Powers of the Board, and the Restrictions on Them

First proviso: the Board is subject to the Act and the constitution. In exercising any such power the Board is subject to the provisions contained in that behalf in this Act, or in the memorandum or articles, or in any regulations not inconsistent therewith and duly made thereunder, including regulations made by the company in general meeting.

Second proviso: what belongs to the members stays with the members. The Board shall not exercise any power or do any act or thing which is directed or required, whether under this Act or by the memorandum or articles or otherwise, to be exercised or done by the company in general meeting.

Section 179(2) protects what the Board has already done. No regulation made by the company in general meeting shall invalidate any prior act of the Board which would have been valid if that regulation had not been made. So the members may bind the Board for the future, but cannot undo a completed act by passing a regulation afterwards.

Take the three together and the division of power is clear. The Board has everything, the members may narrow it for the future, and what the Act itself reserves to a general meeting is beyond the Board altogether.

The eleven powers that need a Board meeting: section 179(3)

The Board shall exercise the following powers on behalf of the company by means of resolutions passed at meetings of the Board:

• (a) to make calls on shareholders in respect of money unpaid on their shares;
• (b) to authorise buy-back of securities under section 68;
• (c) to issue securities, including debentures, whether in or outside India;
• (d) to borrow monies;
• (e) to invest the funds of the company;
• (f) to grant loans or give guarantee or provide security in respect of loans;
• (g) to approve financial statement and the Board's report;
• (h) to diversify the business of the company;
• (i) to approve amalgamation, merger or reconstruction;
• (j) to take over a company or acquire a controlling or substantial stake in another company;
• (k) any other matter which may be prescribed.

The point of the sub-section is the words "at meetings of the Board". These eleven cannot be done by resolution by circulation under section 175. Everything else the Board may decide by circulation if the articles allow.

First proviso: three of them may be delegated. The Board may, by a resolution passed at a meeting, delegate clauses (d), (e) and (f), that is borrowing, investing and granting loans, guarantees or security, to any committee of directors, the managing director, the manager or any other principal officer, or, in the case of a branch office, the principal officer of that branch, on such conditions as it may specify.

Note what cannot be delegated. Calls, buy-back, issue of securities, approval of the financial statement and Board's report, diversification, amalgamation and takeover stay with the Board.

Second proviso and the two Explanations: banking companies. The acceptance of deposits from the public repayable on demand and withdrawable by cheque, draft or order, and the placing of monies on deposit by one banking company with another, are not borrowing or lending within the section. Explanation I takes borrowings by a banking company from other banks, the Reserve Bank of India, the State Bank of India or any bank established by or under any Act outside clause (d). Explanation II provides that in dealings with bankers, the power to borrow means the arrangement made for an overdraft or cash credit, not the day-to-day operation of that account.

Explanation II is the practical one. Every cheque drawn on an overdraft is technically a borrowing; without the Explanation a Board meeting would be needed for each.

Section 179(4) preserves the members' right: nothing in the section affects the right of the company in general meeting to impose restrictions and conditions on the exercise by the Board of any of these powers.

The four powers that need a special resolution: section 180(1)

The Board shall exercise the following powers only with the consent of the company by a special resolution.

(a) Selling the undertaking

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.

The Explanation defines both expressions, and both are twenty per cent tests measured differently.

• "Undertaking" means one 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 which generates twenty per cent of the total income of the company during the previous financial year.
• "Substantially the whole of the undertaking" in any financial year means twenty per cent or more of the value of the undertaking as per the audited balance sheet of the preceding financial year.

So the enquiry has two stages. First ask whether the thing being sold is an undertaking at all, by the net worth or income test. Then ask whether what is being sold is the whole or twenty per cent or more of its value.

(b) Investing compensation on a merger

To invest otherwise than in trust securities the amount of compensation received by the company as a result of any merger or amalgamation.

(c) Borrowing beyond capital and reserves

To borrow money where the money to be borrowed, together with the money already borrowed, will exceed the aggregate of its paid-up share capital, free reserves and securities premium, apart from temporary loans obtained from the company's bankers in the ordinary course of business.

"Securities premium" was added by the Companies (Amendment) Act, 2017; before that the measure was paid-up capital and free reserves alone.

The proviso excludes a banking company's acceptance of public deposits from being a borrowing within the clause.

The Explanation defines "temporary loans" as 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 other short-term loans of a seasonal character, but not loans raised for the purpose of financial expenditure of a capital nature.

Note the sting in the tail. A six-month loan taken to build a factory is not a temporary loan, because it is capital expenditure. Duration alone does not decide it.

(d) Remitting a director's debt

To remit, or give time for the repayment of, any debt due from a director.

Short but important, and it belongs beside sections 185 and 184: the Board cannot forgive what a director owes the company; only the members can.

The rest of section 180

Section 180(2): the resolution must state the amount. Every special resolution in relation to clause (c) shall specify the total amount up to which monies may be borrowed by the Board. An open-ended borrowing resolution is not enough.

Section 180(3): two savings for clause (a). Nothing in clause (a) affects (a) the title of a buyer or other person who buys or takes on lease any property, investment or undertaking in good faith, or (b) the sale or lease of any property where the ordinary business of the company consists of or comprises such selling or leasing.

The first saving protects the market; a good faith buyer does not have to audit the seller's internal resolutions. The second is common sense: a company whose business is selling property does not need a special resolution for every sale.

Section 180(4): conditions in the resolution. The special resolution may stipulate conditions, including conditions regarding the use, disposal or investment of the sale proceeds. Proviso: this does not authorise any reduction of capital except in accordance with the Act.

Section 180(5): the consequence of excess borrowing. No debt incurred in excess of the limit in clause (c) shall be valid or effectual, unless the lender proves that he advanced the loan in good faith and without knowledge that the limit had been exceeded.

Read that carefully, because the burden is the answer. The debt is invalid, and it is the lender who must prove both good faith and absence of knowledge to save it. The company does not have to prove the lender knew.

Charitable contributions: section 181

The Board of Directors of a company may contribute to bona fide charitable and other funds.

The proviso is the limit: prior permission of the company in general meeting is required where the amount, in the aggregate in any financial year, exceeds five per cent of the company's average net profits for the three immediately preceding financial years.

Three details decide most questions on this section.

• The permission must be prior, not a later ratification.
• The measure is the aggregate in the financial year, not each gift.
• The base is the average net profits of the three immediately preceding financial years, not the current year's profit.

And note the relationship with section 135. Corporate social responsibility spending under section 135 is a statutory obligation measured at two per cent of average net profits of the three immediately preceding financial years; section 181 is a power to give, capped without members' permission at five per cent of the same base. The base is the same; the character of the two provisions is not.

Political contributions: section 182

Section 182(1). Notwithstanding anything contained in any other provision of this Act, a company, other than a Government company and a company which has been in existence for less than three financial years, may contribute any amount directly or indirectly to any political party.

Two companies are excluded outright: a Government company, and a company in existence for less than three financial years.

And note the words "any amount". The proviso that once capped contributions at seven and a half per cent of average net profits of the three immediately preceding financial years was omitted by the Finance Act, 2017. There is now no statutory ceiling in section 182. An answer that still recites the cap is quoting a repealed proviso.

The surviving proviso is procedural: no contribution shall be made unless a resolution authorising it is passed at a meeting of the Board, and that resolution shall be deemed to be justification in law for making the contribution it authorises.

Section 182(2): two deeming provisions that close the obvious evasions.

• (a) a donation, subscription or payment given by the company to a person who, to its knowledge, is carrying on any activity which at the time can reasonably be regarded as likely to affect public support for a political party, is deemed to be a contribution of that amount to that person for a political purpose; and
• (b) expenditure on an advertisement in a souvenir, brochure, tract, pamphlet or the like is deemed, (i) where the publication is by or on behalf of a political party, a contribution to that party, and (ii) where it is not by or on behalf of but for the advantage of a political party, a contribution for a political purpose.

The souvenir advertisement was the classic route by which money reached a party without being called a donation, and clause (b) exists to name it.

Section 182(3): disclosure. Every company shall disclose in its profit and loss account the total amount contributed under the section during the financial year to which the account relates.

Section 182(3A): the mode of payment. The contribution shall not be made except by an account payee cheque drawn on a bank, an account payee bank draft, or use of electronic clearing system through a bank account. Proviso: a company may contribute through any instrument issued pursuant to any scheme notified under any law for the time being in force for contribution to political parties. That proviso operates only so long as such a scheme is in force, so a student answering on it should say what the position is at the time of the paper.

Section 182(4): punishment, and it is heavy. The company is punishable with fine which may extend to five times the amount contributed, and every officer in default with imprisonment up to six months and with fine which may extend to five times the amount contributed.

The Explanation defines a political party as one registered under section 29A of the Representation of the People Act, 1951.

Defence contributions: section 183

Section 183(1). The Board of Directors of any company, or any person or authority exercising the powers of the Board, or the company in general meeting, may, notwithstanding anything contained in sections 180, 181 and 182 or any other provision of this Act or in the memorandum, articles or any other instrument, contribute such amount as it thinks fit to the National Defence Fund or any other Fund approved by the Central Government for the purpose of national defence.

Section 183(2). Every company shall disclose in its profit and loss account the total amount contributed to that Fund during the financial year.

This is the widest of the three giving powers, and deliberately so. There is no ceiling, no members' resolution, and it overrides sections 180, 181 and 182 and the company's own constitution. The only requirement is disclosure.

A worked example

Sahyadri Textiles Limited has paid-up share capital of five crore rupees, free reserves of eight crore and a securities premium account of two crore. It owns two units, a spinning mill at Ichalkaranji and a garment unit at Solapur. Its average net profits of the three immediately preceding financial years are four crore rupees.

Borrowing. The company has already borrowed twelve crore. The Board proposes to borrow five crore more, of which one crore is a cash credit from its bankers repayable within four months for seasonal working capital.

The cash credit is a temporary loan obtained from the company's bankers in the ordinary course of business, so it is left out. The rest, four crore, brings borrowings to sixteen crore. The aggregate of paid-up capital, free reserves and securities premium is fifteen crore. Sixteen exceeds fifteen, so the borrowing needs a special resolution under section 180(1)(c), and by section 180(2) the resolution must specify the total amount up to which the Board may borrow.

If the Board borrows without it. The debt of one crore in excess is not valid or effectual under section 180(5) unless the lender proves that he advanced it in good faith and without knowledge that the limit had been exceeded. If the lender saw the audited balance sheet and the borrowing resolutions, that proof will be hard.

A six-month loan for a new shed. The company borrows two crore for six months to build a new shed. Six months is within the period in the Explanation, but the loan is for financial expenditure of a capital nature, so it is not a temporary loan and it counts towards the limit.

Selling the Solapur unit. The garment unit represents an investment of twenty-five per cent of net worth and generates twenty-two per cent of total income. Either test makes it an undertaking under the Explanation to section 180(1)(a). The company proposes to sell the whole of it, so a special resolution is required. The resolution may, under section 180(4), stipulate how the sale proceeds are to be used or invested.

If only a part is sold. The company sells machinery worth twenty-two per cent of the value of that undertaking as per the audited balance sheet of the preceding year. That is "substantially the whole of the undertaking", twenty per cent or more, so it still needs a special resolution. Had it been fifteen per cent, it would not.

The buyer. A purchaser who buys the unit in good faith takes a good title even if the special resolution was defective, by section 180(3)(a).

Board procedure. The decision to borrow and to invest the sale proceeds must be taken by resolution at a Board meeting under section 179(3)(d) and (e), though the Board may delegate both to a committee, the managing director, the manager or a principal officer by a resolution passed at a meeting, on conditions it specifies. The decision to approve the financial statement and the Board's report under clause (g) cannot be delegated at all, and cannot be taken by circulation.

A charitable gift. The Board wishes to give twenty-five lakh rupees to a hospital trust during the year. Five per cent of average net profits of four crore is twenty lakh rupees. The aggregate exceeds it, so prior permission of the company in general meeting is required under the proviso to section 181. A gift of eighteen lakh would not need it, but a second gift of five lakh in the same financial year would take the aggregate to twenty-three lakh and bring the proviso into play.

A political contribution. The company has been in existence for eleven years and is not a Government company, so it may contribute. Since the Finance Act, 2017 there is no ceiling by amount, but it must be authorised by a resolution passed at a Board meeting, paid only by account payee cheque, account payee bank draft or electronic clearing system (or through an instrument under a notified scheme, if one is in force), and disclosed in the profit and loss account. If it instead pays six lakh rupees for an advertisement in a party's souvenir, that is deemed a contribution of six lakh to that party under section 182(2)(b)(i) and every one of those requirements applies to it.

If the company were two years old. It could not contribute at all, being in existence for less than three financial years, and a contribution would expose the company to a fine up to five times the amount and every officer in default to imprisonment up to six months and a like fine.

A defence contribution. The Board contributes fifty lakh rupees to the National Defence Fund. Section 183 permits it notwithstanding sections 180, 181 and 182 and the articles, with no ceiling and no members' resolution, subject only to disclosure in the profit and loss account.

Distinctions that carry marks

What this does NOT mean

It does not mean the members may undo what the Board has already done. Section 179(2) protects a prior act of the Board that would have been valid but for a later regulation.

It does not mean all eleven powers in section 179(3) may be delegated. Only borrowing, investing and granting loans, guarantees or security, clauses (d) to (f).

It does not mean every sale of a large asset needs a special resolution. The asset must be an undertaking on the net worth or income test, and the sale must be of the whole or twenty per cent or more of its value; and a company whose ordinary business is selling or leasing property is outside clause (a) altogether by section 180(3)(b).

It does not mean excess borrowing is always void against the lender. It is invalid unless the lender proves good faith and want of knowledge.

It does not mean political contributions are capped at seven and a half per cent. That proviso was omitted by the Finance Act, 2017 with effect from 31 March 2017.

It does not mean section 181 requires ratification. It requires prior permission of the general meeting.

Quick revision

• 179(1): the Board may exercise all powers the company may exercise, subject to the Act, memorandum, articles and regulations made in general meeting, and may not do what must be done by the company in general meeting.
• 179(2): a later regulation of the general meeting does not invalidate a prior act of the Board.
• 179(3), by resolution at a Board meeting only: calls; buy-back under section 68; issue of securities including debentures in or outside India; borrowing; investing the funds; granting loans, guarantees or security; approving the financial statement and Board's report; diversifying the business; approving amalgamation, merger or reconstruction; taking over a company or acquiring a controlling or substantial stake; and any prescribed matter. Only (d), (e) and (f) may be delegated, to a committee, the managing director, the manager, a principal officer, or a branch's principal officer. Banking company deposits and inter-bank placements are not borrowing or lending; the power to borrow means the overdraft arrangement, not day-to-day operation.
• 179(4): the general meeting may still impose restrictions and conditions.
• 180(1), only by special resolution: (a) selling, leasing or disposing of the whole or substantially the whole of an undertaking; (b) investing compensation from a merger otherwise than in trust securities; (c) borrowing beyond paid-up capital, free reserves and securities premium, apart from temporary loans from bankers in the ordinary course; (d) remitting or giving time for a debt due from a director.
• Explanations to (a): an undertaking is one with investment above twenty per cent of net worth or generating twenty per cent of total income; substantially the whole means twenty per cent or more of its value. Temporary loans are those repayable on demand or within six months, excluding loans for capital expenditure.
• 180(2): the borrowing resolution must specify the total amount. 180(3): a good faith buyer's title is safe, and a company in the business of selling or leasing property is outside clause (a). 180(4): the resolution may impose conditions on the use of proceeds, but cannot authorise a reduction of capital outside the Act. 180(5): excess borrowing is not valid or effectual unless the lender proves good faith and want of knowledge.
• 181: the Board may contribute to bona fide charitable and other funds, but needs prior permission of the general meeting where the aggregate in a financial year exceeds five per cent of average net profits of the three immediately preceding financial years.
• 182: any company other than a Government company and one in existence less than three financial years may contribute any amount to a political party, by resolution at a Board meeting; souvenir advertisements and payments to persons affecting public support for a party are deemed contributions; disclosure in the profit and loss account; payment only by account payee cheque, draft or electronic clearing system, or an instrument under a notified scheme; punishment fine up to five times the amount on the company and imprisonment up to six months with a like fine on every officer in default. A political party is one registered under section 29A of the Representation of the People Act, 1951.
• 183: contribution of such amount as it thinks fit to the National Defence Fund or a Fund approved by the Central Government for national defence, notwithstanding sections 180, 181 and 182 and the company's constitution, subject to disclosure in the profit and loss account.

Test yourself

1. Which powers must the Board exercise by resolution passed at a meeting, and which of them may be delegated? The eleven in section 179(3): calls, buy-back, issue of securities, borrowing, investing funds, granting loans, guarantees or security, approving the financial statement and Board's report, diversification, amalgamation or reconstruction, takeover or acquisition of a controlling or substantial stake, and any prescribed matter. Only clauses (d), (e) and (f), borrowing, investing and granting loans, guarantees or security, may be delegated to a committee, the managing director, the manager, a principal officer, or a branch's principal officer.

2. When does a sale of assets require a special resolution? When what is sold, leased or disposed of is the whole or substantially the whole of an undertaking. An undertaking is one in which the company's investment exceeds twenty per cent of its net worth per the audited balance sheet of the preceding financial year, or which generates twenty per cent of total income during the previous financial year; substantially the whole means twenty per cent or more of the value of that undertaking per the same balance sheet.

3. What is the borrowing limit in section 180(1)(c), and what is excluded? Borrowings, existing and proposed together, exceeding the aggregate of the company's paid-up share capital, free reserves and securities premium require a special resolution specifying the total amount. Temporary loans from the company's bankers in the ordinary course of business are excluded, being loans repayable on demand or within six months, but not loans raised for capital expenditure.

4. Is a loan taken beyond that limit recoverable? No debt incurred in excess of the limit is valid or effectual, unless the lender proves that he advanced the loan in good faith and without knowledge that the limit had been exceeded: section 180(5).

5. What is the ceiling on charitable contributions? There is no absolute ceiling, but prior permission of the company in general meeting is required where the aggregate in any financial year exceeds five per cent of the company's average net profits for the three immediately preceding financial years: proviso to section 181.

6. Which companies may not make political contributions, and what is the penalty for a contribution in contravention? A Government company and a company in existence for less than three financial years. The company is punishable with fine up to five times the amount contributed, and every officer in default with imprisonment up to six months and fine up to five times the amount: section 182(4).