Section 180 of Companies

Act, 2013
April 24, 2023
5526

This article is written by Himanshu Verma, a graduate of the University of

Petroleum and Energy Studies. In this article, the author has discussed
Section 180 of the Companies Act, 2013, along with the restrictions and
penalties imposed by the act on the board of directors as well as the role of
the board of directors.

It has been published by Rachit Garg.

Table of Contents

 Introduction
 Role of Board of Directors under Companies Act, 2013
o Duty of care and diligence
o Making strategic decisions
o Management oversight
o Interest disclosure
o Protecting the interests of shareholders
o Senior executives’ appointment and supervision
 Explanation of provisions under Section 180 of the Companies Act, 2013
o To sell, lease or dispose
o Undertaking
o Substantial the whole of the undertaking
o Merger or amalgamation amount
o Banking company
o Repayment of debt
o Specified limit
o Purchaser’s claim
 Exceptions under Section 180 of Companies Act, 2013
o Ordinary course of business
 Example
o Transactions by wholly-owned subsidiaries
 Example
o Prior shareholder approval
 Example
o Transactions in compliance with other provisions of the Companies Act, 2013
 Example
 Restrictions on the power of the board of directors under Section 180 of Companies Act,
2013
o Borrowing limitations
o Compliance with law
o Consent of shareholders
o Value of assets
 Penalties for violation of Section 180 of Companies Act, 2013
o Imposition of fine
o Imprisonment of directors
o Disqualification
o Director’s liability
 Case laws
o Priyaranjani Fibres Ltd. v. D. Srinivasa Rao(2018)
 Facts
 Issue
 Judgement
 Observation
o Nagarajan v. ICICI Bank Limited (2018)
 Facts
 Issue
 Judgement
o Observation
 Conclusion
 Frequently Asked Questions (FAQs)
o What is a special resolution?
o Is section 180 of the act applicable to private companies?
o Can a private limited company borrow money?
o What are temporary loans?
 References

Introduction
A company can exercise its power through a board of directors or
shareholders under the Companies Act, 2013. The shareholder’s relationship
with the board of directors functions as an alliance because the board of
directors has some powers that can only be performed by them and some
powers that can only be carried out with the consent of the shareholders,
either via an ordinary resolution or a special resolution. Section 180 of the
Companies Act, 2013, confines the restrictions on the power of the board of
directors.

Role of Board of Directors under

Companies Act, 2013
Under the Companies Act, 2013, the following significant responsibilities and
roles are assigned to the board of directors:

Duty of care and diligence

In accordance with Section 166, the board of directors shall manage the
affairs of the organisation with due care, skill, and diligence.

Making strategic decisions

The board of directors is responsible for the company’s strategic decisions,
which include setting the company’s goals, developing its policies, and
ensuring that it operates in a manner that is consistent with those goals.
According to Section 177, businesses must set up an audit committee that
will be in charge of monitoring the company’s internal controls, external audit
procedures, and financial reporting procedures.

Management oversight
The board of directors is responsible for overseeing management and making
sure that the business is run legally and efficiently. This includes monitoring
the performance of the company’s executives. Companies are required
by Section 178 to form a committee, which is in charge of choosing and
recommending candidates for directorships as well as deciding how much to
pay directors and senior executives.

Interest disclosure
The Board of Directors shall be responsible for the company’s compliance
with all applicable laws and regulations, including those relating to corporate
governance, financial reporting, and disclosure. Section 184 forbids directors
from voting on any interests they may have in agreements made by the
company and requires them to disclose any such interests.

Protecting the interests of shareholders

The board of directors is responsible for defending the interests of the
company’s shareholders and ensuring that the business is run in a way that
maximises shareholder value. The authority of the board of directors is
subject to some limitations under Section 180, including the need for
shareholder approval for certain kinds of transactions, like the sale of the
company’s assets or a sizable amount of debt.

Senior executives’ appointment and

supervision
The board of directors is responsible for choosing and supervising the
company’s senior executives and other significant executives. Companies are
not allowed to provide loans, guarantees, or securities to their directors, with
some exceptions, according to Section 185.

Explanation of provisions under

Section 180 of the Companies Act,
2013
Section 180 of the Act provides certain matters that require the shareholder’s
approval via special resolution before the board could use such powers:

To sell, lease or dispose

If the company desires to sell, lease or otherwise dispose of the entire
business or a substantial portion of the business, or if the company owns
more than one business, all or substantially all of any such business, it must
first get shareholder approval through a special resolution as per Section
180(1)(a).

Undertaking
In Section 180(a)(i) the term ‘undertaking” is defined, which means an
undertaking in which the company’s investment exceeds 20% of its net worth
as per the audited balance sheet of the previous financial year or an
undertaking that generates 20% of the company’s total income during the
previous financial year.

Substantial the whole of the undertaking

Section 180(a)(ii) states that “substantial the whole of the undertaking”
means 20% or more of the undertaking’s value as per the audited balance
sheet of the preceding financial year.

Merger or amalgamation amount

If the company received any sort of payment through a merger or
amalgamation and wishes to invest such an amount anywhere, the company
must have shareholder approval via a special resolution. It should be noted
here that the company does not need the shareholder’s approval to invest an
amount in trust securities, according to Section 180(1)(b).

Banking company
As per Section 180(1)(c), if a company desires to borrow money and the
amount borrowed, plus the amount to be borrowed, surpasses the company’s
paid-up capital, free reserves and securities premium apart from temporary
loans then in such cases, the company must have shareholder approval. It
should be noted here that the securities premium was added under Section
180(1)(c) by Companies (Amendment) Act, 2017.

If a banking company accepts public deposits of money that are payable on

demand and can be collected by cheque, draft, order or otherwise, then such
transactions are not subject to shareholder approval as long as it is done in
the ordinary course of business. As per Companies (Amendment) Act,
2020 housing finance companies registered under the National Housing Bank
Act, 1987 are also exempt from Section 180.

According to Section 180(4), borrowings made by banking companies or

housing finance companies in their ordinary course of business are exempt
from the restrictions imposed under Section 180(1)(a). This means that
before borrowing money or offering securities or guarantees that exceed the
total of their paid-up share capital, free reserves, and securities premium,
banking companies and housing finance companies are exempt from the
requirement to obtain prior approval from shareholders by way of a special
resolution. It is significant to note that this exemption only applies to the
aforementioned types of businesses and does not extend to any other
businesses that are not involved in the banking, insurance, or housing
finance industries. Other corporations are required to abide by the limitations
imposed by Section 180(1)(a) and receive advance approval from
shareholders via a special resolution.

Repayment of debt
Under Section 180(1)(d), to remit or allow time for the repayment of any debt
due by a director means that if the company waives or allows time for the
reimbursement of any debt from the directors of the company, such a
decision requires a special resolution approval.

Specified limit
Section 180(2), deals with the total amount up to which the board of directors
can borrow funds, which is determined by each special resolution adopted by
the company’s general meeting. This means that shareholders can limit the
amount of money the company’s directors are permitted to borrow without
consent from shareholders. If the board intends to borrow more than the
agreed limit, it must seek shareholder approval by carrying out a special
resolution.

As per Section 180(5), no debt incurred by the company over the specified
limit shall be valid or effective unless the creditor shows that the loan was
made in good faith and with no prior knowledge that the director had
exceeded the specified limit.

Purchaser’s claim
As per Section 180(3), in the event, the company passes a special resolution
for the above transactions as mentioned under Section 180(1)(a), then the
purchaser or other person buys or leases any property in good faith without
knowing that the company has failed to comply with the law, then the
purchaser’s claim against such person’s property is unaffected.

Exceptions under Section 180 of

Companies Act, 2013
Section 180 of the Companies Act 2013, makes certain exceptions to the
general rule that the board of directors of a company must obtain prior
shareholder approval before borrowing money, investing funds, or creating a
charge or mortgage on the company’s assets. These exceptions are intended
to give companies more flexibility in their business activities while also
protecting shareholders’ interests. The following are some exceptions to this
general rule:

Ordinary course of business

In the ordinary course of business, the board of directors of a company can
borrow money, invest funds or create a charge or mortgage on the
company’s assets without the prior approval of the shareholders. The term
“ordinary course of business” is not defined in the Companies Act of 2013
and its interpretation and application are determined by the specific
circumstances and facts of each case.

Example
PQR Ltd. is a manufacturing company that borrows money from banks
regularly to meet its working capital needs. In this particular scenario, the
company’s borrowing of money would be considered a transaction in the
ordinary course of business, thus shareholder approval is not necessary.

Transactions by wholly-owned subsidiaries

Transactions that are made in the ordinary course of business or with the
prior approval of the board of directors of the holding company, such as
wholly-owned subsidiaries, are exempt from the requirement to obtain the
prior approval of the shareholders.

Example
XYZ Ltd., a wholly owned subsidiary of NMO Ltd. and is in the trading
industry. XYZ borrows money from banks to cover its working capital needs.
This is regarded as a business transaction, so shareholder consent is not
needed.

Prior shareholder approval

The board of directors of a company may engage in particular transactions
that are not in the ordinary course of business but are favourable for the
company with the prior approval of the shareholder. Such transactions
include the sale, lease or disposal of the company’s entire or substantial
whole of the undertaking or where the investment exceeds the limit specified
in Section 186 of the Act.

Example
UVW Ltd. is a real estate firm looking to sell its entire operation to a third
party. In this case, UVW directors are exceeding the limits therefore, the
company would need the approval of its shareholders before engaging in
such a transaction.

Transactions in compliance with other

provisions of the Companies Act, 2013
If the Board of Directors borrows, invests, or creates a charge or mortgage
that does not exceed the aggregate of the company’s paid-up share capital
and free reserves, then prior consent from shareholders is not required.
However, if it exceeds such an aggregate, the shareholders must first
approve it. It is important to note that temporary loans obtained from the
company’s bankers in the ordinary course of business are not considered as
borrowing, and this exemption is subject to compliance with other provisions
of the Act, such as Section 179, which deals with the powers of the Board of
Directors, and Section 186, which deals with a company’s loans and
investments. As a result, when exercising their powers, the Board of Directors
has to make sure that they adhere to all relevant provisions of the Act.

Example
RST Ltd. wishes to create a charge on its assets to secure a bank loan that
does not exceed the aggregate of the company’s paid-up share capital and
free reserves. In this case, the company can create a charge under Section
77 of the Companies Act 2013, and shareholder approval is not required.

Restrictions on the power of the board

of directors under Section 180 of
Companies Act, 2013

Borrowing limitations
The company’s articles of association include a reference to the borrowing
cap. This cap cannot be exceeded by the board of directors without the
shareholders’ approval. If the borrowing cap has already been reached, the
board cannot borrow any more money without the shareholders’ approval.

Compliance with law

The board of directors must abide by all applicable laws and rules when
exercising their authority under Section 180. Any non-compliance may lead
to legal and financial repercussions.

Consent of shareholders
Without the approval of the shareholders, the board of directors cannot
borrow money, impose an obligation or charge on the assets of the company,
or issue securities. The shareholder’s approval must be obtained by passing a
special resolution at a company general meeting.
Value of assets
If the value of the assets is less than the amount borrowed or to be borrowed,
the board of directors cannot impose a charge on those assets. This prevents
any negative effects on the company’s financial health and makes sure that
the assets offered as collateral are enough to cover the borrowed amount.

Penalties for violation of Section 180

of Companies Act, 2013

Imposition of fine
If an organisation or any individual violates Section 180 rules, they must pay
a fine. According to Section 451 of the Act, if a company, any officer of the
company contravenes any provision of the Act or the rules and regulations
made thereunder for which no specific penalty is stipulated then such person
shall be punishable with a fine or with imprisonment and if the violation is for
the second time within three periods, then the fine imposed on directors will
be twice and Section 450 of the Act states that if a company violates any
provision of the Act or the rules made thereunder, the company and every
officer of the company who is in default shall be punished with a fine, which
may extend to Rs. 10,000 and if contravention is continuing then with a
further fine which may extend to one thousand rupees for every day after the
first during which the contravention continues.

Imprisonment of directors
In addition to fines, directors found in breach of Section 180 may be punished
for up to two years. The imprisonment can be placed alone along with a fine.
According to Section 188, any director found guilty of violating Section 180 is
punishable by a fine of not less than Rs. 25,00,000/-. It is important to note
that Rs. 25,00,000 is only applicable to listed companies under Section
188(5)(i) earlier it was imprisonment and a fine up-to 5,00,000 but it was
amended by Companies (Amendment) Act, 2020 and for other companies, it
is 5,00,000 as per the Amendment Act, 2020. In addition, imprisonment is a
severe penalty that is typically reserved for cases of willful and deliberate
violations. Before imposing an imprisonment penalty, the courts will consider
several factors, including the nature and extent of the violation, the level of
involvement of the director, and the impact of the violation on the company
and its stakeholders.

Disqualification
An infraction of Section 180 may also result in the director’s disqualification
from holding office in any company for a period of up to five years. The
disqualification can have grave repercussions for the director’s professional
reputation and career prospects. Section 164 of the Act contains the
provision that allows directors to be disqualified for violating Section 180 of
the Companies Act, 2013. Section 164 specifies the circumstances in which a
person is ineligible for an appointment as a director of a company or must
resign as a director.

One of the grounds for disqualification specified in Section 164(1)(d) is that a

person shall not be eligible for an appointment as a director if they have been
convicted of a fraud-related offence and five years have not elapsed since
the date of such conviction. A breach of Section 180 can be considered a
fraud offence under Section 447 of the Act. As a result, if a director is found
guilty of infringing on Section 180 and is convicted of a fraud-related offence,
they may be barred from serving as a director of any company for up to five
years under Section 164 of the Act.

Director’s liability
If a company’s board of directors violated the provision of Section 180, the
directors who are responsible for the violation will be held personally liable.
The directors can be sued for breach of fiduciary duty and will be responsible
for compensating the company or its shareholders. The provision holding
directors personally liable for the violation of Section 180 of the Companies
Act is not expressly stated in the Act. However, the director’s liability for
breach of fiduciary duties is well established in company law principles and
judicial precedents. Section 166 of the Companies Act 2013 requires
directors to act in good faith and in the best interests of the company and its
shareholders. They must also exercise due diligence, reasonable care and
skill in carrying out their duties. Any breach of these duties may result in the
directors being held personally liable for the company’s or its stakeholder’s
losses or damages.

Case laws

Priyaranjani Fibres Ltd. v. D. Srinivasa

Rao(2018)

Facts
In this given case, the director of Priyaranjani Fibres Ltd. agreed with an
outsider to sell the shares of himself and other shareholders without the
shareholders’ prior approval. The other shareholders filed a petition with the
National Company Law Tribunal (NCLT) alleging the director’s oppression and
mismanagement. The NCLT ruled that the director’s agreement was not
binding on the shareholders because it was made without their prior
approval. The director filed an appeal with the National Company Law
Appellate Tribunal (NCLAT) against the NCLT’s decision.

Issue
If the shareholders will be bound by an agreement a director of a company
makes with a third party to sell shares of himself and other shareholders
without their prior consent?

Judgement
The NCLAT ruled that the director’s agreement to sell shares of himself and
other shareholders without the shareholder’s prior approval was not binding
on the shareholders. The NCLAT observed that the director was obligated to
act in the best interests of the company and its shareholders and could not
enter into a share-sale agreement without the shareholder’s approval.

The NCLAT also ruled that the director had breached his fiduciary duty to the
company and its shareholders by entering into the agreement without their
prior approval, and that such an agreement would be unenforceable against
the shareholders. The NCLAT dismissed the director’s appeal and upheld the
NCLT’s decision.

Observation
The case of Priyaranjani Fibres Ltd. v. D. Srinivasa Rao is of significance
because it emphasises the importance of obtaining shareholder approval
before entering into an agreement to sell a company’s shares. A company’s
directors have a fiduciary duty to the company and its shareholders and are
expected to act in their best interests. Any action taken by a director that is
not in the best interests of the company or its shareholders will almost
certainly be scrutinised and could be declared invalid by the courts.

Nagarajan v. ICICI Bank Limited (2018)

Facts
In this case, V. Nagarajan, a guarantor of a loan made by ICICI Bank Limited
(“the Bank”) to a company, had executed a guarantee deed in the bank’s
favour. When the company defaulted on the loan, the bank invoked the
guarantee clause and sought repayment from the guarantor. The bank filed a
claim against the guarantor with the Debt Recovery Tribunal (“DRT”) and
obtained a recovery certificate. The bank also notified the guarantor that it
intended to sell the mortgaged property to recover the outstanding amount.

The guarantor filed a writ petition in the Madras High Court, challenging the
property’s sale because the bank did not obtain the prior approval of the
company’s shareholders, as required by Section 180 of the Companies Act,
2013. The High Court rejected the writ petition, ruling that Section 180 didn’t
apply to the bank’s sale of the mortgaged property. The guarantor then
appealed to the Supreme Court.

Issue
Whether the sale of mortgaged property by a bank to recover the
outstanding loan amount from the guarantor who executed a deed of
guarantee in favour of the bank require prior approval of the company’s
shareholders under Section 180 of the Companies Act, 2013?

Judgement
According to Section 180 of the Companies Act, 2013, the sale of mortgaged
property by a bank to recover the outstanding loan amount from the
guarantor, who had executed a deed of guarantee in favour of the bank, does
not require the prior approval of the company’s shareholders. The court
noted that the provisions of Section 180 apply to the sale of a company’s
undertaking, which is distinct from the sale of mortgaged property to recover
a debt from a guarantor. The court also stated that the bank’s right to sell the
mortgaged property to recover the outstanding loan amount is a statutory
right granted to the bank by the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002.

The Court ruled that a secured creditor’s right to sell the mortgaged property
to recover the outstanding loan amount is not subject to Section 180 of the
Companies Act of 2013. The court also pointed out that Section 180 applies
only to the sale of a company’s undertaking, not to the sale of its assets. As a
result, the court reversed the Madras High Court’s order and held that the
bank did not need the prior approval of the company’s shareholders under
Section 180 of the Companies Act, 2013 for the sale of the mortgaged
property to recover the outstanding loan amount.

Observation
The Supreme Court’s decision clarifies that a bank’s sale of mortgaged
property to recover an outstanding loan amount from a guarantor does not
require the prior approval of the company’s shareholders under Section 180
of the Companies Act, 2013. The court ruled that a secured creditor’s right to
sell a mortgaged property to recover the outstanding loan amount is a
statutory right granted to the bank under the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002.

Conclusion
The directors are the heart and soul of a successful company, and they hold
the key to its success. A company can borrow money under Section 180 only
after obtaining the approval of its shareholders via a special resolution
passed at a general meeting. The company can then borrow up to the
amount specified in the resolution. If the company desires to exceed this
limit, yet another special resolution must be passed. The section also requires
the company to disclose the purpose of its borrowings, the amount borrowed,
and the terms and conditions of the borrowing in its financial statements. The
company must also keep its shareholders up to date on the status of its
borrowings on a regular basis. Furthermore, the section limits the board’s
ability to provide security for loans or guarantees made on behalf of the
company. For any such action, the board must first obtain shareholder
approval via a special resolution.

The Companies Act, 2013, along with other regulations, established rules to
govern the actions of directors. The regulations mentioned in such acts are
for the protection of creditors and shareholders. These rules ensure that the
director’s personal interests do not come at the expense of the company’s or
its stakeholder’s interests.