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    Borrowings And Related Compliancesunder The Companies Act, 2013

    Borrowed Funds form a kay part in the running the business, and the Companies Act, 2013, has robed in more checks and balances, compliances fortransparency and good governance. An effort has been made the list out the provisions as to Borrowings and related compliances thereof. 

    Section 180 of the Companies Act, 2013 corresponds to section 293 of the Companies Act, 1956, notified to be effective from 12.09.2013, accordingly, compliance of the provisions of Section 180 is to be seen with effect from that date. 

    The provisions of Section 180 are applicable to all Companies, including OPC/Small Companies, as there is no specific exemption provided.

    The earlier section 293 and the new section 180 pertain to restrictions on powers of the Board of Directors i.e., items/acts/limitsfor which permission of the members is to be obtained at a general meeting.

    Sl. No.

    Aspect of difference

    Section 293, CA, 1956

    Section 180, CA, 2013

     

     

     

     

     

     

     

     

    Only to Public Companies and

    A p p l i c a b l e

    t o

    a l l  t h e

    1.

    Applicability of the Section

    Subsidiaries  of

    a  Public

    Companies .

    Even  Small

     

    C o m p a ny.  P u re

    P r i va te

    Companies/OPC, as there is no

     

     

     

     

    Companies are not covered.

    specific exemption.

     

     

     

     

     

     

     

     

    2.

    Type of member resolution

    Ordinary Resolution

     

    Special Resolution

     

    required

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    3.

    Structural aspect difference

    Sub-section (1)

     

    Sub-Section (1)

     

     

     

    (a) Sell, Lease or otherwise

     

     

     

     

     

    (a)  Sell,  Lease

    or

    otherwise

     

     

    dispose

     

    dispose

     

     

     

     

     

     

     

     

     

     

    (b) remit, or give time for the

    (b) to invest otherwise in trust

     

     

    repayment of, any debt due by

     

     

    a director

     

    securities  the  amount  of

     

     

    (c) invest, otherwise than in

    compensation received by it as

     

     

    a  result  of  any  merger  or

     

     

    trust securities, the amount of

    amalgamation;

     

     

     

     

    compensation received by the

     

     

     

     

    company in (a)

     

    (c) Borrow monies

    (excluding

     

     

     

     

     

     

    (d) Borrow monies (excluding

    temporary loans) in excess of

     

     

    temporary loans) in excess of

    paid-up capital and reserves;

     

     

    paid-up capital and reserves;

    (d) to remit, or give time for the

     

     

    (e) Contribution to Charitable

     

     

    repayment of,

    any

    debt due

     

     

    and other funds{now included

    from a director.

     

     

     

     

    as separate section181}

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    The discussion in this article is restricted to provisions of Section 180 (1)(a) & (c), other related provisions thereto, and compliances thereunder so as to be in line with the title of the article. 

    Pursuant to Section 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: 

    (a) to sell, lease or otherwise dispose of:

    èthewholeorsubstantially the whole of the undertaking of the company or; 

    èwherethecompany owns more than one undertaking, of the whole or substantially the whole of any of such undertakings. 

    For the purpose of the sub-section, the terms “Undertaking” and “Substantially the whole of the undertaking” has been explained as below: 

    “Undertaking” shall mean an undertaking in which the investment of the company exceeds 20 % of its net worth as per the audited balance sheet of the preceding financial year or an undertaking which generates 20 % of the total income of the company during the previous financial year; 

    “Substantially the whole of the undertaking” in any financial year shall mean 20 % or more of the value of the undertaking as per the audited balance sheet of the preceding financial year; 

    1. C) to borrow money: 

    èwherethemoney to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capitaland free reserves, apart from temporary loans obtained from the company's bankers in the ordinary course of business. 

    èEverySpecial Resolution passed by the company in general meeting in relation to the exercise of power by the Board of Directors relating to borrow monies, shall specify the total amount up to which monies may be borrowed by the Board of Directors. 

    For the purpose of the sub-section, the term “Temporary Loans” has been explained as below: 

    “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. 

    Borrowing not to be included - Exemption to Banking Company under Section 180 (1)(C): 

    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. 

    NON-COMPLIANCE / PENALTIES / RELIEF 

    From the above, it is clearly evident that prior Special Resolution of the members is to be obtained by the Board of Directors to exercise the powers beyond the limits. Now, we will have a peek in to the consequences for non-compliance. 

    Penalties for non-compliance:

    Similar to Section 293 under the Companies Act, 1956, Section 180 of the Companies Act, 2013, also does not provide for any penalties for non-consequence i.e., obtaining of approval of Members for acting in excess of the limits. 

    Apart from this, there is also no concept of ratification either under the Old Section or under the new section. 

    So, it is to be presumed that if the authorities under the Companies Act, identify the contravention, the provisions of Section 450 of the Companies Act, 2013, will be applicable i.e., Punishment where no specific penalty or punishment is provided, as per which 

    èacompanyor; 

    èanyofficerof a company or;

    èanyotherperson; 

    contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to Rs.10,000/-, and where the contravention is continuing one, with a further fine which may extend to Rs.1,000/- for every day after the first during which the contravention continues. 

    The only question remains is, who will identify the contravention on the first hand, to penalise under Section 450. 

    What about the validity of the excess loan amount ? 

    Under both the Sections i.e., 293 of the CA, 1956 and 180 of CA, 2013, it is categorically stated that :

    “No debt incurred by the company in excess of the limit imposed by the respective sub-clauseshall 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. 

    Relief to the Banker/Lender: 

    The above is a relief to the Banker/Lender, and he will definitely take the shelter available in the sections. 

    CLARIFICATIONS BY MINISTRY ON SECTION 180

    After the notification of the said section effective from 12.09.2013, there were some queries raised by the stakeholders, which were clarified by the Ministry through its circulars. 

    1. Query Sought - EGM notices dispatched before 12.09.2013, for passing of resolutions under Section 
    • (1) (a) & (d) – Whether Ordinary Resolution to be passed or Special resolution to be passed ? 

    Clarification given by Ministry – Vide General Circular No.15/2013, Dated:13.09.2013, the Ministry had clarified queries raised by the stakeholders on various sections notified effective from 12.09.2013, one of the said clarifications pertains to Section 180, wherein it was clarified that if the EGM Notice for passing of resolutions under Section 293 (1) (a) and (d), were dispatched before 12.09.2013, then passing of Ordinary resolution is enough.

    1. Query Sought - Validity of Resolutions passed under Section 293(1) (a) & (d) – after the commencement of Section 180 from 12.09.2013. Whether new resolutions to be passed even though there is no variation in limits exercised ?

    Clarification given by Ministry –Vide General Circular No.04/2014, Dated:25.03.2014, the Ministry had clarified that the vvalidity of resolutions passed prior to12.09.2013, shall be for one year from the date of notification of Section 180 i.e., one year from 12.09.2013 = 11.09.2014. 

    It is opined that the above clarification as to the validity of the resolution may not be applicable to Private Companies, as in the first instance, they would not have obtained the approval of the members pursuant to Section 293 (1) (a) & (d), and accordingly, they would have to comply with the provisions of Section 180 with effect from 12.09.2013. 

    PRACTICAL ASPECTS AS TO BORROWINGS AND COMPLIANCES THEREUNDER

    As already discussed at the beginning of the Article, the provisions ofSection 293 of the Companies Act, 1956 were applicable only to Public Company and to Private Company which is a subsidiary of a Public Companyi.e. Pure Private Limited Companies were exempted from the compliance and therefore they could borrow any sums of money without any limit without the need of seeking any approval from the members of the company. 

    Whereas, the provisions of Section 180 of the Companies Act, 2013, is applicable to all companies i.e. public as well as private. So effective from 12.09.2013, even private companies intending to borrow monies in excess of their paid up share capital and free reserves, have to seek the approval of their members by way of a Special Resolution. 

    Practical Situation: 

    One of your client comes to you in connection with availing of Credit facilities from Bank? Assuming that the client is either a Private Company or an unlisted Public Company, the following steps would be required from the Secretarial side, to be in compliance with the provisions of Companies Act, 2013.

    èConveningof Board meeting and passing of Board resolution for the proposed Borrowings pursuant to Section 179 (3) (d), and filing of Form MGT-14(*) with the Registrar of Companies, within 30 days from the passing of the resolution. 

    èIftheproposal to borrow money, where the money to be borrowed, together with the money already borrowed by the company will not exceed the 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, then directly we can proceed ahead with making loan application. 

    If not, then approval of the members to be obtained by way of Special resolution for the limits pursuant to Section 180 (1) (c). In case any of the immovable properties of the Company are proposed to be given as security to the Bank/FI for the limits as proposed under Section 180 (1) (c), then approval of the members, under 180 (1)(a), will also need to be obtained. 

    Accordingly, convening and holding of EGM, passing of the resolutions, and filing of Resolutions in form MGT-14, with Registrar of Companies, within 30 days from the passing of the EGM resolution. 

    èCompletion of Loan documentation, filing of Charge Creation/modification forms with the Registrar of Companies, within 30 days from the date of creation/modification as the case may be. 

    èRegistrationof Charge. 

    èMakingentries in the Register of Charges – in CHG-7 

    GREY AREA: 

    Section 179 (3) (d) – to borrow monies:

    According to the section, in order to borrow monies, approval of the Board is to be obtained at a Board meeting, and a copy of the said resolution is to be filed with the Registrar of Companies, in Form MGT-14, [Section 117] 

    Query: Whether RENEWAL of a existing CC facility, with out any enhancement in the limits, will amount to a borrowal of monies, and whether the Board resolution given to the Bank for renewal, is required to be filed with ROC.

    Answer: There is no Clarity. To be on a safe side, it is better to file the resolution with ROC. 

    • - In the recent Companies Amendment Bill, 2014, passed by the Loksabha on 17.12.2014, awaiting approval of Rajya Sabha, amendments have been proposed that the resolutions filed pursuant to Section 179 (3) will not be available for inspection and even certified copies of the same cannot be obtained. 

    FILING OF CHARGE DOCUMENTS

    Chapter VI [Sections 77-87]– Registration of Charges, deal with the various provisions as to filing of forms for creation of Charges.

    Charge creation/modification (Form CHG-1) – to be filed within 30 days from the date of creation/modification, and can be filed with additional fee upto a period of 300 days, by filing an application. However, it seems there is no provision provided for filing application for delay, and the ROC is accepting forms even filed with delay, by mentioning the reasons for the filing delay in the Form CHG-1 itself.

    In case of delay beyond 300 days, then a Petition needs to be filed with the Central Government [Powers delegated to the concerned Regional Director, vide Gazette Notification S.O. 1352(E), Dated:21.05.2014. 

    Satisfaction of Charge (Form CHG-4) – to be filed within 30 days from the date of satisfaction, and can be filed with additional fee upto a period of 300 days, by filing an application. However, it seems there is no provision provided for filing application for delay, and the ROC is accepting forms even filed with delay, by mentioning the reasons for the filing delay in the Form CHG-4 itself. 

    Creation/Modification of Charge on Debentures (CHG-9)– In respect of secured Debentures, this form is to be filed 

    Filing of Charge Creation/Modification/Satisfaction forms by the Chargeholder himself: 

    Unlike under the Companies Act, 1956, wherein only the Company was to file the forms in support of Creation/Modification/Satisfaction of Charges, the Companies Act, 2013, enables the Charge holder/Trustees (in case of debentures), also to file the forms with ROC. 

    By including this facility, if the Company delays or does not file the forms with ROC either for Creation/Modification/Satisfaction, then the Charge holder himself/themselves can file the forms, without any requirement from the company side, by attaching the already executed documents, thereby protecting their interests.

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