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Restriction on Powers of Board of Directors

As per Company law powers of Company are exercise either by Board of Directors or by Shareholders. The relationship of Board of Directors and Shareholders is like federation.
Some powers are exclusively reserved for Board of Directors and some are exercise by board of directors after the approval of shareholders either by Ordinary resolution or by Special Resolution.

In simple words we can say that either board has absolute power(s) in certain matter(s) such as appointing an additional director as per Section 161 of the Companies Act, 2013 or the Board has restricted power(s) such as appointment of Independent Director as per Section 149 of the Companies Act, 2013.

Section 180 of the Companies Act, 2013 talks about the restriction on the Powers of Board of Directors. It would be easy for us if we first understand the provisions of Section 179 before understanding the Section 180.

Section 179: Power of Board of Directors

As per the provisions of Section 179(1) Board of Directors are entitled to exercise all such powers, and to do any act or thing on behalf of Company, as the company is authorised to exercise and do, provided:
  1. Exercising such power or doing such act or thing, the Board shall be subject to the provisions contained in that behalf in Companies Act, or in the memorandum or articles, or in any regulations duly made thereunder, including regulations made by the company in general meeting:

    • It means such powers should be well in the limits of Companies act, Memorandum of Association, Article or Association or any regulation or rule made under Companies Act or any regulation made by company in General Meeting. Board cannot exercise any power which is in contradiction to Act, MOA, AOA or any regulation under Companies Act or any regulation made by company in general meeting.
       
  2. Board shall not exercise any power or do any act or thing which is directed or required, whether under this Act or by the memorandum or articles of the company or otherwise, to be exercised or done by the company in general meeting.
     
    • It means that Board of Directors cannot exercise those powers on its own which are required to be exercised by the shareholders in general meeting, whether under this Act or any other act or by the memorandum or articles of the company or otherwise.
       
    • Restriction on the power of board are imposed under various sections of Companies Act, 2013 such as Section 62,42,152,180,13,66,188,149 and under many other sections under Companies Act, 2013. It may be noted that restriction can be imposed by any other Act also.
(Here we can say that board of directors have restricted powers on those matters in which approval of shareholders is required)

So now it is very much clear that in order to exercise any such power of the company which requires the approval of shareholders in that matter then Board shall obtain the approval of shareholders by way or Ordinary Resolution or Special Resolution, as the case may be, before using such power.

Section 180 of the Companies Act, 2013: Restrictions on the powers of Board of Directors

Section 180 of Companies Act, 2013 prescribed certain matters for which Shareholders approval by way of Special Resolution is necessary before exercising such power by Board of directors. Here we can say that Section 180 imposed the restrictions on the general powers of the Board of directors.
In order to achieve the matters of Section 180, Board of Directors require the approval of Shareholders approval by way of Special Resolution.

Here are the following matters prescribed under Section 180:

  1. To sell, lease or otherwise dispose of the whole undertaking or substantially the whole of the of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings.

    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;

    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;

    • If a company wants to sell, lease or otherwise dispose (includes mortgage) whole of the undertaking (as defined above) or substantial the whole of the undertaking (as defined above) then it requires prior approval of shareholders by way of Special Resolution.
       
    • If a Company do not pass the Special Resolution for the above mentioned transaction and buyer or other person who buys or takes on lease any property under good faith without knowing that the company has not complied with the law, then the title of such person towards such property shall not be affect.
       
    • If a Company sell or lease properties in its ordinary course of business, then the approval of shareholders is not required.
       
    • Any Special Resolution passed by the company for the above-mentioned transaction may stipulate such conditions under such resolution regarding the use, disposal or investment of the sale proceeds which may result from the transactions.
       
  2. To invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation

    • If a company received any amount of compensation as a result of any merger or amalgamation and wants to invest such amount anywhere then the Company requires the approval of shareholders by way of Special Resolution.
       
    • It may be noted that approval of shareholders is not required if the company wants to invest such amount into trust securities.
       
  3. 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:

    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.

    • If the company wants to borrow money and amount of money already borrowed plus amount of money to be borrowed exceeds its paid-up share capital, free reserves and securities premium. In such case company requires approval of shareholders by way of Special Resolution
      (Amount already Borrowed + Amount to be Borrowed > paid-up share capital, free reserves and securities premium) = Special Resolution required
       
    • It can be said that if the money already borrowed and the money to be borrowed is less than aggregate of its paid-up share capital, free reserves and securities premium then Board Resolution is enough and there is no need of passing the Special Resolution
      (Amount already Borrowed + Amount to be Borrowed < paid-up share capital, free reserves and securities premium) = Board Resolution is enough.

      o In the whole provision Temporary loans (as defined above) shall not be considered while calculating amount already borrow and amount to be borrowed.
       
    • Acceptance by a banking company, of any deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise, in the ordinary course of its business, shall not be deemed to be a borrowing of monies by the banking company within the meaning of this clause.
       
    • If a banking company accepts any deposits of money from the public, weather repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise then it do not require the approval of Shareholder by way of Special Resolution provided that transaction should be in the ordinary course of its business activities.
       
    • It means if the transaction is not in the ordinary course of business the it will require the approval of shareholders by way of Special Resolution.
       
    • No debt incurred by the company in excess of the limit imposed shall be valid or effectual, unless the lender proves that he advanced the loan in good faith and without knowledge that the limit imposed had been exceeded.
       
    • If Company do not pass the Special Resolution and borrows money in excess of the limits mentioned above then the onus is on the lender to prove that he advanced the loan in good faith and without knowing that the limit imposed had been exceed.
       
    • Every Special Resolution passed by the company in general meeting in relation to the borrow money under Section180(1)(c) shall specify the total amount up to which monies may be borrowed by the Board of Directors.
       
    • It means that the Shareholders can specify the upper limit up to which the amount can be borrowed by the company without the approval of shareholders. If the Board wants to borrow any amount beyond that upper limit then it will again require the approval of Shareholders by way of Special Resolution.
       
  4. To remit, or give time for the repayment of, any debt due from a director
    • If a Company remits (give up) or give time for the repayment of any debt due from any of the director of the Company then it requires Special Resolution for such decision.

Written By: Kunal Madhukar

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