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.

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.

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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.

Frequently Asked Questions (FAQs) 

What is a special resolution?

A special resolution is one that is passed by the members of the company with the support of at least three-fourths, i.e., 75% of the shareholders.

Is section 180 of the act applicable to private companies?

No, section 180 of the act does not apply to private companies, as stated in the Companies (Amendment) Act, 2017.

Can a private limited company borrow money?

Yes, private limited companies can borrow money according to Section 179(3) of the Act by borrowing in the form of exempted deposits, issuing debentures as per Section 71 of the Act and through deposits under Section 73 of the Act.

What are temporary loans?

Temporary loans have no definition in the Companies Act, 2013. However, it is generally accepted as a short-term borrowing made by a company to meet immediate funding needs, which are expected to be repaid in a period of no more than one year. Bank overdrafts, cash credit, short-term loans, and commercial papers are all examples of temporary loans. 

References 

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