Companies Act Section 180 — Restrictions on powers of Board
CHAPTER XII MEETINGS OF BOARD AND ITS POWERS
Commercial / Corporate
Summary
Sub-section (1) sets out the powers that the Board of Directors can exercise only if the company approves them through a special resolution. These powers are listed in clauses (a) to (d).
Under clause (a) of sub-section (1), the Board needs this special resolution to sell, lease, or otherwise dispose of the whole or substantially the whole of the company's undertaking. If the company owns more than one undertaking, the same consent is needed to sell, lease, or dispose of the whole or substantially the whole of any one of those undertakings. The Explanation clarifies that an "undertaking" means one where the company's investment exceeds twenty per cent of its net worth as per the audited balance sheet of the preceding financial year, or one that generates twenty per cent of the company's total income during the previous financial year. It also states that "substantially the whole of the undertaking" means twenty per cent or more of the value of the undertaking as per the audited balance sheet of the preceding financial year.
Under clause (b) of sub-section (1), the Board needs this special resolution to invest, in trust securities, any amount of compensation it received as a result of a merger or amalgamation.
Under clause (c) of sub-section (1), the Board needs this special resolution to borrow money, but only when the amount to be borrowed, together with money already borrowed by the company, will exceed the aggregate of its paid-up share capital, free reserves, and securities premium. This limit does not apply to temporary loans obtained from the company's bankers in the ordinary course of business. The proviso states that a banking company accepting deposits from the public in the ordinary course of its business is not considered borrowing money under this clause. The Explanation defines "temporary loans" as loans repayable on demand or within six months, such as short-term cash credit arrangements, discounting of bills, and other short-term loans of a seasonal character, but it does not include loans raised for financial expenditure of a capital nature.
Under clause (d) of sub-section (1), the Board needs this special resolution to remit, or give more time for repayment of, any debt that is due from a director.
Sub-section (2) requires that every special resolution passed by the company in a general meeting, which relates to the borrowing power under clause (c) of sub-section (1), must specify the total amount up to which the Board of Directors may borrow money.
Sub-section (3) states that clause (a) of sub-section (1) does not affect the title of a buyer or other person who buys or takes on lease any property, investment, or undertaking in good faith. It also does not affect the sale or lease of any property of the company where the ordinary business of the company consists of, or includes, such selling or leasing.
Sub-section (4) allows any special resolution that consents to a transaction under clause (a) of sub-section (1) to include conditions, such as conditions regarding the use, disposal, or investment of the sale proceeds from the transaction. The proviso clarifies that this sub-section does not authorise the company to reduce its capital except in accordance with the provisions of this Act.
Sub-section (5) provides that any debt incurred by the company in excess of the borrowing limit imposed by clause (c) of sub-section (1) will not be valid or effective, unless the lender proves that he advanced the loan in good faith and without knowledge that the limit had been exceeded.
Official Text
(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 1[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:
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 withdraw able 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.
(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.