RESTRICTION ON POWER OF BOARD

SECTION 180: RESTRICTION ON POWER OF BOARD

The powers of the Board of Directors of a company are not unrestricted or uncontrollable as Section 180 portrays. This Section contains directive provisions which direct that the powers in respect of specified matters shall be exercised by the Board subject to the certain restrictions i.e. in such cases the exercise of powers by the Board shall be restricted as per law. Section 180 is not applicable to a private company.

(i) Matters in respect of which powers shall be exercised after obtaining consent by a special resolution: According to Section 180 (1), following are the matters in respect of which the Board shall exercise the powers with the consent of the company by a special resolution and not on its own simply by passing a Board resolution at a Board meeting:

(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. In other words, out of multiple undertakings of a company even if one is sold, leased or disposed of, either wholly or substantially, the consent by special resolution shall be required.

Imposition of conditions by the shareholders: According to Section 180 (4), any
special resolution passed by the company consenting to the transaction of sell, lease, etc., may stipulate certain conditions and if so, the same need to be specified in such resolution. Among others, the conditions shall be regarding the use, disposal or investment of the sale proceeds which may result from the transactions.

Section 180 (4) not to be taken as authorization for reduction in capital: It is
provided that sub section (4) shall not be deemed to authorize the company to effect any reduction in its capital. Such reduction must be effected in accordance with the provisions contained in the Companies Act, 2013.

No need for special resolution if selling, leasing, etc. is part of ordinary business of the company: According to Section 180 (3) (b), the restriction in the form of special resolution is not attracted to the sale or lease of any property of the company where its ordinary business consists of such selling or leasing.

Clean title of the buyer, etc. [Section 180 (3) (a)]: In respect of a buyer who buys or in respect of other person who takes on lease (i.e. lessee) any property, investment or undertaking as is referred to in Section 180 (1) (a) in good faith, his title shall not be affected despite the fact that the directors resorted to selling or leasing without first obtaining the consent of the company by a special resolution.

Note 1: The expression “undertaking” means 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.

Note 2: 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.

Note 3: In case the provisions of Section 110 of the Act apply to the company which is resorting to sale of the whole or substantially the whole of its undertaking in terms of Section 180 (1) (c), it shall pass the special resolution containing such item of business by means of voting through postal ballot. [Refer Rule 16 (i) of the Companies (Management and Administration) Rules, 2014.]

Note 4: A One Person Company and other companies having members up to two
hundred are not required to transact any business through postal ballot.[refer Proviso to Rule 16 of the Companies (Management and Administration) Rules, 2014.]

(b) To invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation. It implies that if the investment of the
compensation amount is made in trust securities", there is no need to obtain consent of the members through a special resolution.

(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, free reserves and securities premium apart from temporary loans obtained from the company’s bankers in the ordinary course of business.

In simple words, ‘borrowings’ (including loans raised for meeting financial
expenditure of a capital nature) are not to include temporary loans which are obtained by the company from its bankers in the ordinary course of business.

Limit on ‘borrowings’ need to be specified: Section 180 (2) requires that every
special resolution passed by the company in general meeting in relation to the
‘borrowings’ shall specify the total amount up to which monies may be borrowed by the Board of Directors. Thus, the Board cannot be given blanket powers to borrow monies up to any extent of its choice, but the special resolution must specify the total amount that can be borrowed. In other words, a rational thinking in the form of specifying a ‘particular amount’ must be exercised by the shareholders so that borrowings are restricted. The specifying of total amount that can be borrowed is a step in this direction. Excessive borrowings at the whims and caprices of the Board are dangerous to the company as a whole including its shareholders.

Debt raised in excess of the specified limit [Section 180 (5)]: If a company incurs debt in excess of the limit imposed i.e. more than the ‘total amount specified in the special resolution, it shall not be valid or effectual from the point of view of lender unless such lender proves that he advanced the loan in good faith and without knowledge that the limit imposed had been exceeded. Thus, lender has to be fully cautious before extending any loan to a company. The loaned amount must not be in excess of the limit imposed otherwise it shall not be legally enforceable against the company. In other words, the lender must be aware in no uncertain terms the implications of Section 180 (5) and must carefully check the financial statements as well as the special resolution, if any, passed by the company before extending any loan facility to it.

Meaning of “Temporary Loans”: It is clarified by way of Explanation that the term ‘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.

Exemption to a banking company: 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 withdrawal by cheque, draft, order or otherwise, shall not be deemed to be a borrowing of monies by the banking company.

(d) To remit, or give time for the repayment of, any debt due from a director. Thus, if any debt is repayable by a director, then it cannot be remitted, or its repayment time cannot be extended unless consent by passing a special resolution is given by the company.

(ii) Contribution to bona-fide and charitable funds, etc.: This type of contributions by a company beyond certain limit requires passing of an ordinary resolution as required by Section 181.

Exemption
(As notified by the MCA, Section 180 of the Act (i.e. restrictions on the powers of the Board) shall not apply to a private company which has not committed a default in filing is financial statements under Section 137 or Annual Return under Section 92 with the Registrar. [Notification No. 464(E), dated 5 June, 2015 as amended by Notification No. 583 (E), dated 13 June, 2017.]