Companies Act 2013

Section 14: Alteration of articles.

Chapter II
INCORPORATION OF COMPANY AND MATTERS INCIDENTAL THERETO
Provisions of the Companies Act, 2013:
Section 14: Alteration of articles.
Rule 2.30 of the Companies Rules, 2013
[Section 14 is not yet brought to force and the Companies Rules, 2013 is not yet brought to force]Corresponding provisions of the Companies Act, 1956:
Section 31Corresponding provisions of the English Companies Act, 2006
Sections 21, 23, 24 and 26Applicability:
This section is applicable to all companies.
A company may later its articles of association with consent of its members by way of a special resolution. However this power is subject to provisions of the Companies Act and Memorandum of association of the company. Meaning, while a company is free to alter its articles of association the way it wants, it shall not be contrary to provisions of the Act and its memorandum of association.
A private company may alter its articles of association by removing restrictions and limitations of a private company to convert itself into a public company. And upon receiving consent of its members, a private company becomes a public company. [1st proviso to section 14(1)]
And registering altered articles and receiving fresh certificate of incorporation from the Registrar of Companies remains formality, though important.
Normally consent of members by special resolution for alteration of articles suffices. However, if articles contains entrenchment provision, i.e. requiring consent of more or all members for alteration of its articles, the same shall be obtained. [section 5(3)].
A public company may alter its articles of association by inserting restrictions and limitations of a private company to convert itself into a private company. However, it’s conversion is subject to approval of National Company Law Tribunal. [2nd proviso to section 14(1)].
Every alteration of articles and in case of conversion of a public company into a private company by altering articles, a copy of order of National Company Law Tribunal shall also be filed with the Registrar of Companies in Form no. 2.31 within 15 days of receipt of the order of the Tribunal. Copy of printed articles of association is also required to be filed along with it. [section 14(2) r/w rule 2.30].
Wordings of draft Rule 2.30 suggests that altered articles shall be filed only in case of conversion of a public company into a private company by altering articles.
Any alteration of the articles once registered with the Registrar of Companies shall be valid as if it were originally contained in the articles. [section 14(3)].
Penalty: 
Since no specific penalty or punishment is prescribed for contravention of section 14, general penalty prescribed under section 450 of the Act is applicable. Accordingly, the company as well as its officer who is in default or such other person shall be punishable with fine upto Rs.10,000/-. For continuing offence, they are punishable with further fine upto Rs.1,000/- for every day after the first during which contravention continues.
 
It may be noted that for second or subsequent contravention of the provision of this section, if made within a period of three years, then the company as well as its officer who is in default shall be punishable under section 451 with twice the amount of fine.

Adjudication:
Under Section 454, the officer appointed by the Central Government, not below the rank of Registrar of Companies, may adjudicate and impose monetary penalty for violation of this section, where it decides that no prosecution be launched. However, before imposing penalty, an opportunity of hearing shall be given to the Company and its officers.

Compounding:
It may be noted that under section 441, where offence is punishable with fine only, the same may be compounded by the National Company Law Tribunal or where the fine does not exceed Rs.5,00,000/- by the Regional Director or any other officer authorised by the Central Government.
Only company may apply for compounding for violation of section 14. Since directors and officers of company who is in default are punishable with fine or imprisonment or both, they cannot avail compounding mechanism to settle the contravention.

Summary of forms and records:
Altered articles with copy of order of National Company Law Tribunal together with printed copy of altered articles of association shall be filed in Form no. 2.31 within 15 days of receipt of the order of the Tribunal. [rule 2.30].
A copy of special resolution together with the explanatory statement under section 102, if any, shall be filed with the Registrar in Form No. 7.14 [section 117 r/w rule 7.22].
Standard
Companies Act 2013

Section 13: Alteration of memorandum.

Chapter II
INCORPORATION OF COMPANY AND MATTERS INCIDENTAL THERETOProvisions of the Companies Act, 2013:
Section 13: Alteration of memorandum.
Rules 2.26 to 2.29 of the Companies Rules, 2013
[Section 13 is not yet brought to force and the Companies Rules, 2013 is not yet brought to force]Corresponding provisions of the Companies Act, 1956:
Sections 16, 17, 18, 19, 21, 23 and 37Corresponding provisions of the English Companies Act, 2006
Sections 37, 77 to 81 (change of name) and 87

Applicability:
This section is applicable to all companies.

Memorandum of association contains following clauses:
(a) Name of the Company,
(b) State of India where registered office of the company is situated,
(c) Main objects of the Company and matters considered necessary in furtherance thereof,
(d) Liability of members of the company; and
(e) Authorised share capital of the company.

Alteration made under section 13 shall have any effect until it has been registered. [section 13 (10)].

Special resolution: [section 13 (1) and (6)]
For alteration of any of the clauses [as aforesaid, except (e)] of memorandum of association, consent of members by way of special resolution is required. However, in case of alteration of authorised share capital (as stated in (e) above), consent of members by way of ordinary resolution as stated in section 61 is required.

The company is required to file special resolution passed by shareholders for alteration of memorandum of association with the Registrar of Companies [section 13(6)].

Change of name clause of memorandum: [section 13 (2) and (3)]
For change of name of the company, which is part of memorandum of association of the company, written approval of the Central Government is required and provisions of section 4 (2) and (3) of the Act shall be complied with.
However, in case of conversion of status of a company from one class to another, procedure prescribed for conversion shall be followed and consequential addition or deletion of word ‘Private’ in name of the company shall not require approval under section 13. [proviso to section 13(2)].

Draft Rule 2.26
As per the sub-rule (1), change of name shall not be allowed by Central Government in following cases:
(a) Company which has defaulted in filing any document or annual return or financial statement, as required to be filed under the Act, with the Registrar of Companies,
(b) Company which has defaulted on repayment of matured deposits, matured debentures or interest due on deposits or debentures.

The company is required to file with the Registrar of Companies, approval of the  Central Government for change of name of the Company.  [section 13(6)].

Change of name shall be take effect only upon Registrar of Companies issuing fresh certificate of incorporation. [section 13 (3)].

Draft Rule 2.26
As per the sub-rule (2), fresh certificate of incorporation shall be in Form no. 2.27.

Change of registered office clause of memorandum: [section 13 (4), (5), (7)]
For shifting of registered office from one State to another State of India, prior approval of Central Government is required. For this purpose application in form no. 2.28 shall be made to the Central Government and a copy thereof shall also be filed with the Chief Secretary of the State [Rule 2.27 (1) and (5)].

The Central Government shall dispose application within a period of 60 days [section 13 (5)].

Shifting of registered office shall not be allowed where any inquiry, inspection or investigation has been initiated under the Act against the company or any prosecution under the Act is pending against the company. [proviso to rule 2.27 (10)].

An application shall be accompanied with several documents including list of creditors and debenture holders, if any. Said list shall be prepared as on latest practical date which shall not be older than 30 days.
Further, an affidavit verifying the said list shall be given by Company Secretary, if any and atleast two of the directors of the Company, one of whom shall be managing director, if any. [rule 2.27(2)].
An affidavit from directors is also required to be submitted, along with the application, stating that no employees shall be retrenched as a consequence of shifting of registered office. [rule 2.27(3)].
To dispose of application, hearing shall take place. The company shall atleast 14 days before the date of hearing, [rule 2.27(6)]:
(i) give advertisement (about date, time and venue of hearing) in newspapers in vernacular and English language, in vernacular and English newspapers, respectively, circulating in the district where registered office of the applicant company is situated at time of application;
(ii) serve notice of hearing  (about date, time and venue of hearing) by registered post acknowledgement due
(a) individually to all creditors and debenture holders,
(b) to Registrar of Companies; and
(c) along with copy of application to SEBI, in case of listed company, and to other regulatory body if the company is regulated by any special law.

Objections, if any, received by the applicant company shall be forwarded to the Central Government on or before the date of hearing. [rule 2.27 (7)].

Where no objections are received, an application may be disposed of without hearing. [rule 2.27 (8)].

The Central Government shall ensure that the applicant company either obtains consent of objecting creditors or satisfies debt or secures the debt of objecting creditors. [rule 2.27 (9) and section 13 (5)].

Central Government may put terms and conditions while granting the approval, including order as to costs. [rule 2.27 (10)].

Within 30 days of receipt of order of the Central Government approving the alteration of registered office clause of memorandum of association, the Company shall file file the certified true copy of the order in Form no. 2.29 with the Registrar of Companies of each of the States. The Registrar of Companies shall register the same.  Further, the Registrar of the State where the registered office is being shifted to, shall issue a fresh certificate of incorporation indicating the alteration. [section 13 (7) and rule 2.28].

Change of object clause of memorandum: [section 13 (8), (9)]
Where money is raised by a company from public by issue of prospectus and still has got those money unutilised then for change of object clause of memorandum of association, the company would require consent of members by way of special resolution with specific prescribed disclosures.

While section 13 (8) speaks generally of change of object clause where money is raised from public by issue of prospectus and remaining unutilised, draft rule 2.29 prescribes procedure only when there is a change in the objects as stated in prospectus, stating which the money was raised.

Postal ballot and contents of notice: [rule 2.29 (1)]
Consent of members by special resolution shall be obtained by way of postal ballot.  The notice to members shall contain the following:
(a) total money received (from public by issue of prospectus which remained untilised at time of seeking consent for change of object);
(b) total money utilized for the objects stated in the prospectus;
(c) unutilized amount out of the money so raised through prospectus,
(d) particulars of the proposed alteration/ change in the objects;
(e) justification for the alteration/change in the objects;
(f) amount proposed to be utilized for the new objects;
(g) estimated financial impact of the proposed alteration on the earnings and cash flow of the company;
(h) other relevant information which is necessary for the members to take an informed decision on the proposed resolution;
(i) place from where any interested person may obtain a copy of the notice of resolution to be passed.

Newspaper advertisement [section 13 (8)(i) and rule 2.29 (2)]
The details of such resolution shall also be published in the newspapers (one in English and one in vernacular language) which is in circulation at the place where the registered office of the company is situated and shall also be placed on the website of the company, if any, indicating therein the justification for such change.
Advertisement shall be in form no. 2.30 which shall be published simultaneously with the dispatch of postal ballot notices to shareholders.

The notice shall also be placed on the website of the company, if any. [rule 2.29 (3)].

Dissenting shareholders [section 13 (8)(ii)]
The dissenting shareholders shall be given an opportunity to exit by the promoters and shareholders having control in accordance with regulations to be specified by the SEBI. SEBI is yet to notify regulation for the same.

While money is received from public by the company, exit opportunity shall be given by promoters and shareholders having control.

Above procedure of postal ballot, newspaper advertisement and exit opportunity to dissenting shareholders shall not apply
(a) where money is raised by a company from public by issue of prospectus and has got those money fully utilised; and
(b) where the company has not raised any money from public.

The Registrar shall register any alteration of the memorandum with respect to the
objects of the company and certify the registration within a period of thirty days from the date of filing of the special resolution. [section 13 (9)].

Change of liability clause of memorandum: [Section 13(11)]

In the case of a company limited by guarantee and not having a share capital, any alteration of the memorandum made in order to give or has effect of giving any person (except member) a right to participate in the divisible profits of the company otherwise than as a member, shall be void.

Penalty:

Since no specific penalty or punishment is prescribed for contravention of section 13, general penalty prescribed under section 450 of the Act is applicable. Accordingly, the company as well as its officer who is in default or such other person shall be punishable with fine upto Rs.10,000/-. For continuing offence, they are punishable with further fine upto Rs.1,000/- for every day after the first during which contravention continues.
 
It may be noted that for second or subsequent contravention of the provision of this section, if made within a period of three years, then the company as well as its officer who is in default shall be punishable under section 451 with twice the amount of fine.

Adjudication:

Under Section 454, the officer appointed by the Central Government, not below the rank of Registrar of Companies, may adjudicate and impose monetary penalty for violation of this section, where it decides that no prosecution be launched. However, before imposing penalty, an opportunity of hearing shall be given to the Company and its officers.

Compounding:
It may be noted that under section 441, where offence is punishable with fine only, the same may be compounded by the National Company Law Tribunal or where the fine does not exceed Rs.5,00,000/- by the Regional Director or any other officer authorised by the Central Government.
Both company and every officer who is in default may apply for compounding for violation of section 12.

Summary of forms and records:
Fresh certificate of incorporation in Form no. 2.27 consequent to change of name.
An application for obtaining approval of the Regional Director is required to be made in Form no. 2.28 along with the fees (Rule 2.27)  for shifting of registered office from one State to another.
An order of the Regional Director approving shifting of registered office from one State to another shall be filed with ROC in form no. 2.29 (rule 2.28).
Format of notice to be given in newspaper in Form no. 2.30 (rule 2.29(2)).
Standard
Companies Act 2013

Section 12: Registered Office of the Company.

Chapter II
INCORPORATION OF COMPANY AND MATTERS INCIDENTAL THERETO

Provisions of the Companies Act, 2013:
Section 12: Registered Office of the Company
Rule 2.22 to 2.25 of the Companies Rules, 2013
[Section 12 is not yet brought to force and the Companies Rules, 2013 is not yet brought to force]

Corresponding provisions of the Companies Act, 1956:
Sections 146 and 147

Corresponding provisions of the English Companies Act, 2006:
Sections 86 and 87

Applicability:
This section is applicable to all companies.

A company shall on and from the 15th day of its incorporation and at all times thereafter, have a registered office for receiving and acknowledging all communications and notices as addressed to the company. [Section 12(1)].

Verification of Registered office:
The company shall furnish to the Registrar of Companies (ROC) a verification of its registered office in Form no. 2.25 along with the following documents within 30 days of its incorporation [Section 12(2) r/w rule 2.22]:

1. Registered document of the title of the premises of the registered office in the name of the company; or
2. Notarized copy of lease / rent agreement in the name of the company along with a copy of rent paid receipt not older than one month;
3. Authorization from the owner or authorized occupant of the premises along with proof of ownership or occupancy authorization, to use the premises by the company as its registered office;
4. Document of connection of any utility service like telephone, gas, electricity, etc. depicting the address of the premises in the name of the owner/document as the case may be which is not older than 2 months.
5. the list of all other companies with their CIN, having the same unit/tenement/premises as their registered office address.

 

Publication of Name of the Company: [Section 12(3) r/w rule 2.23]
A company shall paint or affix its name and the address of its registered office outside every office of the company in a conspicuous position in legible characters. Where the name of the company is in language which is not used in that locality, where the registered office of the company is situated, in such case, name and address shall be affixed in that language and also in local language. The Company shall have its name engraved on common seal.

Further, the company shall print its name, registered office address, corporate identity number along with telephone number, fax number, email and website addresses, if any, in all its business letters, billheads, letter papers and in all its notices and other official publications. The company shall print its name on hundies, promissory notes, bills of exchange and such other documents as and when notified by the Central Government.

Where a company has changed its name or names during the last two years, it shall affix or paint or print the former name of the company outside every office of the company in legible characters, and in all its official publications mentioned above.

In case of One Person Company, a company shall affix, print or engrave the words “One Person Company” in bracket below the name of the Company.

 

Notice and verification of change of registered office: [section 12(4) r/w rule 2.24]

1. A company shall give intimation of change in registered office of the company (within the local limits of city, town or village where such office is situated) to ROC within 15 days of such change in Form no. 2.25.

2. Change in / shifting of the registered office of the company within the same State but outside the local limits of city, town or village where such office is situated: [Section 12(5) r/w rule 2.25]

Approval of the members of the company by way of special resolution is required for shifting of the registered office of the company within the same State but outside the local limits of city, town or village where such office is situated.

3. Further, if shifting of the registered office of the company within the same State but outside the local limits of city, town or village where such office is situated results into falling of new registered office within the jurisdiction of another ROC within the same State then prior approval of the Regional Director is also required to be obtained.

Before making an application to the Regional Director, the company shall publish a notice in newspapers as under:

Atleast one month before filing any application with the Regional Director for the change of registered office, notice shall be published:
(a) at least once in a daily newspaper published in English and in the local language where the registered office of the company is situated and
(b) serve individual notice on each debenture holder, depositor and creditor of the company;
clearly indicating the matter of application and stating that any person whose interest is likely to be affected by the proposed alteration of the memorandum may intimate his nature of interest and grounds of opposition to the Regional Director with a copy to the company within twenty one days of the date of publication of that notice:
In case no objection is received by the Regional Director within twenty one days from the date of service or publication of the notice, the person concerned shall be deemed to have given his consent to the change of registered office proposed in the application:
The shifting of registered office shall not be allowed if any inquiry, inspection or investigation has been initiated against the Company or any prosecution is pending against the company under the Act. [2nd proviso to rule 2.225].

As per Section 12(6) & (7), the Regional Director shall give its confirmation within 30 days from the date of receipt of application made by the company. Further, the company shall file the confirmation with ROC within 60 days from the date of confirmation. The Registrar shall certify the same within 30 days from the date of filing of such confirmation and issue certificate of registration and the change shall take effect from the date of said certificate.

4. Shifting of registered office from one State of India to another is covered by provisions of section 13.

Penalty:
If default is made in complying with the requirements of this section, the company and every officer who is in default shall be liable to a penalty of Rs. 1,000 for every day during which the default continues which shall not exceed Rs. 1,00,000 [Section 12(8)]

Nature of offence:
Since officers of company may be punished with imprisonment, it is necessary to decide nature of offence.
As violation of the section 12 is not covered under sub-section 6 of section 212, it is non-cognizable offence as provided in section 439.

Adjudication:
Under Section 454, the officer appointed by the Central Government, not below the rank of Registrar of Companies, may adjudicate and impose monetary penalty for violation of this section, where it decides that no prosecution be launched. However, before imposing penalty, an opportunity of hearing shall be given to the Company and its officers.

Compounding:
It may be noted that under section 441, where offence is punishable with fine only, the same may be compounded by the National Company Law Tribunal or where the fine does not exceed Rs.5,00,000/- by the Regional Director or any other officer authorised by the Central Government.
Both company and every officer who is in default may apply for compounding for violation of section 12.

Summary of forms and records
A verification of its registered office and notice of every change in registered office of the company shall be filed in Form No. 2.25 (Rule 2.22 and Rule 2.24)
An application for obtaining approval of the Regional Director is required to be made in Form no. 2.26 along with the fees (Rule 2.25)

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Companies Act 2013

Section 5 Articles

Chapter II
INCORPORATION OF COMPANY AND MATTERS INCIDENTAL THERETO

Section 5: Articles
Rules 2.7 and 2.8 of the Companies Rules, 2013
[Section 5 is not yet brought to force. The Companies Rules, 2013 is not yet brought to force.]

Corresponding provisions of the Companies Act, 1956:
Sections 26, 27, 28 and 29

Corresponding provisions of the English Companies Act, 2006:
Sections 18 and 22

Applicability:
This section is applicable to all companies.

Contents of Articles of Association [Section 5(1) and (2)]:
The articles of association of a company shall contain the regulations for management of the company.

The Articles shall also contain matters prescribed by the Central Government.

Use of word ‘shall’ suggests that articles must contain compulsorily provisions relating to management of the company.

Under draft rules, the Government has prescribed following specific provisions which a company may incorporate in its Articles.
1. Issue of equity shares with differential voting rights. draft Rule 4.2(1)(a)
2. Certain terms relating to preference shares. draft Rule 4.7(2)
3. Issue of shares on a preferential basis. draft Rule 4.11(2)
4. Fees for inspection of documents, registers etc. and copy thereof. draft Rule 7.12, Rule 7.14 and Rule 7.24
5. Fees for extracts from register of loans and investments. draft Rule 12.10
6. Fees for extracts from register of of contracts or arrangements in which directors are interested. draft Rule 12.15(4)

Entrenchment [Section 5(3), (4) and (5)]:

The Articles may contain entrenchment provisions. This is new a concept under the Indian Companies Act, as there was no such concept under the Companies Act, 1956.

The word ‘entrench’ is not defined under the Companies Act, 2013. As per Oxford English Dictionary, the word ‘entrench’ means establish (an attitude, habit, or belief) so firmly that change is very difficult or unlikely. As per wikipedia, an entrenched clause or entrenchment clause of a basic law or constitution is a provision which makes certain amendments either more difficult or impossible, i.e., inadmissible. It may require a form of supermajority, a referendum submitted to the people, or the consent of another party.

Use of word ‘may’ suggests that a company has discretion to include entrenchment provisions in its articles.

Such entrenchment provision may relate to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of a special resolution, are met or complied with.

And that such a provision can be made either at time of incorporation of the company or after incorporation thereof, by amendment in the articles.

If such entrenchment provisions are intended to be incorporated in the articles of a company after incorporation, then consent of members is mandatory in the prescribed manner. In case of a private company, consent of all the members of the company is required and  in case of a public company, consent of its members by way of a special resolution is required.

It may be noted that any amendment of articles requires consent of members by way of a special resolution, be it a private company or a public company [under section 14(1)]. However, in case of a private company intending to alter its articles to provide for aforesaid entrenchment provision, it shall obtain consent of all of its members. The manner of obtaining consent in case of a private company shall be by way a resolution, as it appears from instruction no.2 given in attachment instructions to Form no. 2.8.

Wordings of the provisions (sub-section 3) suggests that entrenchment provisions can only be relating to matters requiring consent of members by way of special resolution.

In case the company inserts such a clause in the articles, either on formation or by way of amendment, the company shall give notice to the Registrar of Companies informing the same within thirty days from the date of formation or amendment of the articles. Rule 2.7 prescribes intimation shall be given in Form no. 2.8.

Model Articles [Section 5(6) and (7)]:
Model of articles as applicable to different companies have been provided in Table F, G, H, I and J of Schedule I to the Act. Though format of articles shall be as per applicable table of Schedule I, a company is having freedom to adopt all or any of the regulations from applicable model articles.

Formats: The Articles of the company shall be in the form provided in Schedule I, i.e
For a company limited by shares – Table F
For a company limited by guarantee and having a share capital – Table G
For a company limited by guarantee and not having a share capital – Table H
For a unlimited company and having share capital – Table I
For a unlimited company and not having a share capital – Table J

Applicability of model articles [Section 5(8) and (9)]:
For companies incorporated after the commencement of the Companies Act, 2013, by default provisions of relevant model articles (to the extent applicable to it) shall apply. If a company intends to have a different provision than those prescribed in the relevant model articles, it shall specifically exclude or modify the same in its articles.

In case of companies registered under previous company law, the provisions of its articles shall apply upto the time it amends articles after commencement of the Companies Act, 2013. Upon amendment of articles (made after commencement of the Companies Act, 2013), provisions of relevant model table becomes applicable automatically by operation of law [sub-section (9) of section 5]. In case of  companies registered under previous company law, effect of section 6 may be noted.

Penalty:
Since no specific penalty or punishment is prescribed for contravention of section 5, general penalty prescribed under section 450 of the Act is applicable. Accordingly, the company as well as its officer who is in default or such other person shall be punishable with fine upto Rs.10,000/-. For continuing offence, they are punishable with further fine upto Rs.1,000/- for every day after the first during which contravention continues.

It may be noted that for second or subsequent contravention of the provision of this section, if made within a period of three years, then the company as well as its officer who is in default shall be punishable under section 451 with twice the amount of fine in addition to any imprisonment provided for the offence.

Adjudication:
Under Section 454, the officer appointed by the Central Government, not below the rank of Registrar of Companies, may adjudicate and impose monetary penalty for violation of this section. However, before imposing penalty, an opportunity of hearing shall be given to the Company and its officers.

Compounding:
It may be noted that under section 441, where offence is punishable with fine only, the same may be compounded by the National Company Law Tribunal or where the fine does not exceed Rs.5,00,000/- by the Regional Director or any other officer authorised by the Central Government.

Summary of forms and records:
Form no. 2.8 for giving notice to the Registrar with respect to the provision of entrenchment.

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Companies Act 2013

Section 180 Restrictions on powers of Board.

Restrictions on powers of Board

– as contained under section 180 of the Companies Act, 2013 is reproduced below:

180. (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 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.

This provision is covered by CHAPTER XII on MEETINGS OF BOARD AND ITS POWERS [Sections 173 to 195].

Section 180 is brought to force with effect from September 12, 2013.

Corresponding provisions of the Companies Act, 1956:
Section 293

Corresponding provisions of the English Companies Act, 2006:
Sections 761 and 762

Applicability:
This section is applicable to all companies.

What is the difference from the Companies Act, 1956:

 

Section 180 of Companies Act 2013 Section 293 of Companies Act 1956
Applicable to all companies Applicable to public companies
For specified matters consent of members required by way of special resolution i.e. three-fourth of majority of members present and voting (including those participating by electronic voting) and where postal ballot allowed, votes in favour shall be three fourth of the total valid votes castes by postal ballot. For specified matters consent of members required by way of ordinary resolution i.e. simple majority of members present and voting (including those participating by electronic voting) and where postal ballot allowed, votes in favour shall be more than the total valid votes castes by postal ballot.
Terms ‘undertaking’ and ‘substantially whole of the undertaking’ are explained. No such explanation
Consent of members required to invest amount of consideration received as a result of any merger or amalgamation (except where investment made in trust securities) Consent of members required to invest amount of consideration received as a result of(a)    compulsory acquisition of any undertaking of the company (whole or substantially whole) or

(b)   compulsory acquisition of any premise or property used for such undertaking and without which it cannot be carried on or can be carried on only with difficulty or only after a considerable time (except where investment made in trust securities)

Fact that consent of members as required under this section is not obtained, shall not affect title to property purchased by a buyer in good faith.  Fact that consent of members as required under this section is not obtained, shall not affect title to property purchased by a buyer in good faith AND after exercise of due care and caution.
No such provision under section 180. However similar provision is made under section 181. Consent of members required to contribute 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, exceed 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.

Comments:

This section shall be read with section 221 of the Companies Act, 2013.

Copy of Board resolutions for sell, lease or disposal of undertaking or substantial undertaking as well as Board resolution to borrow; copy of special resolution together with explanatory statement annexed to notice calling the meeting is required to be filed with the Registrar of Companies within 30 days. ((Section 117(1) and Section 117(3)(a) and (e) ))

Undertaking:

An explanation is inserted to explain the term ‘undertaking’. It comprises two test. Any one test if complied with, then it is an ‘undertaking’.

Test 1: An undertaking in which the investment of the company exceeds 20% of its net worth as per audited balance sheet of the preceding financial year.

Test 2: An undertaking which generates 20% of the total income of the company during the previous financial year.

As can be observed from the explanation, the term ‘undertaking’ is not defined as explanation itself uses the term ‘undertaking’. Hence recourse needs to be given to its dictionary meaning.

Judicially it is not accepted that an ‘undertaking’ means an asset or property of the company.  The expression “undertaking” used in section 293(1)(a) is not necessarily limited to some property or asset but would extend to a distinct business activity. ((Yallamma Cotton, Wollen & Silk Mills Co. Ltd., In re (1970) 40 Comp Cas 466 (Mys.) ))

In Yallamma Cotton’s case ((ibid)), a learned single judge of the Mysore High Court was concerned with a situation where the official liquidator of the company in liquidation had impugned the action of the creditor bank in taking possession of certain assets of the company in apparent exercise of its power as a mortgagee and charge-holder of the immovable and movable properties of the company. The mortgage had been created by the ex-director of the company. It was argued for the liquidator that the mortgage was beyond the powers of the board of directors under section 293(1)(b), and further that taking into possession the mortgaged property amounted to an act which was specifically prohibited by section 293(1)(a) as beyond the scope of the power of the board of directors, without ratification by the company in general meeting. In this context, the learned section (1) of section 293, and, as the said word was not defined in the Act, placing reliance upon the dictionary definition, the learned single judge observed (at page 485) : “It is not in its real meaning anything which may be described as a tangible piece of property like land, machinery or the equivalent; it is in actual effect an activity of man which in commercial or business parlance means an activity engaged in with a view to earn profit. Property, movable or immovable, used in the course of or for the purpose of such business can more accurately be described as the tools of business or undertaking, i.e. things or articles which are necessarily to be used to keep the undertaking going or to assist the carrying on the activities leading to the earning of profits.”

The matter was carried in appeal and, in the decision reported at page 1154 of the same volume ((International Cotton Corporation P. Ltd. v. Bank of Maharashtra (1970) 40 Comp Cas 1154 (Mys.) )), the appeal Bench upheld the findings of the learned judge and, while doing so, it also took note of the fact that the expression “undertaking” as used in section 293(1)(a) of the Companies Act has not been defined. The appeal court, therefore, fell back upon the meaning of the said word contained in dictionaries, and observed (at page 1157) : “The business or undertaking of the company must be distinguished from the properties belonging to the company. In this case it is only the properties belonging to the company that have been deal with by the board of directors under the deeds of hypothecation and mortgage in favour of the bank. Hence, the learned company judge was right in holding that no part of the undertaking of the company was disposed on in favour of the bank.”

Borrowings:
Where borrowing proposed by a company, when aggregated with the borrowings already made by that company, will exceed aggregate of its paid-up share capital and free reserves of the company, then prior consent of members by special resolution is required.

The term ‘paid-up share capital’ means such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paid-up in respect of shares of the company, but does not include any other amount received in respect of such shares, by whatever name called.((Section 2(64) ))

The term ‘free reserve’ 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 recognized 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.((section 2(43) ))

What if consent of members is not obtained?
Exercise of power without consent of members is exercise of powers beyond the authority of the Board and is ultra vires. The company can avoid it. And if the Board of Directors borrows in excess of the limits and without consent of members by special resolution, then the debt incurred by the company shall not be valid or effectual ((Section 180(5) )). However, in such cases debt of the company could become valid and effective if the lender proves that he advanced loan in good faith and without knowledge that the limit imposed by section 180(1)(c) had been exceeded. Hence lenders needs to be extra cautious while lending to companies.

Validity of resolution passed under section 293 of the Companies Act, 1956:
Ministry of Corporate Affairs, clarified ((general circular no.04/2014 dated March 25, 2014)) that the resolution passed under section 293 of the Companies Act, 1956 prior to September 12, 2013 (date on which Section 180 of the Companies Act 2013 brought to force) 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 section 180 of the Companies Act, 2013 for a period of one year from September 12, 2013.

Penalty:
Since no specific penalty or punishment is prescribed for contravention of the section, general penalty prescribed under section 450 of the Act is applicable. Accordingly, the company as well as its officer who is in default or such other person shall be punishable with fine upto Rs.10,000/-. For continuing offence, they are punishable with further fine upto Rs.1,000/- for every day after the first during which contravention continues.

It may be noted that for second or subsequent contravention of the provision of this section, if made within a period of three years, then the company as well as its officer who is in default shall be punishable under section 451 with twice the amount of fine in addition to any imprisonment provided for the offence.

Adjudication:
Under Section 454, the officer appointed by the Central Government, not below the rank of Registrar of Companies, may adjudicate and impose monetary penalty for violation of this section, where it decides that no prosecution be launched. However, before imposing penalty, an opportunity of hearing shall be given to the Company and its officers.

Compounding:
It may be noted that under section 441, where offence is punishable with fine only, the same may be compounded by the National Company Law Tribunal or where the fine does not exceed Rs.5,00,000/- by the Regional Director or any other officer authorised by the Central Government.

 

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