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Section 180: Its Explanations & Myriad Interpretations!

Published on Wed, Mar 26,2014 | 21:07, Updated at Thu, Mar 27 at 20:42Source : Moneycontrol.com 

By: Payaswini Upadhyay, CNBC-TV18

The Ministry of Corporate Affairs today notified 183 Sections of the Companies Act, 2013. This is in addition to the 100 Sections that were notified in September last year.

List of newly notified Sections

www.mca.gov.in/Ministry/pdf/CompaniesActNotification26March2014.PDF

The 183 Sections that have been notified today will become effective on April 1st. MCA is yet to notify Sections relating to NFRA, Investor & Education Protection Fund, compromise and arrangement, oppression & mismanagement, winding up, sick companies, special courts and National Company Law Tribunal. But the biggest concern right now is that the Ministry has not notified the final rules as yet and since the entire Act will come into effect on April 1st, companies will get little or no time to digest the Rules

Story abhi baaki hai!

The MCA also issued a clarification on March 25th, 2013 with regards to Section 180, Companies Act, 2013

The clarification says:

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

This is the second clarification for Section 180; the first one was issued on 13th Sep’2013. It said:

“In respect of requirements of special resolution under Section 180 of the said Act,, as against ordinary resolution required by the Companies Act 1956, if notice for any such general meeting was issued prior to 12.9.20!3, then such resolution may be passed in accordance with the requirement of the Companies Act 1956.”

Before we proceed to understand how these two clarifications reconcile, here’s what Section 180 says

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(defined), of the whole or substantially the whole of any of such undertakings (defined)

(b) to invest otherwise in trust securities the amount of compensation receivedby it as a result of any merger or amalgamation;

(c) to borrow money, where the money to be borrowed, together with the moneyalready borrowed (exception provided) by the company will exceed aggregate of its paid-up share capital and free reserves, apart from temporary loans(defined), obtained from the company’s bankers in the ordinary course of business:

(d) to remit, or give time for the repayment of, any debt due from a director…………..

The equivalent, so to speak, of Section 180 is Section 293 of the Companies Act, 1956 that says

(1) The Board of directors of a public company, or of a private company which is a subsidiary of a public company, shall not, except with the consent of such public company or subsidiary in general meeting, -

(a) sell, lease or otherwise dispose of the whole, or substantially the whole, of the undertaking of the company, or where the company owns more than one undertaking, of the whole, or substantially the whole, of any such undertaking

(b) remit, or give time for the repayment of, any debt due by a director except in the case of renewal or continuance of an advance made by a banking company to its director in the ordinary course of business ;

(c) invest, otherwise than in trust securities, the amount of compensation received by the company in respect of the compulsory acquisition, after the commencement of this Act, of any such undertaking as is referred to in clause (a), or of any premises or properties used for any such undertaking and without which it cannot be carried on or can be carried on only with difficulty or only after a considerable time;

(d) borrow moneys after the commencement of this Act, where the moneys to be borrowed, together with the moneys already borrowed by the company (apart from temporary loans obtained from the company's bankers in the ordinary course of business), will exceed the aggregate of the paid-up capital of the company and its free reserves, that is to say, reserves not set apart for any specific purpose ; or

(e) contribute, after the commencement of this Act, to charitable and other funds not directly relating to the business of the company or the welfare of its employees, any amounts the aggregate of which will, in any financial year, 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.

So while under Section 293, Companies Act 1956, the Board of Directors could approve these transactions once an ordinary resolution was obtained, Section 180, Companies Act 2013 requires a special resolution

So why did we need a second clarification on Section 180?

S&R’s M&A Partner Rajat Sethi says he is not sure what prompted the second clarification by the Ministry. He interprets the first clarification to mean that if a company has activated the requirement (by sending a notice) of an ordinary resolution for transactions listed under Section 180 before the Ministry notified this Section (12th Sep’2013), no special resolution is required. But for a company that has only proposed to enter into such a transaction before Section 180 became effective and not sent out a notice, a special resolution will be required. As for the second clarification, he interprets it to have a narrow application i.e. if a company has obtained an ordinary resolution for a borrowing/ creation of security on assets transaction before Section 180 came into effect, such a transaction will be considered to be compliant under the new Act but only for a 1 year period from the date Section 180 became effective; so till September 13th 2014. But Rajat is wondering what happens after 1 year? Will the same borrowing/ creation of security on assets transaction that have been passed via ordinary resolution need special resolution after September 13th 2014? And does this mean transactions other than the ones specified in MCA’s second clarification have been grandfathered for their natural life? This too isn’t clear.

Trilegal’s Managing Partner Sridhar Gorthi has reconciled the two explanations like this:

“The previous Sep 2013 clarification had merely stated that if any notice for general meeting for passing an ordinary resolution under the 1956 Act had already been issued prior to 12 Sep 2013, then the resolution could be passed as an ordinary resolution. The said 2013 clarification did not say what happens to ordinary resolutions that were already passed prior to 12 Sep 2013. Logically, those resolutions have also been passed pursuant to notices issued before 12 Sep 2013 and should be seen as valid. Yesterday’s clarification puts this issue to rest and clarifies that ordinary resolutions passed prior to 12 Sep 2013 would be regarded as sufficient compliance with the requirements of Section 180 –however for a period of one year from the date of notification of Section 180. This one year condition was not stipulated in the previous 2013 clarification. So now a sunset period has been introduced, which is sensible.”

KPMG’s Sai Venkateshwaran interprets the two explanations as this:

“MCA’s clarification on Section 180 is essentially a transitional relief that has been provided to companies by extending the validity of ordinary resolutions passed under the ‎Companies Act 1956 in connection with loans taken by the company and security created on assets of the company. Within a year, where required, companies will have to get special resolutions passed in order for such loans and security on assets to remain valid under the 2013 Act. This is a welcome move, as the MCA has taken a practical approach in providing transitional relief to companies in complying with the new provisions, as we can expect to see more such instances as the remaining sections come into effect next week.”

Our sources in the MCA offered this explanation: After the Ministry put out the first explanation to Section 180, it was interpreted by lawyers/industry to mean that all resolutions for which notices were sent before 13th September, 2013 and for which ordinary resolution was obtained have been grandfathered for their natural life. But that is not the intention. And the Ministry now wants to clarify that these resolutions will be considered compliant with Section 180, Companies Act 2013 only till September 13th, 2014.

But if we go by this interpretation, does it mean that transactions - other than borrowing/ creation of security on assets- for which notices were sent before 13th September, 2013 have been grandfathered for their natural life?

Seems like we may need a third explanation to Section 180 to answer that!

 
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