(IN) A Ramaiya: Guide To The Companies Act, 18th Edition 2014

A Ramaiya: Guide To The Companies Act, 18th Edition 2014

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A Ramaiya: Guide To The Companies Act, 18th Edition 2014 > A Ramaiya: Guide To The Companies Act,
18th Edition 2014 > Volume 2 > THE COMPANIES ACT, 2013 > CHAPTER XII Meetings of Board and
its Powers

THE COMPANIES ACT, 2013 (18 OF 2013)

CHAPTER XII Meetings of Board and its Powers

24 S. 180. Restrictions on powers of Board.—

(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
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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.

Corresponding Provision(s) of the Companies Act, 1956

S. 293. Restrictions on powers of Board.—

(1) The Board of Directors of a public company, or of a private company which is a subsidiary of a public
company, shall not, except with the consent of such public company or subsidiary in general
meeting,—
(a) 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 such undertaking;
(b) remit, or give time for the re-payment of, any debt due by a director25 [except in the case of
renewal or continuance of an advance made by a banking company to its director in the ordinary
course of business];
(c) invest, otherwise than in trust securities,26[the amount of compensation received by the company in
respect of the compulsory acquisition, after the commencement of this Act], of any such
undertaking as is referred to in clause (a), or of any premises or properties used for any such
undertaking and without which it cannot be carried on or can be carried on only with difficulty or
only after a considerable time;
(d) borrow moneys after the commencement of this Act, where the moneys to be borrowed, together
with the moneys already borrowed by the company (apart from temporary loans obtained from the
company’s bankers in the ordinary course of business), will exceed the aggregate of the paid-up
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capital of the company and its free reserves, that is to say, reserves not set apart for any specific
purpose; or
(e) contribute, after the commencement of this Act, to charitable and other funds not directly relating
to the business of the company or the welfare of its employees, any amounts the aggregate of
which will, in any financial year, exceed27 [fifty thousand rupees], or five per cent of its average
net profits as determined in accordance with the provisions of sections 349 and 350 during the
three financial years immediately preceding, whichever is greater.28[Explanation I.—Every
resolution passed by the company in general meeting in relation to the exercise of the power
referred to in clause (d) or in clause (e) shall specify the total amount up to which moneys may be
borrowed by the Board of Directors under clause (d) or as the case may be, the total amount which
may be contributed to charitable and other funds in any financial year under clause (e).
Explanation II.—The expression “temporary loans” in clause (d) 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 financing expenditure of a capital nature.]

29 [Explanation III].—Where a portion of a financial year of the company falls before the
commencement of this Act, and a portion falls after such commencement, the latter portion shall be
deemed to be a financial year within the meaning, and for the purposes of clause (e).

(2) Nothing contained in clause (a) of sub-section (1) shall affect—

(a) the title of a buyer or other person who buys or takes a lease of any such undertaking, as is referred
to in that clause, in good faith and after exercising due care and caution; or
(b) the selling or leasing of any property of the company where the ordinary business of the company
consists of, or comprises, such selling or leasing.
(3) Any resolution passed by the company permitting any transaction such as is referred to in clause (a) of
sub-section (1) may attach such conditions to the permission as may be specified in the resolution,
including conditions regarding the use, disposal or investment of the sale-proceeds which may result
from the transaction:

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 that behalf in this Act.

(4) 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 moneys by the banking company within the
meaning of clause (d) of sub-section (1).
(5) No debt incurred by the company in excess of the limit imposed by clause (d) 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.

Indian Act, 1913: S. 86-H

Indian Act, 1956: S. 293

NOTES

Companies Act, 1956: Section 293

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Section 293 of the 1956 Act placed restrictions on the authority of the Board by requiring permission of the
shareholders to undertake transactions covered under s. 293 of the 1956 Act.

Section 293 of the 1956 Act adopted with some improvements the following recommendations of the Company
Law Committee:

“Section 86-H of the Act of 1913 imposes some restrictions on the general powers of directors. We have
considered it necessary to amplify these powers and also to add to the restrictions. Thus, we recommend that
clause (a) of section 86-H should be so elaborated as to prohibit the directors of a public company or of a
subsidiary company of a public company, from selling, leasing or otherwise disposing of the whole or
substantially the whole of the undertaking of a company provided that, where a company owns more than one
independent undertaking the directors should not dispose of any such undertaking, without the consent of the
shareholders by an ordinary resolution. Secondly, we suggest a similar amendment in clause (b) of the section
so as to prevent the directors from extending the date of repayment of any debt due by a director without the
consent of a company in general meeting. The object of our first recommendation is to prevent the directors,
without the consent of the general body of shareholders from leasing out an undertaking to some other person,
when the company is formed clearly for the purpose of working the undertaking and not for transferring the
responsibility for its working to a lessee. We recognise that there may be occasions, when in pursuance of any
general proposal for pooling the resources of an industry or for its controlled and integrated working it may be
necessary for some particular units in the industry to be leased out to some other units in it. But such pooling or
controlled and integrated working of an industry does not come off overnight and is usually the result of
prolonged negotiations with the constituent units in an industry. It should not, therefore, be difficult for the
directors of a company to consult the general body of shareholders when such proposals are under discussion,
and we have no reason to think that when the position is fully explained to the latter, as it must be, they will
accept the advice of the directors, particularly when such advice will be necessarily in the long-term interests of
the company. In emergencies, such integrated working of an industry can be brought about only by special
legislation which will necessarily supersede the provisions of the Companies Act. In these circumstances, we
see no serious practical difficulty in depriving the directors of the power to sell, lease or otherwise dispose of
the whole or substantially the whole of the undertaking. In some special cases, where a company owns more
than one independent undertaking the sale, lease or disposal of any one of these undertakings may so cripple, or
damage the activities of the company, as to throw it almost out of gear. We have, therefore, considered it
necessary to provide that in such cases the directors should not exercise the powers to dispose of any single
undertaking without the consent of the shareholders. The object of the second recommendation about non-
extension of the period of re-payment of a debt by a director is self-evident and does not require any comment.”
(Report: para 102).

The Joint Committee made some more changes and explained as under:

a) Temporary loans obtained from the company’s bankers in the ordinary course of business have been
excluded when reckoning the limit up to which a company may borrow.
b) The Committee have provided that where any borrowing by a company is in excess of the limit
imposed by sub-clause (1)(d), the debt will not be binding on the company, unless the lender who
advances the loan has done so in good faith and without knowledge of the limit having been
exceeded.” (Report: para 103).

The Companies (Amendment) Act, 1960, inserted Explanations I and II to s. 293 of the 1956 Act whereby
provisions with respect to advances and temporary loans to directors were made. The Companies (Amendment)
Act, 1960, amended clause (b) in subsection (1) of s. 293 of the 1956 Act and provided an exception to a
banking company where the renewal or continuance of an advance made by that banking company to its
director is in the ordinary course of business. Clause (c) of sub-section (1) of s. 293 of the 1956 Act was also
amended by the Companies (Amendment) Act, 1960, which substituted “the amount of compensation received
by the company in respect of the compulsory acquisition, after the commencement of this Act” with “the sale
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proceeds resulting from the acquisition, after the commencement of this Act, without the consent of the
company”.

Later the Companies (Amendment) Act, 1977, increased the amount that could be contributed by the Board to
any charitable and other funds under s. 293(1)(e) of the 1956 Act from twenty-five thousand rupees to fifty
thousand rupees.

Companies Act, 2013: Section 180

Section 180 of the 2013 Act was notified vide SO 2754(E) and has been in effect from 12-09-2013.

Section 180 of the 2013 Act corresponds to s. 293 of the 1956 Act. Section 293 of the 1956 Act was applicable
to public companies and private companies which are subsidiary of public companies. Section 180 of the 2013
Act is applicable to both public and private companies. It is to be noted that to exercise the powers as specified,
under the provisions relating to restrictions on powers of the Board, by the Board of Directors, the 1956 Act
only required the consent of the company in general meeting, whereas, the 2013 Act requires the consent of the
company by way of a special resolution. Section 293(1)(a) of the 1956 Act neither defined the term,
‘undertaking’ nor the expression, ‘substantially the whole of the undertaking’, as a concept. So does s.
180(1)(a) of the 2013 Act, which is the corresponding provision of the 2013 Act. Explanation (i) to s. 180(1)(a)
of the 2013 Act only specifies the percentage of the company’s net worth the company invests in the
undertaking, or the percentage of the total income of the company such undertaking generates, so as to bring
such undertaking within the applicability of the provision of s. 180 of the 2013 Act. Therefore, the legal concept
of the term ‘undertaking’ as laid down by various judicial precedents and explained by various authorities on
the subject shall have to be relied on to understand the term ‘undertaking’. Also that, clause (e) of s. 293(1) of
the 1956 Act, which deals with contributions to charitable and other funds has been segregated from its
corresponding provision, that is, s. 180 of the 2013 Act, and is provided under s. 181 of the 2013 Act.

Activities in respect to which powers of the Board are restricted [Section 180(1) of Companies Act, 2013]

Section 180(1) of the 2013 Act provides the four specific classes of activities which cannot be performed by the
Board without the authority of the shareholders by a special resolution passed at a general meeting.

The provisions of s. 180(1) of the 2013 Act are similar to s. 293(1) of the 1956 Act except that it is now
applicable to both private and public companies and requires authority to be granted by a special resolution
instead of an ordinary resolution.

The terms “undertaking” and “substantially whole of the undertaking” have also been defined in the explanation
to sub-section (1) of s. 180 of the 2013 Act. The definition of undertaking adopts the test of “going concern”
while stating that an undertaking which generates 20 per cent of total income of the company for the preceding
financial year. Even in a case where a company is not carrying on business or where the unit is closed down,
approval of the shareholders will be necessary under s. 180(1)(a) of the 2013 Act to sell, lease or otherwise
dispose of the whole of the investment in such undertaking if it exceeds 20 percent of the net worth as per the
audited balance sheet of the preceding financial year.

“Sell, lease or otherwise dispose of. undertaking” [Section 180(1)(a) of Companies Act, 2013]. As per the
Explanation (i) to s. 180(1)(a) of the 2013 Act, an 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. The term substantially the whole of the undertaking is defined as “twenty per cent or more of the
value of undertaking as per the audited balance sheet of the preceding financial year”.

It may be noted that Explanation (i) to s. 180(1)(a) of the 2013 Act only specifies the percentage of the
company’s net worth the company invests in the undertaking, or the percentage of the total income of the
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company such undertaking generates, so as to bring such an undertaking within the applicability of the
provision of s. 180 of the 2013 Act.

The words ‘otherwise dispose of’ cover all other modes of disposing of property such as transfer by mortgage,
etc.

The authority to borrow is covered under s. 180(1)(c) of the 2013 Act. Every special resolution for borrowing
must specify the total amount that may be borrowed. [Section 180(2) of the 2013 Act].

The special resolution passed by the company under s. 180(1)(a) of the 2013 Act may stipulate conditions
including conditions regarding use, disposal or investment of the sale proceeds. However, s. 180 of the 2013
Act does not authorise reduction of share capital which can only be effected as per the provisions of the 2013
Act. [Sub-section (4) of s. 180 of the 2013 Act].

It is pertinent to note that the Central Government vide Circular, GC 04/2014 dt 25.03.2014, has clarified that
that the resolution passed under s. 293 of the 1956 Act, prior to 12.09.2013, will be regarded as sufficient
compliance of requirements of the 2013 Act. This is applicable for a period of one year from the date of
notification of s. 180 of the 2013 Act.

The general circular is reproduced below:

GC 04/14 dated 25.03.104. This Ministry has received many representations regarding various difficulties
arising out of implementation of section 180 of the Companies Act, 2013 with reference to borrowings and/or
creation of security, based on the basis of ordinary resolution. The matter has been examined in the Ministry
and it is hereby clarified that the resolution passed under section 293 of the Companies Act, 1956 prior to
12.09.2013 with reference to borrowings (subject to the limits prescribed) and/or creation of security on assets
of the company will be regarded as sufficient compliance of the requirements of section 180 of the Companies
Act, 2013 for a period of one year from the date of notification of section 180 of the Act.

Section 180(3) of the 2013 Act protects the title of a third party who purchases or takes on lease any property,
investment or undertaking in good faith. Section 180(3) of the 2013 Act corresponds to s. 293(2) of the 1956
Act except that the words “after exercising due care and caution;” is omitted in sub-section (3) of s. 180 of the
2013 Act.

Investment of compensation received on account of amalgamation [Section 180(1)(b) of Companies Act,

2013].Section 180(1)(b) of the 2013 Act corresponds to s. 293(1)(c) of the 1956 Act. Unlike clause (c) of s.
293(1) of the 1956 Act, clause (b) of sub-section (1) of s. 180 of the 2013 Act, provides for investing the
amount of compensation received by the company on account of any merger or amalgamation otherwise than in
trust securities to require consent of the company by special resolution. Section 293(1)(c) of the 1956 Act
referred to investment of amount of compensation received by the company with respect to compulsory
acquisition of the undertaking or of any premises or properties of any undertaking while s. 180(1)(b) of the
2013 Act refers to investment of amounts received as compensation on merger or amalgamation.

Borrowing [Section 180(1)(c) of Companies Act, 2013].Section 180(1)(c) of the 2013 Act corresponds to s.
293(1)(d) of the 1956 Act and the proviso to s. 180(1)(c) of the 2013 Act corresponds to s. 293(4) of the 1956
Act. It may be noted that the expression “free reserves” employed in s. 293(1)(d) of the 1956 Act was defined
thereunder as “reserves not set apart for any specific purpose.” The 1956 Act however contained no general
definition of “reserve” or of “free reserve”. And even the last limb of clause (d) of s. 293(1) of the 1956 Act did
not give any indication whether the reserves in regard to which restrictions were imposed were only “revenue
reserve” or included “capital reserve” as well. In the absence of any indication in the provisions of s. 293 of the
1956 Act and in the absence of any general definition of “free reserves”, it was open to interpretation whether
the term was not restricted only to “revenue reserves”. Whereas in the 2013 Act, clause (43) of s. 2 defines the
expression ‘free reserves’ to mean as follows:
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““free reserves” means such reserves which, as per the latest audited balance sheet of a company, are available
for distribution as dividend:

Provided that—

(i) any amount representing unrealised gains, notional gains or revaluation of assets, whether shown as a
reserve or otherwise, or
(ii) any change in carrying amount of an asset or of a liability recognised in equity, including surplus in
profit and loss account on measurement of the asset or the liability at fair value,

shall not be treated as free reserves;”.

Capital Reserve is not normally regarded as available for distribution as dividend. In addition, Securities
Premium Account would also not come within the definition of “free reserves”.

Section 180(5) of the 2013 Act provides that no loan advanced in excess of the limits imposed under s.
180(1)(c) of the 2013 Act will be valid unless the lender is able to establish that he advanced the loan in good
faith without knowledge that the limits had been exceeded.

Power of remission [Section 180(1)(d) of Companies Act, 2013]. As regards the power to remit debts in the
case of directors of banking companies, see s. 20-A of the Banking Regulation Act, 1949.

It is interesting to note that loans to directors is prohibited under s. 185 of the 2013 Act, while s. 180(1)(d) of
the 2013 Act, which corresponds to s. 293(1)(b) of the 1956 Act, relates to approval for granting of time for
repayment of debts due by a director.

Clarification on transitional period for resolutions passed under the Companies Act, 1956

The following General Circular has been issued by the Ministry of Corporate Affairs giving clarity on the
validity of the resolutions passed under the relevant provisions of the 1956 Act.

It has been brought to the notice of the Government that many companies have passed resolutions during
financial year 20l3-14 under the relevant provisions of the Companies Act, 1956 (Old Act) which are/were at
different stages of implementation after coming into force of corresponding provisions of the new Companies
Act, 2013 (New Act). Ministry has received suggestions that while section 6 of the General Clauses Act, 1897
protects the validity of such resolutions, it will be advisable if a suitable communication is also issued in the
matter by the Ministry by way of abundant caution. The matter has been examined in the light of similar issues
clarified earlier. It is clarified that resolutions approved or passed by companies under relevant applicable
provisions of the Old Act during the period from 1st September, 2013 to 31st March, 2014, can be
implemented, in accordance with provisions of the Old Act, notwithstanding the repeal of the relevant provision
subject to the conditions (a) that the implementation of the resolution actually commenced before 1st April,
2014 and (b) that this transitional arrangement will be available upto expiry of one year from the passing of the
resolution or six months from the commencement of the corresponding provision in New Act whichever is
later. It is also clarified that any amendment of the resolution must be in accordance with the relevant provision
of the New Act. [General Circular No. 32/2014 dated 23-07-2014 (F. No. 1/25/13-CL-V)].

Analysis of Relevant Provisions of Companies Act, 1956vis-à-vis Companies Act, 2013

Section 293 of Companies Act, 1956

It may be noted that the propositions stated below in the context of s. 293 of the 1956 Act would also be
relevant to the provisions of s. 180 of the 2013 Act.
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Powers of Board of Directors

It must be noted that though, as per s. 293 of the 1956 Act, the Board should not exercise the powers specified
in clauses (a) to (e) of sub-section (1) without the consent of the company in general meeting, the Board is not,
however, bound to exercise the powers, even though the company passes resolutions in respect of the exercise
of such powers. Pothen v. Hindustan Trading Corporation (P.)Ltd., (1967) 37 Com Cases 266(Ker).
Accordingly, a resolution passed by a company in a general meeting asking the directors to make an advance of
money to the shareholders pending the declaration of a dividend was held to be not binding on the directors and
the court refused to pass any order compelling the directors to implement the resolution. Scott v. Scott, (1943) 1
All ER 582.

Where however the directors improperly refuse to exercise a power which is vested in them, e.g., the power to
initiate a legal proceedings, the shareholders may resolve to file a case in that respect under the general
exceptions to the rule in Foss v. Harbottle. FFI (U.K. Finance) Ltd. v. Lady Kagan, (1982) 132 NLJ 830; Satya
Charan Law v. Rameshwar Prasad Bajoria (1950) 20 Com Cases 39 : AIR 1950 PC 133. Power to manage the
business of the company does not give directors the power to fix their remuneration. Foster v. Foster, (1916) 1
Ch 532 : (1916-17) All ER Rep 856.

The powers can be exercised by the Board only with the consent of the general body. The Board cannot exceed
the powers in the hope that the general body will ratify their actions. Duomatic Ltd., Re, (1969) 1 All ER 161 :
(1969) 2 Comp LJ 81(Ch D).

The requirement of shareholders resolution can be satisfied with the consent of the shareholders without a
formal resolution. Wright v. Atlas Wright (Europe) Ltd., (1999) 2 BCLC 301(CA); Dumatic Ltd. Re, (1969) 1
All ER 161.

All the powers under the section are exercisable only with the prior consent of the company in general meeting.

Persons who deal bona fide with a Managing Director are entitled to assume that he has all the powers he
purports to exercise as if these are powers which according to the constitution of the company he can have.
Biggerstaff v. Rowatt’s Wharf Ltd., (1896) 2 Ch 93 (CA).

Property transactions involving directors. There were no provisions in the 1956 Act comparable to ss. 320-
322 of the UK Companies Act, 1985 (replaced by the Companies Act, 2006). The above three sections deal
with substantial property transactions involving directors. However, the application of Duomatic principle to
property transactions is of relevance to Indian Law. (See Re Duomatic Ltd. (1969) 1 All ER 161). Under the
2013 Act, dealings in property involving directors are now covered under ss. 188 and 192.

The principle in Duomatic Ltd. Re, (1969) 1 All ER 161 has it that if all shareholders who have a right to attend
and vote at a general meeting of the company assent to some matter which a general meeting of the company
could carry into effect, that assent is as binding as a resolution in general meeting would be. This is also known
as the ‘unanimous consent’ rule.

The Re Duomatic principle has to be applied in a manner consistent with established company law doctrines.
Normally, it means that shareholder primacy is the norm. But in cases of insolvency, the interests of the
creditors would prevail. For a detailed exposition of the application of this principle, see ROBERT
GODDARD, “The Re Duomatic Principle and Sections 320-322 of the Companies Act, 1985”, 2004
JOURNAL OF BUSINESS LAW 121-129.

In Walker v W.A. Personnel Ltd. (2002) BPIR 621 it was held that Re Duomatic should be capable of applying
to sections 320-322 of Companies Act, 1985 (UK), so that a sole shareholder could waive the formalities
required by these sections. But it was also held that Re Duomatic should not apply to sections 320-322 of
Companies Act, 1985 (UK), where the company was “plainly insolvent.”
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In Conegrade, Re, (2002) EWHC 2411(Ch), a conclusion was reached without referring to Walker’s case that
the Duomatic principle could apply to ss. 320-322 of Companies Act, 1985 (UK), even when the company is
insolvent. This view is incorrect, for when a company becomes insolvent, the directors must act in the interests
of the company’s creditors and not its shareholders.

Committee of management.Section 293 of the 1956 Act does not apply to a committee of management
appointed by the court in proceedings under s. 397 of the 1956 Act (s. 241 of the 2013 Act). Such a committee
appointed to discharge the functions of the Board is not either a receiver or a manager and is not subject to the
limitations which apply to a receiver or a manager, but it must always act under the superintendence and
direction of the Company Court. Pramod Kumar Mittal v. Andhra Steel Corporation Ltd., (1985) 58 Com Cases
772(Cal).

Consent of company in general meeting. The consent of the company in general meeting may be in the shape
of a formal resolution in a general meeting. See Bamford v. Bamford (1970) Ch 212 : (1969) 1 All ER
969(CA) or it may be at an informal meeting of all the shareholders. Re, Oxted Motor Co., (1921) All ER Rep
646; Re, Express Engineering Works Ltd., (1920) 1 Ch 466 : (1920) All ER Rep Ext 850 (CA) or by the
acquiescence of all the shareholders without a meeting. Parker and Cooper Ltd. v. Reading , (1926) All ER Rep
323. An ordinary resolution is needed for this purpose.

The requirement of shareholders’ approval was held to have been not satisfied by a shareholders’ agreement
which was too vague and which mentioned no price which was to be paid to the company for its assets. The
company accordingly had the right to avoid the sale. Domite Ltd. v. Protech Health Ltd., (1998) BCC 638 (Ch
D)

In EBM Co. Ltd. v. Dominion Bank, (1937) 7 Com Cases 448(PC), it was held the company was not bound by
the charge in favour of the respondent bank on certain bonds as the security given to the bank had the consent
of only the three principal shareholders (out of a total number of five shareholders), although the collective
holdings of the other two shareholders were insignificant. In this case, there was no resolution either of the
Board or of the general body of shareholders. The decision seems to be based on the rule that informal consent
should be unanimous.

Note:Section 180 of the 2013 Act specifically requires a special resolution to be passed for the Board to acquire
powers to deal with the activities enumerated in the section.

Usufructuary mortgage requires consent of general meeting. Mentioned below is the Department’s view on
the Board’s power to mortgage whole or substantially the whole of the company’s undertaking.

Department’s view. If a company mortgages the whole or substantially the whole of its undertaking for
obtaining loans or other financial assistance, it need not comply with the provision of section 293(1)(a) of the
Act, but if it is a usufructuary mortgage the said section would be attracted. In this view of the matter the
question of a conflict between the provisions of section 293(1)(a) and section 292(1)(b) necessitating an
amendment of section 293, may not arise. (Letter No. 8/19/(293)/64-PR, dated 21-07-1964).

The clarification above issued under the 1956 Act will be relevant to s. 180(1)(a) of the 2013 Act.

IFRS for sale/disposal of undertaking. The relevant accounting standard for treatment of undertaking meant
for sale/disposal is IFRS 5 for non-current assets held for sale. Distinction is made in the standard for disposal
of “discontinued operations” and “continuing operations”. Where an undertaking is meant for sale, it would,
most likely, be categorised as “discontinuing operations”.

“Sell, lease or otherwise dispose of. undertaking” [Section 293(1)(a) of Companies Act, 1956]

Execution of equitable mortgages and pledges is not disposition of the whole or substantially the whole of the
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undertaking of the company. Sheth Mohanlal Ganpatram v. Sayaji Jubilee Cotton & Jute Mills Co., (1964) 34
Com Cases 777(Guj). But usufructuary mortgage can operate as a transfer and therefore requires consent of the
general meeting.

Transfer of all equity shares in a wholly owned subsidiary company by the holding company may not attract the
provision of s. 293 of the 1956 Act.

By an ‘undertaking’ is meant a business unit or enterprise in which a company may be engaged as gainful
occupation. For example, each one of several factories or manufacturing plants of a company will be considered
an undertaking from the business point of view. It does not consist of mere assets or property. It is a productive
organism, so to speak, and signifies a going concern engaged in the production, distribution etc., of goods or
services, sometimes it means also the entire business or organisation of a company. [per A.N. Ray, J., in Rustom
Cavasjee Cooper v. Union of India, (1970) 40 Com Cases 325 : AIR 1970 SC 564]. Sale of a mere asset or
property will not be sale of an undertaking. For a theoretical discussion of the meaning of the expression
‘undertaking’ see In re, Yellamma Cotton Woollen and Silk Mills Co. Ltd., (1970) 40 Com Cases 466 : AIR
1969 Mys 280, where it was held that hypothecation of movable assets with the condition that on default the
lender would take possession of the assets does not amount to sale of assets; International Cotton Corpn. (P.)
Ltd. v. Bank of Maharashtra (1970) 40 Com Cases 1154(Mys), where the stipulation in the mortgage deed that
on default the mortgagee would take over the management of the company was held to be void, but the rest of
the mortgage was valid.

Note: The term undertaking is defined in explanation (i) to s. 180(1)(a) of the 2013 Act.

A resolution by the Board of Directors authorising one of themselves to dispose of the company’s assets for the
satisfaction of its debts was held to be beyond the directors’ powers and therefore ultra vires. U. Ba Din v.
Janki Devi, AIR 1938 Rang 447. Section 86H of the 1913 Act (corresponding to s. 293 of the 1956 Act)
imposes a restriction upon the competence of the Board to dispose of the company’s assets. It does not have the
effect of depriving the general body of shareholders who are the owners of the company to dispose of the
company’s assets according to their wishes and if the directors do not collaborate with them they can either
replace directors or get a court order in the matter and ultimately it is their wishes which will prevail. Kriparam
v. Shreyanprasad, AIR 1951 Punj 79.

Assets of the company would include its shareholdings in other companies and therefore any arrangement by
the director to deal with such shares otherwise than in the ordinary course of business, e.g., sale of shares for
paying off preference shareholders with the sale proceeds, would be void. Nand Kishore v. Gaya Sugar Works,
AIR 1953 Pat 390.

A unit of the company which has been closed for five years cannot be held to be “an undertaking” within the
meaning of sub-section (1)(a) of s. 293 of the 1956 Act and these provisions do not apply to a proposed sale of
the unit. Pramod Kumar Mittal v. Andhra Steel Corporation Ltd., (1985) 58 Com Cases 772(Cal).

In a similar case before the Bombay High Court in P.S. Offshore Inter Land Services Pvt. Ltd. v. Bombay
Offshore Suppliers & Services Ltd., (1992) 75 Com Cases 583, 599(Bom) where out of the three vessels of a
company, one which was lying idle was proposed to be sold and the question arose whether it would amount to
a sale of the undertaking, the court followed in principle the case of Pramod Kumar Mittal (supra), differing
only to this extent that s. 293(1)(a) of the 1956 Act [corresponding to s. 180(1)(a) of 2013 Act] makes no
distinction whatsoever between a running undertaking and closed undertaking. The learned Judge did not agree
with the view that where the unit in question of a company remained closed for more than five years, its sale
could not be regarded as a sale of the undertaking. Thus the learned Judge was of the view that once a unit is
identified as an undertaking it remains an undertaking whether it is in action or suspension. Conducting a
thorough survey of the existing authorities DHANUKA J. proceeded as follows [at pp. 596-597]: “The
expression “undertaking” used in this section is liable to be interpreted to mean “the unit”, the business as a
going concern, the activity of the company duly integrated with all its components in the form of assets and not
merely some asset of the undertaking. Having regard to the object of the provision, it can, at the most, embrace
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within it all the assets of the business as a unit or practically all such constituents. If the question arises as to
whether the major capital assets of the company constitute the undertaking of the company while examining the
authority of the Board to dispose of the same without the authority of the general body, the test to be applied
would be to see whether the business of the company could be carried on effectively even after disposal of the
assets in question or whether the mere husk of the undertaking would remain after disposal of the assets? The
test to be applied would be to see whether the capital assets to be disposed of constitute substantially the bulk of
the assets so as to constitute the integral part of the undertaking itself in the practical sense of the term.”

In the case of Yallamma Cotton, Woollen and Silk Mills Co. Ltd., In re, (1970) 40 Com Cases 466(Mys).
NARAYANAPAI J., held that an “undertaking” was not, in its real meaning, anything which may be described
as a tangible piece of property like land, machinery or equipment. It was held by the court that an undertaking
within the meaning of the above provisions was an activity which in commercial or in business parlance meant
an activity engaged in with a view to earn profit. In this case, a dispute arose between the official liquidator of
the company under liquidation and a secured creditor who was the mortgagee in respect of practically all the
assets of the company and the question arose as to whether the security created was in respect of the
“undertaking” and was liable to be treated as void for want of resolution of the general body of the company. It
was held by the court that s. 293(1)(a) of the 1956 Act [corresponding to s. 180(1)(a) of the 2013 Act] was not
applicable. During the course of the judgment, the learned Judge referred to the meaning of the expression
“undertaking” given in Webster’s Dictionary as under (Page 484): “An undertaking, according to Webster’s
Dictionary, only means something that is undertaken or a business, work or project which one engages in or
attempts, or an enterprise.” This judgment was approved by the Division Bench of the same High Court in
International Cotton Corporation P. Ltd. v. Bank of Maharashtra, (1970) 40 Com Cases 1154(Mys).

A somewhat similar question arose in a different context in the case of Rustom Cavasjee Cooper v. Union of
India (1970) 40 Com Cases 325 : AIR 1970 SC 564 necessitating discussion of the meaning of the word
“undertaking” as interpreted in judicial decisions, Indian and English. A.N. RAY J. in his dissenting judgment
(Note: The judgment is not a dissenting judgment on the meaning of the word “undertaking”) observed at page
415 that the expression “undertaking” meant a “going concern”. The learned Judge observed that the
undertaking meant the entire organisation. It was observed by the learned Judge at page 417 that the
undertaking was an amalgam of all ingredients of property and was not capable of being dismembered.

A debenture executed by a company as security for repayment of loan with no power given to the lender to take
over the management of the company was held to be not such a disposal of the company’s undertaking or
property as to require a resolution of a general meeting of the company. A resolution of the Board of Directors
was sufficient for the purpose. One of the two directors having died, the surviving director had filled the
vacancy in accordance with the company’s articles. Therefore, there was in existence a properly constituted
Board of Directors and the Board resolution passed was valid. The debenture was also valid and enforceable.
The debenture was nothing more than security for the repayment of the loan by the company which was a valid
form of security within the realm of commercial transactions pertaining to loans granted by financial
institutions to their borrowers. The parties were entitled to assume that the debenture was properly created and
the signatories to the debenture were duly authorised to do so. Moreover, it was clearly stated that the debenture
was issued pursuant to the company’s memorandum and articles of association. There was no duty to inquire as
to the company’s capacity to enter into the debenture or as to any such limitation on the director’s powers and
the parties were presumed to have acted in good faith unless the contrary was proved. In the instant case, the
plaintiff had not adduced evidence to prove that the parties had not acted in good faith. Liwa Holdings Sdn Bhd
v. Chi Liung Holdings Sdn Bhd, (1998) 4 MLJ 465(HC) - Malaysia).

Leasing of the right to use the spare slaughter house, facilities of a company, was held to be not a lease or
disposal of the company’s undertaking, because undertaking means a substantial part of the assets. The court
said that an agreement of sale etc. would mean a complete and exclusive transfer whereby the transferee gets
the right to hold, possess and control the undertaking in question. Allana Cold Storage Ltd. v. Goa Meat
Complex Ltd., (1997) 90 Com Cases 50 at 64 : (1997) 4 Comp LJ 225(Bom—DB).

Where a company’s business was neither to invest in shares, nor even to engage in the business of investing in
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shares, but even so the company carried on some investments in shares, the sale of such shares by the company
was held to be not the sale of the company’s undertaking or even a substantial part of the undertaking. The
Company Law Board, while examining the validity of such a transfer of shares, propounded this test as to
whether the sale of undertaking was involved or not that whether the business of the company would be carried
on effectively even after the disposal of the assets in question or whether a mere husk of the undertaking would
remain after the disposal of the asset. Tracstar Investments Ltd. v. Gordon Woodroffe Ltd., (1996) 87 Com
Cases 941(Mad—CLB)affirmed in Shoe Specialities Ltd. v. Tracstar Investments Ltd., (1997) 88 Com Cases
471(Mad—DB).

The takeover of a firm by a company will not be treated as a sale if all the partners of the firm become
shareholders of the company.

There was an agreement with one of creditors to sell only immovable property of the company prior to
initiation of liquidation proceedings. The agreement was made when the company was passing through
financial crisis. Consideration was paid in part and the balance was adjusted against the amount due to the
creditor. The agreement provided for handing over of possession and title deed on registration of sale deed. But
all this was done before registration. There was no resolution of the general body of the company. It was held
that the agreement was not capable of creating any interest in or charge on immovable property. There was no
transfer of property because the sale deed was not registered. The fact that the transaction was entered into six
months prior to commencement of winding up could not go to the benefit of the creditor. The sale deed was not
to be registered because it embodied an unjust preferential treatment of a creditor. IDBI Bank Ltd. v.
Administrator, Kothari Orient Finance Ltd. (2009) 152 Com Cases 282(Mad—DB).

Company and its undertaking. The undertaking of a company is something different from the company itself.
Hall and Anderson Ltd. v. Union of India, (2005) 125 Com Cases 97 : AIR 2005 Cal 156.

The company’s undertaking was sold. The sale deed was signed by the directors of the company, but without
proper resolution. A shareholder sought an injunction to restrain the alienation of the property. The court
conceded that the shareholder had the right to maintain an action for anything wrong done or proposed to be
done to the company, No resolution was passed authorising the sale of the company’s undertaking. No
explanatory statement was forwarded. This was violation of statutory requirements under s. 293 of the 1956
Act. Such a transaction is not saved by the doctrine of internal or indoor management. The deed of conveyance
was void. No relief could be granted to the purchaser under such a deed. Nirad Amilal Mehta v. Genelec Ltd.,
(2008) 146 Com Cases 581(Bom).

Sale subject to approval of shareholders under section 293 of Companies Act, 1956. The objects clause of a
company’s memorandum contained a provision enabling directors to transfer the assets of the company subject
to approval of shareholders under s. 293 of the 1956 Act [now s. 180 of the 2013 Act]. The court said that the
effect of the provision was that the approval would be necessary only in cases where s. 293 of the 1956 Act
applied and not in all cases. Sale of shares held by a company, even if it is of controlling interest, does not
amount to sale of the company’s undertaking. Sale of undertaking has to be with the approval of shareholders.
The Indian company was carrying on cellular business in various areas through subsidiaries. An agreement was
arrived at to merge the business with other groups by transfer of shareholdings of the company in subsidiaries.
This was held to be not a sale of undertaking. Even if shareholders’ approval was necessary, it had only to be
that of the subsidiary’s shareholders. The resolution for implementing the agreement without shareholders’
approval was not void. CDS Financial Services (Mauritius) Ltd. v. BPL Communications Ltd., (2004) 121 Com
Cases 376 : (2004) 56 SCL 665.

Sale of company’s shareholding. The sale was of the company’s shares to a shareholder in the company. The
sale was negotiated by a director in the genuine belief that the transaction was a commercial sale at a market
value. The question was whether the sale was at an under value and therefore unlawful and ultra vires
distribution of assets. The Trial Judge held that the sale was a genuine sale and not ultra vires the company. It
was held on appeal that the well settled common law rule devised for the protection of the creditors of a
company was that a distribution of a company’s assets to a shareholder, except in accordance with specific
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statutory procedures such as the winding up of a company, was an unlawful return of capital which was ultra
vires the company. However, what made the sale of a company’s asset to a shareholder an unlawful distribution
and ultra vires was the fact that it was known and intended to be a sale at an undervalue and was not a genuine
sale. The correct test to be applied by the court on the issue of vires was to look to the true nature and substance
of the payment and assess its genuineness by determining whether, on the facts as they were genuinely
perceived to be, and having regard to the nature and character of the payment, it could properly be characterised
as something other than a gratuitous distribution to one or more shareholders. Given that the first defendant
(director) believed when the sale was entered into that the agreed price for the shares was at market value and
there was no knowledge or intention on his part that the shares should be disposed of at an undervalue and there
was no knowledge or intention on his part that the shares should be disposed of at an undervalue and no reason
to doubt the genuineness of the transaction as a commercial sale of the shares, the sale of the shares was not a
disguised distribution of assets. Instead, it was an intra vires sale of shares for a proper purpose, even if it was
at an under value. Progress Property Co. Ltd. v. Moorgarth Group Ltd. (2010) 1 BCLC 1 : (2009) EWCA Civ
629.

Sale of controlling interest. The sale of shares, whatever be their number, even if it amounts to a transfer of
the controlling interest of a company, cannot be equated to the sale of any part of the “undertaking” so as to
come within the mischief of s. 293(1)(a) of the 1956 Act [s. 180(1)(a) of the 2013 Act]. Notwithstanding the
fact that, both in the agreement and in the plaint, there has been use of the expression like sale of “food
business” of the seller to the purchaser and there has been reference to the seller’s “food business” carried on
through its subsidiaries, prima facie, the agreement merely contemplated sale of the controlling shares. Brooke
Bond India Ltd. v. U.B. Ltd., (1994) 79 Com Cases 346(Bom).

Sale of assets with knowledge, assent and approval of shareholders. Where the objects clause of a company
enabled it to dispose of its assets for such consideration as it thought fit, this was held to authorise a transfer in
consideration of the promise of the transferee or a third party to pay to the company the value of assets
transferred and the transaction was, therefore, not ultra vires the company. Furthermore, the court said that it
made no difference that the promise was provided by a parent or associated company or that the parent or
associated company’s only assets were shares in the company. The proposed transaction was also not a
misfeasance on the part of the directors or fraud on the creditors of the company because the transaction was
carried out not only with the knowledge and assent of all the shareholders but with their active co-operation and
at their instigation, the company being also solvent with a considerable surplus of assets over liabilities. Brady
v. Brady , 1988 BCLC 579 : (1988) 2 All ER 617(HL).

Where the directors of a company transferred the company’s property under their resolution and handed over
possession to the transferee, it was held that this possession was with “consent” for the purposes of s. 9 of the
Specific Relief Act, 1963 irrespective of the fact that the shareholders had not approved the transfer under s.
293 of the 1956 Act and, therefore, the underlying transaction was voidable at the instance of the company.
Shree Onama Glass Works Ltd. v. Shri Ram Harak Pandey, AIR 1966 MP 282 [LNIND 1964 MP 105].

Where the Managing Director of a company acting on its behalf granted a lease of the hotel premises to another
director without the necessary approval of the shareholders, it was held that the person challenging the validity
of the transaction would have to show that proper value was not taken, which was not done. Furthermore, the
court noted that the purchasing director had acted throughout with complete honesty and openness and with the
agreement of the Managing Director and practically all of the shareholders that she should run the community
home independently of the company. The transaction was not voidable at the instance of the company. Joint
Receivers and Managers of Niltan Carson Ltd. v. Hawthorne, (1988) BCLC 298(QBD).

In the case of a company whose business is colonisation, the Managing Director would have the authority to
deal with the immovable property of the company. The articles of the company authorised him to act on behalf
of the Board of Directors. The Managing Director of such a company would have the authority to sell the
immovable property of the company. A specific authorisation by a resolution of the Board was not needed.
Ashok Kumar v. Shingal Land and Finance P. Ltd., (1995) 82 Com Cases 430(Del).
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Sale or purchase of assets requiring general meeting approval. There was a substantial property transaction
which required general meeting approval. The property in question was sold to the company by a seller
connected with a director of the company at an overvalue. But no loss was made by the company on a resale of
the property. The transaction was approved by a director who was directly or indirectly the sole shareholder of
the company or its subsidiary. The court regarded this informal approval as equivalent to approval at a general
meeting. The court said: The approval required by s. 320(1) of the English Act, 1985 was approval of the
transaction before it took place, since property transactions involving directors were invalid under s. 320(1)
(English Act, 1985) unless the arrangement was ‘first’ approved by a resolution of the company and since H as
the sole owner of HHHL had approved the transaction before the purchase of the J&W assets, while HHHL had
approved the HWM’s holding company, it followed that H’s informal approval was not affected by the timing
of that approval. Furthermore, the principle of informal shareholder approval being as binding as a resolution in
general meeting applied to transactions effected by s. 320 and, therefore, it’s prior approval sufficed to meet the
requirement of s. 320(1). The scheme of ss. 320-322 of the 1985 Act (English) was that where a director or
person connected with him purchased assets from a company at an undervalue, so that the director or connected
person was in a position to make a gain at the expense of the company the transaction was invalidated by s.
322(3)(a) and the director was liable to account to the company under s. 322(3), while, conversely, where a
director or person connected with him sold assets to a company at an overvalue so that the company was
exposed to a loss which ought to have fallen on the director or the connected person the transaction was
invalidated by s. 320(1)(b) and the director was liable to indemnify the company under s. 322(3)(b). However,
it did not follow that where a director or person connected with him sold assets to a company at an overvalue
and no loss was made by the company on a resale of those assets, the director was liable to account to the
company under s. 322(3)(a) for the extra profit, the company might have made when it sold the assets on, since
although the court would take account of movements of value after the purchase, if the asset fell in value, if the
company did not make a loss after the purchase any change in the value of the assets in the period when it was
owned by the vendor before the sale to the company was irrelevant. On a realistic analysis, the £ 4 million
received by C Ltd. on the sale of the landfill assets was not a ‘gain’ of the type to which ss. 320(1)(a) and
322(3)(a) applied, since C Ltd. had in fact suffered a loss ‘by’ the transaction it ceased to have those assets and
instead only had £ 4.4 million cash. The claim against H alone under s. 322 of the 1985 Act, therefore, failed
and was dismissed. NBH Ltd. v. Hoare, (2006) 2 BCLC 649(Ch D). The Court applied the ruling in Duckwari
plc, Re, (1998) 2 BCLC 315 at 320.

Questioning by single shareholder. A decision was taken by the Board of Directors to sell the immovable
property of the company. They also obtained sanction of the general body of shareholders. An individual
shareholder was not allowed to question the wisdom of the decision. The court cannot at the instance of a single
shareholder upset the decision taken by the Board of Directors and sanctioned by the general body. The court
cannot substitute its decision for the commercial wisdom of the Board of Directors. Cochin Malabar Estates &
Industries Ltd. v. P.V. Abdul Khader, (2003) 114 Com Cases 777(Ker).

Resolution to be passed by postal ballot by listed company. In terms of Rule 4(f) of the Companies (Passing
of the Resolution by Postal Ballot) Rules, 2001, sale of whole or substantially the whole of the undertaking of a
company as specified in s. 293(1)(a) of the 1956 Act [corresponding to s. 180(1)(a) of the 2013 Act] by a listed
company will require the ordinary resolution to be passed by following the procedure laid down for postal
ballot under s. 192A of the 1956 Act [corresponding to s. 108 of the 2013 Act] and the aforesaid Rules.

Note: The Rules referred herein have been repealed and are no longer applicable. Please refer to notes under
Chapter VII of the 2013 Act.

Power of remission [Section 293 (1)(b) of Companies Act, 1956]

Section 293 (1)(b) of the 1956 Act is corresponding to s. 180(1)(d) of the 2013 Act.

As regards the power to remit debts in the case of directors of banking companies, see s. 20-A of the Banking
Regulation Act, 1949.
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Borrowing [Section 293 (1)(d) of Companies Act, 1956]

Temporary loans. Temporary loans obtained from the company’s bankers in the ordinary course of business
are to be excluded, when reckoning the limit up to which a company may borrow. See Cilum Mining Co., LR 7
Eq 88 (discounting bills for the purpose of wiping out overdraft, held neither lending nor borrowing); Water
Law v. Sharp, (1869) LR 8 Eq 501, 503 (held that cash credit with bank is not a ‘loan’ even it is described as
‘loan account’); Medla Tea Co., ILR 9 Cal 14. (Advances for business needs on the security of assets were not
regarded as borrowing).

Advance received in ordinary course of business. Bona fide advances received by a company from its
customers in the ordinary course of business cannot be construed as borrowing of money falling within the
purview of s. 293(1)(d) of the Companies Act, 1956, (ICAI’s Compendium of Opinions Vol. XII, pp 120-121).

Capital expenditure and temporary loans, distinction. The clarification below issued by the Department
under the 1956 Act is relevant to s. 180(1) read with the explanation thereunder.

Department’s view. “Section 293(1)(d) as amended does not prohibit the Board from incurring loans without
any limit if these loans are temporary loans in the sense defined in Explanation-II. As regards loans other than
temporary loans, if the Board desires to borrow moneys, it can do so only when the amount intended to be
borrowed together with the moneys already borrowed does not exceed the aggregate of the paid-up capital of
the company and its free reserves or where the limit is exceeded, by obtaining the consent of the company in a
general meeting. Thus, if the whole or part of the loan intended to be borrowed is raised for the purpose of
financing expenditure of a capital nature, the ceiling specified in section 293(1)(d) will apply. As the loan for
financing expenditure of a capital nature is raised only occasionally it is felt that it is not difficult to separate
such loans from temporary loans.” (Letter No. 8/16(1)61-PR, dated 09-05-1961.)

Contingent liabilities. Mentioned below is the Department’s view on the issue whether contingent liabilities
can be termed as borrowings for the purpose of s. 293 of the 1956 Act.

Contingent liabilities like amounts outstanding on deferred payment agreement or under guarantee issued by the
bankers for such deferred payment instalments or in respect of letters of credit established by the company’s
bankers cannot be termed borrowings by the company and are not covered by the provisions of section 293.
This view has also been clarified by the Company Law Board, stating that in the view of the Department, the
term borrowing under section 293(1)(d) does not include debts on account of purchase of machinery and
deferred payments. (Letter No. 8/16/(1)61-PR, dated 09-05-1961).

Debenture and option agreement in favour of investor. The company was in financial difficulties.
Debentures and option agreement in favour of investor was signed by the Chief Executive Officer. The
transaction was authorised at meetings of directors. The question was whether the meetings were properly
convened in accordance with the requirements of articles and shareholders’ agreement. There were also other
allied questions concerning the transaction. The court said that the instrument was binding on company if the
Chief Executive Officer of the company had express or ostensible authority to sign the instrument on its behalf.
The court found that the meetings were not properly convened because notices were not given to all the special
directors as required by the company’s articles. The meetings were also held in UK whereas the provision in the
articles was for meetings to be held outside UK. The serious question of disposal of the company assets under
the option could not be dealt with summarily. There was a sufficient doubt about the propriety of the transaction
to lead to the conclusion that the issue whether the transaction was valid and binding on the company could
only properly be disposed of at a trial. The bona fides of the directors in entering into the option agreement and
the good faith of the investor were all in doubt. Ford v. Ploymer Vision Ltd. (2009) 2 BCLC 160(Ch).

Hire purchase and leasing transactions. Hire purchase and leasing transactions are not covered by s.
293(1)(d) of the 1956 Act, as they do not amount to “borrowing”.
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Foreign currency loans. For foreign currency loans, it is advisable to fix ceiling limits in foreign currency
terms and not on the basis of the rupee equivalent. This will eliminate the need for readjustment due to currency
fluctuations.

“Free reserves”. The expression “free reserves” occurs in s. 293(1)(d) of the 1956 Act where it is defined as
“reserves not set apart for any specific purpose.” The 1956 Act however contains no general definition of
“reserve” or of “free reserve” and even the last sentence in clause (d) of s. 293(1) of the 1956 Act does not give
any indication whether the reserves in regard to which restrictions are imposed are only “revenue reserve” or
include “capital reserve” as well. It must, however, be noted that s. 2(43) of the 2013 Act defines the term ‘free
reserves’.

It is submitted that in the absence of any indication in the provisions of s. 293 of the 1956 Act and in the
absence of any general definition of “free reserves” the term is not restricted only to “revenue reserves”. The
expression “reserves” is used in s. 205 of the 1956 Act which by sub-section (2A) requires a company
distributing dividend after providing for depreciation in accordance with the provisions of sub-section (2) also
to provide reserves of such percentages of its profits not exceeding ten per cent that may be prescribed.
Evidently the expression “reserve” in sub-section (2A) of s. 205 of the 1956 Act must mean revenue reserve
and does not include capital reserve.

The expression “free reserves” for purposes of s. 372A of the 1956 Act means reserves which, as per latest
audited balance sheet of the company, are free for distribution as dividend and shall include balance to the
credit of the securities premium account but shall not include share application money.

Reference is also made to “reserves” in the following provisions of the 1956 Act:

1. Schedule I: Table A Heading of the group of Articles from 85 to 94; Art. 87.—Setting aside of reserve;
Art. 96.—Capitalisation of reserves.
2. Schedule VI: Part I : Form of Balance Sheet—Paragraph I Equity and Liabilities—(1)(b) Reserves and
Surplus.
3. Schedule VI: Under Notes -General Instruction for Preparation of Balance-Sheet Paragraph 6. B.
“Reserves and Surplus” is divided into (i) (ii) and (iii).
(i) Reserves and Surplus shall be classified as:
(a) Capital Reserves;
(b) Capital Redemption Reserve;
(c) Securities Premium Reserve;
(d) Debenture Redemption Reserve;
(e) Revaluation Reserve;
(f) Share Options Outstanding Account;
(g) Other Reserves—(specify the nature and purpose of each reserve and the amount in respect
thereof);
(h) Surplus i.e. balance in Statement of Profit & Loss disclosing

allocations and appropriations such as dividend, bonus shares and transfer to/from reserves etc.

(Additions and deductions since last balance-sheet to be shown under each of the specified heads)

(ii) A reserve specifically represented by earmarked investments shall be termed as a ‘fund’.

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(iii) Debit balance of statement of profit and loss shall be shown as a negative figure under the head
‘Surplus’. Similarly, the balance of ‘Reserves and Surplus’, after adjusting negative balance of
surplus, if any, shall be shown under the head ‘Reserves and Surplus’ even if the resulting figure is
in the negative.

[Schedule VI substituted vide Notification No. S.O. 447(E) dt. 28-02-2011]

The expression “free reserves” is used in other statutory provisions and rules framed under different statutes
and for the purposes of those statutes or rules special definitions of the expression “free reserve” are devised:
for instance, under Rule 3 of the Companies (Acceptance of Deposits) Rules, 1975, a company cannot accept
deposits exceeding 10% of the aggregate of its paid up share capital and free reserves; “free reserves” is defined
in Rule 2(d) as including “the balance of the share premium account, capital and redemption reserve and any
other reserves shown or published in the balance-sheet of the company and created out of appropriation of the
profit of the company but does not include the balance in any reserve created (i) for repayment of any future
liability or for depreciation of assets or for all debts; (ii) by revaluation of any of the assets of the company.”

In the Non-Banking Non-Financial Companies (Reserve Bank) Directions, 1977 the expression “free reserve”
is defined as including the balance in the share premium account, capital and redemption reserve and any other
reserve as shown or published in the balance sheet of the company and created through allocation of profits not
being (i) reserve created for repayment of any future liability or for depreciation of assets or for debts; or (ii) a
reserve created by revaluation of assets. In the Miscellaneous Non-Banking Companies (Reserve Bank)
Directions, 1977 the expression “free reserve” is defined in the same terms.

In the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986), the expression “free reserves” is
defined in the Explanation to s. 2(o) which defines “Sick Industrial Company” as “all reserves created out of the
profits of the share premium account but does not include reserves created out of revaluation of assets, write
back of depreciation provision or amalgamation”.

The Supreme Court in CIT v. Century Spg. & Mfg. Co. Ltd., (1953) 23 Com Cases 462 : AIR 1953 SC 501
[LNIND 1953 SC 80], while dealing with a case under the Business Profits Act, 1947, referred to the meaning
of the word “reserve” in the light of the definition in Webster’s Dictionary and observed that the word reserve
meant (a) to keep for future use or enjoyment, to store up for some time or again to refrain from enjoying at
once; (b) to keep back or hold over to a later time or place for future treatment; (c) to retain reserve for certain
purposes. The Supreme Court also referred to the definition of “reserve” in the Oxford Dictionary, Vol. VIII,
page 513 in that connection.

‘Undivided profits’ are not reserves which satisfy the test laid down in Century Spinning case referred to above.
National City Bank of New York v. CIT (1957) 27 Com Cases 331(Bom).

It is observed in Pickle’s Accountancy, 4th Edn. at p. 0718 that companies distinguish between two kinds of
reserves, capital reserve and revenue reserve.

Capital reserve. This is not normally regarded as available for distribution as dividend. It arises from:

(a) Sales of fixed assets at a profit;

(b) Profits of a company accrued before incorporation or purchase;
(c) Premium on shares or debentures;
(d) Profit on redemption of debentures;
(e) Profit on forfeiture of shares;
(f) Surplus on revaluation of assets and liabilities;
(g) Capital Redemption Reserve Fund.
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Revenue reserve. Revenue Reserve, which is normally regarded as available for distribution through the profit
and loss account is again divided into general reserve and specific reserve.

Power to give gifts out of company’s property

Apart from the contributions, the Board has no power to make gifts. It would seem, however, that the directors
have the power to donate company’s property in the course of the company’s business, if some benefit accrues
thereby to the company, even where there is no statutory sanction therefor, e.g., the giving of a parcel of land
for the formation of a public road, whereby the company itself may stand to gain, or its employees are likely to
receive some benefit or their efficiency is improved or there is an inducement to increased effort on the part of
employees.

Borrowing beyond limit [Section 293(5) of Companies Act, 1956]

The provisions of s. 293(5) of the 1956 Act clearly lay down that debts incurred in excess of the limit fixed by
clause (d) of sub-section (1) of s. 293 of the 1956 Act shall not be valid unless the lender proves that he lent his
money in good faith and without knowledge of the limit imposed by sub-section (1) of s. 293 of the 1956 Act
being exceeded.

A lender cannot assume that the consent of the company in general meeting has been given. Neither the rule in
Royal British Bank v. Turquand , (1856) 6 E & B 327 nor the series of decisions relating to ratification by
shareholders will apply. If the condition in sub-section (5) of s. 293 of the 1956 Act is not satisfied, the debt in
excess of the limit is not valid or effectual.

If the borrowing by the directors is ultra vires their powers, the directors may, in certain circumstances, be
personally liable in damages to the lender, on the ground of the implied warranty given by them that they had
power to borrow. Firbank’s Executors v. Humphreys, (1886) 18 QBD 54 ; Garrard v. James , 1925 Ch 616
. The money may be followed in the hands of the company, and if paid to the company’s creditors, the lender
may be subrogated to the rights of the creditors. See Blackburn Building Society v. Cunliffe Brooks & Co .,
(1881-5) All ER Rep Ext 1280.

It sometimes happens that a power to borrow exists but is restricted to a stated amount. In such a case if by a
single transaction an amount in excess is borrowed, only the excess borrowing would be ultra vires and not the
whole transaction. Deonarayan Prasad Bhadani v. Bank of Baroda, (1957) 27 Com Cases 223(Bom). The
acquiescence of all shareholders in excess loans contracted by directors beyond their powers but not ultra vires
the powers of the company would be sufficient to validate such excess debts. Sri Balasaraswathi Ltd. v. A.
Parameswara Aiyar, (1956) 26 Com Cases 298 : AIR 1957 Mad 122 [LNIND 1955 MAD 110].

It is held by the Allahabad High Court that even if the borrowing is unauthorised, the company will be liable to
repay, if it is shown that the money had gone into the company’s coffers. In such case a claim on the footing of
money had and received for the plaintiff’s benefit would be maintainable. Lakshmi Ratan Cotton Mills Co. Ltd.
v. J.K. Jute Mills Co. Ltd., (1957) 27 Com Cases 660 : AIR 1957 All 311 [LNIND 1956 ALL 216].

Restrictions on powers of Board in case of section 25 Companies under Companies Act, 1956

Department’s views. The question for consideration is whether the Federation of Indian Chambers of
Commerce and Industry has to comply with the provisions of section 293 of the Companies Act in connection
with its proposal to raise additional resources by issue of debentures. It is stated that the Federation is a
company limited by a guarantee to which a licence has been granted under section 25.

2. Section 293 in terms places a limitation on the powers of the Board of Directors of a company to
borrow moneys. It states inter alia that the amount to be borrowed should not exceed the aggregate of
paid-up capital of the company and its free reserves. The argument that is advanced is that the
Federation has no paid-up capital, and no free reserves and so provisions of section 293 would not
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apply to that company. This argument is not sustainable. If a company has no such capital or free
reserves, it means that the amount of such capital or reserve is arithmetically zero and in consequence
the Board of Directors cannot borrow at all. This interpretation is not inconsistent with the scheme of
the Act relating to companies granted licence under section 25. There is nothing in section 25 to
indicate that the provisions of section 293 would not apply to a company coming within the scope of
that section. On the other hand, it is expressly stated in subsection (2) of that section that the company
shall be subject to all the obligations of limited companies, imposed by the various provisions of the
Act.
3. In view of above, if it is intended that the Federation should not be restricted by the provisions of
section 293, the proper course would be to issue an order under section 25 exempting that company or
all companies governed by that section from the provisions of section 293 aforesaid. (Extracts from
File No. 38/2/68-CL-III.)

Note: Until any clarification is issued under the 2013 Act, this clarification will be applicable.

Private companies exempted

The restrictions on the powers of the Board of Directors imposed by s. 293 of the 1956 Act do not apply to a
private company which is not subsidiary of a public company. But those in clauses (a) and (b) of sub-section (1)
of s. 293 of the 1956 Act will apply in the case of private banking companies (vide s. 49 of the Banking
Regulation Act, 1949).

Note: Provisions of s. 180 of the 2013 Act are applicable to private companies.

The mortgage and lease deeds of property by the director of a private company were found to be null and void.
The parties were seeking sale of the property for discharge of debts. The proposal of sale was approved by
majority shareholders of the private company. The court ordered sale of property in the interest of the company
and its shareholders. Pyramid Saimina Theatre Ltd. v. S. Murugan, (2010) 155 Com Cases 42(Mad).

ICSI Guidance Note on compliance certificate (August, 2003)

The ICSI Guidance Note reproduced below was issued under the 1956 Act. Although the procedure as well as
the forms has been amended in the 2013 Act, the Guidance Note will be of guidance under the 2013 Act as
well.

The ICSI has issued a Check List for issue of Compliance Certificate under proviso to s. 383A(1) in respect of
the matters specified under Rule 3 of the Companies (Compliance Certificate) Rules, 2001. Paragraph 24 under
Rule 3 relates to company’s borrowing powers and reads as follows:

Paragraph-24. The amount borrowed by the company from directors, members, public, financial
institutions, banks and others during the financial year ending—is/are within the borrowing limits of the
company and that necessary resolutions as per section 293(1)(d) of the 1956 Act have been passed in duly
convened annual/extraordinary general meeting.

Borrowings

Prescribed Check List

(a) In Case of Private Company

Check whether there are any restrictions on the amount of borrowings contained in the Articles of
Association of the company. If yes, check whether borrowings are in accordance with the
provisions contained in the Articles.
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Note: Provisions of s. 180 of the 2013 Act are also applicable to private companies.

(b) In Case of Public Company

Check whether:

(i) the Memorandum and Articles contains provisions with respect to the powers of the company to
borrow money and to charge the assets of the company;
(ii) the power to issue debentures has been exercised at the meeting of the Board;
(iii) the power to borrow money, otherwise than on debentures, has been exercised at the meeting of the
Board;
(iv) the power to borrow money otherwise than on debentures has been delegated to a committee of
directors or managing director or manager or any other principal officer of the company or in the
case of a branch office principal officer of the branch office, if the delegation was made at the
meeting of the Board and the resolution delegating the power specified the total amount
outstanding, at any time, up to which the money may be borrowed by the delegate;
(v) the total amounts borrowed (apart from temporary loans obtained from the company’s bankers in
the ordinary course of business) exceed the aggregate of the paid-up capital of the company and its
free reserves, if so, consent of the members in general meeting has been obtained. Verify the
resolution passed by the shareholders and the total amount specified therein upto which moneys
may be borrowed by the directors;
(vi) e-Form No. 23* has been filed with the ROC under s. 192(4)(ee)(i).

24 Enforced vide SO 2754(E) dt. 12-09-2013, w.e.f. 12-09-2013 and corresponds to s. 293 of the Companies Act, 1956. For
Clarification on the Notification, see MCA General Circular No. 15/2013 dt. 13-09-2013. For Clarification on implementation
of Section 180, see MCA General Circular No. 04/2014 dt. 25-03-2014.
25 Ins. by Act 65 of 1960, s. 99 (w.e.f. 28-12-1960).
26 Subs. by Act 65 of 1960, s. 99, for “the sale proceeds resulting from the acquisition, after the commencement of this Act,
without the consent of the company” (w.e.f. 28-12-1960).
27 Subs. for “twenty five thousand rupees” by Act 46 of 1977, s. 6 (w.e.f. 24-12-1977).
28 Ins. by Act 65 of 1960, s. 99 (w.e.f. 28-12-1960).
29 Former Explanation re-numbered as Explanation III by Act 65 of 1960, s. 99 (w.e.f. 28-12-1960).

End of Document