has exceeded.
• Paid up share capital basically means such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paid-up in respect of shares of the company[1]. Free reserves of a company are that reserve which as per the latest audited balance sheet of a company, are available for distribution as dividend[2]. Further any amount representing unrealized gains, notional gains or revaluation of assets or any change in carrying amount of an asset or of a liability recognized in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value are not included under free reserves of a company[3].
• This section also includes, remitting and giving time to the director of the company to repay any debt. Every special resolution passed in general meeting with respect to borrowings under this section, must specify the total amount up to which monies can be borrowed by the board of directors.

2.     This section has to be read with section 117 of the act, 2013 to make sure that proper due diligence by company is adhered to. Section 117 briefly states that a copy of Board resolutions for sell, lease or disposal of undertaking or substantial undertaking as well as Board resolution to borrow along with the copy of special resolution together with explanatory statement annexed to notice calling the meeting is required to be filed with the registrar of companies within 30 days from passing of such resolution by company.

3.     Further there seems to be no specific penalty for this section under the act, 2013 and thus penalty under section 450 of the Act will be applicable. Accordingly, the company as well as its officer who is in default or such other person shall be punishable with fine up to rupee ten thousand. For continuing offence, they are punishable with further fine up to rupee ten thousand for every day after the first during which contravention continues.

Situation Before Enactment of Section 180

The old act of 1956 also had a similar section laying down restriction on the power of board. Section 293 of the act, 1956 is like section 180 of the act, 2013. Under Section 293(i)(a), of the old act of 1956 there is similar provision regarding sale, lease or otherwise disposition of the whole or substantially the whole of the undertaking of the company. However, the act, 2013 defines the terms ‘undertaking’ to mean “an undertaking in which the investment of the company exceeds 20 percent of its net worth in accordance with the audited balance sheet of the preceding financial year or an undertaking which generates 20 percent of the total income of the company during the previous financial year” and “substantially the whole of the undertaking” to mean in any financial year shall mean “20 per cent or more of the value of the undertaking in accordance with the audited balance sheet of the preceding financial year”. What all will constitute as investment while comparing the limit of twenty percent of company’s net worth is not clearly mentioned. A view is emerging that while considering the amount of investment, it is also to be on the same parameters as determining the net worth of the company.

The act, 1956 states that the title that a person obtains person on buying or leasing of any such undertaking as is referred to in section 293(1)(a) of the old act, 1956 in good faith and after exercising due care and caution will not be affected under this section. The act 2013 mentions only good faith and has omitted the words ‘after exercising due care and caution’. Powers under section 293 of the act, 1956 could be exercised by the board of directors of public company, or of a private company which is a subsidiary of a public company with the approval of general meeting only by passing an ordinary resolution.

However, the act, 2013 provides for the approval of general meeting by special resolution instead of an ordinary resolution, as provided in the old act, 1956. The act, 2013 further stipulates that the said requirement of approval of general meeting by way of special resolution is now applicable to all companies instead of only public company and its subsidiary. Under the act, 2013 authority has been given to shareholders to review the position in case a director does not pay back loan/debt in time, Also now power to contribute to charitable and other funds as donation in any financial year specified under clause (e) of sub-section (1) of section 293 of the 1956 Act has been dealt separately under section 181 of the Act.

The above clearly shows that there are quite a few changes in the old and the new act and the act, 2013 have really tried to make the section more efficient and clearer.

Application of Section 180

This section basically lays down the powers that the board of directors cannot exercise without passing special resolution in general meeting. This is done to make sure that all the necessary precautions are set in place, so as to make sure only the best decisions for the good of the company are taken. If the board exercises these powers without consent of members by special resolution, then their acts would be invalidated and would be considered 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 would under this section would not be valid as per section 180(5) unless the lender proves that loan was given in good faith and without knowledge of any violation of section 180. Thus, a huge burden of proof lies on the lender.

This section comes into play whenever any of the decisions as represented by various clauses of this section have to be taken by board of directors and for the best interest of the company it is important as per this section, that these decisions be approved by all the important members of the company by passing a special resolution and not an ordinary resolution.

Amendment

This section has been amended in 2017 and under section 180(1)(c) the words ‘paid up share capital and free reserves’ have been replaced by ‘paid up share capital, free reserves and securities premium’[4]. Further by way of notification this section now does not apply to private companies who have not committed default in filing its financial statement or annual return under the act, 2013[5]. Further as per another notification this section will be application in case of specified IFSC public companies unless their articles say otherwise[6]. The Companies (Amendment) act, 2019 brings no changes to this section.

Cases at a Glance

• Though the provision in the act, 2013 with respect to restriction on power of board, explains the term “undertakings’ ‘, it still does not define what constitutes an undertaking. In the case of Yallamma Cotton, Woolen & Silk Mills Co. Ltd.[7], the court held that it is judicially not accepted that an “undertaking” means an asset or property of the company but can be considered as a distinct business activity. It was argued in this case that for the liquidator that the mortgage was beyond the powers of the board of directors under section 293(1)(b), and further that taking into possession the mortgaged property amounted to an act which was specifically prohibited by section 293(1)(a) as beyond the scope of the power of the board of directors, without ratification by the company in general meeting. It was observed by the judge in this case that “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 undertaking, i.e. things or articles which are necessarily to be used to keep the undertaking going or to assist the carrying on the activities leading to the earning of profits.”
• United Spirit Ltd. v. Nil[8]: This case was under section 391 to 394 of the act, 1956 for sanction of scheme of arrangement. The court discussed in detail section 180 of the act, 2013 and its requirements. Section 180 deals with the powers of the board of directors to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking that would necessarily involve the sale of the undertaking also. Such a sale or lease of the undertaking is very well defined under section 391 to 394. Thus, it is held that section 391 to 394 is a code itself and hence it is necessary it would take precedence over the provisions of section 180 of the act, 2013. The court here held that non-compliance of section 180 is not material. The court observed that the section 391 invests the court with the power to approve or sanction a scheme of amalgamation or arrangement, which is for the benefit of the company and thus in doing so, if there are any other things which also require a special resolution to be followed, expect for reduction of capital, then the court has power to sanction them while sanctioning the scheme itself.

Concluding Summary

This restricts the broad powers of the board of directors of a company. The case law on this section helps to understand in depth the various additional inputs that are added in the section by the court. This section not only safeguards the interest of the company but also of all its members and thus is an important section, which needs to be complied with by the board of directors.

References:

[1] Companies Act, 2013, No. 18, Acts of Parliament, § 2(64) (2013).

[2] Companies Act, 2013, No. 18, Acts of Parliament, § 2(43) (2013).

[3] Ibid

[4] The Companies (Amendment) Act, 2017, No. 1, (Acts of Parliament) (2018).

[5] MCA Notification G.S.R 464 (E) dated 5th June 2015.

[6] MCA Notification G.S.R 08 (E) dated 4th January 2017.

[7] Yallamma Cotton, Woolen & Silk Mills Co. Ltd., In re (1970) 40 Comp Cas 466 (Mys.).

[8] United Spirit Ltd. v. Nil (2015) 190 CompCas 225.

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