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Restrictions on Powers of Board of Directors of Company

7 min read

Adv Anup K Tiwari

According to Companies Act, 2013, the Company can exercise its power either through its Board of Directors or through Shareholders.

The relationship between shareholders and Board of Directors works like an alliance as Board of directors have some powers which are exclusively exercised by them and they also have some powers which can only be exercised after getting the approval of shareholders either by Ordinary resolution or by Special resolution.

This article will analyse the provisions of the Companies Act, 2013, which relates to the restrictions on the powers of the Board of Directors. Firstly the powers of Board of Directors under Section 179 of the Act is discussed here, so that there can be better understanding of the restrictions which are imposed on these powers under section 180 of the Act.

WHO ARE DIRECTORS AND BOARD OF DIRECTORS?

Section 2(34) of the Companies Act 2013 defines the term “director”, as a director appointed to the Board of a company whereas Board of Directors means the collective body of directors in a company.

Board of Directors in any company are the highest authority as they have the power to make any call or any decision for the benefit of the company, thus they exercise al their power, which the company has the authority to ratify.

Section 149 of the Act makes it compulsory for every company to have a Board of Directors; the composition given by this section is as follows[1]:

  • For a Public Company minimum 3 and maximum 15 numbers of directors are required to form a Board of Directors with at least one-third numbers of Independent Directors.
  • For a Private Company minimum 2 and maximum 15 numbers of directors are required to form a Board of Directors.
  • One person Company requires only one director.
  • There should be at least one woman director.
  • There should also be one director who has stayed in India for minimum 182 days in the previous calendar year.

POWER OF BOARD OF DIRECTORS:

Section 179 of the Act gives power to Board of Directors and makes them entitled to exercise all such powers and Board of Directors under the purview of such powers can do any act or thing on behalf of company, as company is authorized to do and enact, provided:

  • When Board of Directors exercises such powers or any such at or thing, they are subjected to certain provisions which are there in this behalf under the Companies Act, or in the memorandum, or articles, or in some other regulations which are duly made thereunder and it also includes regulations made by company in their general meeting. [2]

It basically means that powers which are given to Board of Directors should be well in limits of Companies Act, Articles of Association, Memorandum of Association, or any rule or regulation made by Companies Act, or any regulation which is made by company in general meeting.

Board of Directors cannot exercise any power which contradicts Companies Act, Articles of Association, Memorandum of Association, or any rule or regulation made by Companies Act, or any regulation which is made by company in general meeting.

  • Board of Directors cannot also exercise their powers or do any act or thing which is either directed to be done or required to be done, whether under the Companies Act, or by the memorandum or articles of the company, which can be only exercised or done by the company in the company’s general meeting[3].

It simply means that there are some powers which Board of Directors cannot exercise on their own as these powers are needed to be exercised by the shareholders in the general meeting, whether under the Companies Act, or by the memorandum or articles of the company.

This section makes it very clear that if Board of directors wants to exercise any such power which requires the approval of shareholders then the board of directors before using such power first have to obtain approval of shareholders either by way of ordinary resolution or by special resolution.

RESTRICTIONS IMPOSED ON POWERS:

There are certain matters prescribed under Section 180 of Companies Act, 2013 for which approval of Shareholders by the way of Special Resolution is required before Board of Directors can exercise such powers.

This means that Section 180 of Companies Act imposes some restrictions on the general powers of the Board of Directors. Certain matters that prescribed under Section 180 are discussed below:

I. Company’s contest by a passing of special resolution in General meeting is required to sell, lease or otherwise dispose of the whole undertaking or substantially whole of the undertaking of the company. In case the company have more than one undertaking then to sell, lease or otherwise dispose of the whole undertaking or substantially the whole of any such undertaking, requires consent.[4]

“Undertaking” here means that an undertaking in which the investment of the company is more than 20 per cent of its net worth according to the audited balance sheet of preceding financial year or an undertaking which is generating 20 per cent of company’s total income during the previous financial year.

In any financial year “substantially the whole of the undertaking” means twenty per cent or maybe more than twenty per cent of the value of the undertaking according to the audited balance sheet of the preceding final year.

This clause of section 180 does not affect some transactions[5]:

  • Now we know that if the company wants to sell, lease or otherwise dispose (including mortgages) whole undertaking of substantially the whole of the undertaking it requires prior shareholders’ approval by the way of special resolution. If in any case company do not passes the special resolution for such transaction and some person buys o leases any property under good faith without knowing that company has not passed such resolution and has failed to comply with law, then in such cases the title of such person towards such property is left unaffected.
  • If the company in its ordinary course of business decides to sell or lease any property then the approval of shareholders in not necessary.

II. Board of Directors also requires the approval of shareholders in order to invest anywhere the amount which is received by the company as result of any merger or amalgamation. Important point to note here is that the company do not need the shareholders’ approval if they want to invest in trust securities. [6]

III. Company’s contest by a passing of special resolution in General meeting is also needed to borrow money, where the money to be borrowed, together with the already borrowed money by the company is more than the aggregate of its paid-up share capital, free reserves, and securities premium, excluding temporary loans taken by the company in its ordinary course of business.

This means that if the already borrowed money plus the money needed to be borrowed is less than the aggregate of its paid-up share capital, free reserves, and securities premium then in such cases no special resolution is required, passing of board resolution will be enough.[7]

This clause of Sub-section 5 of Section 180 also says that, debt incurred by the company in excess of the limit prescribed will be invalid and will not be effectual, unless the lender is able to prove that the loan was advanced in good faith and the ender had no knowledge that the limit imposed has been exceeded.

In any case where the company do not passes the special resolution and borrows money which is more than the prescribed limit then the onus is on lender to prove that the loan was advanced in good faith and without having the knowledge that the limit prescribed has been exceeded.

Every special resolution which is passed by the company relating to Section 180(1)(c), during the general meeting shall state the total amount up to which Board of Directors may borrows monies.

It simply means that an upper limit is set up to which company can borrow money without needing any approval of shareholders and only when the Board wants to borrow an amount which more than such limit then only shareholders’ approval by special resolution is required.[8]

IV. Company also requires the consent by the special resolution in case where company decides to remit or give time for the repayment of any debt due from any director of the Company.[9]

LIMIT ON POLITICAL CONTRIBUTION:

A company, which is not a Government company and a company which is existing for last three or less than three financial years, may decide to contribute any amount directly or indirectly to any political party.

The aggregate amount which the company is contributing in a financial year shall not be more than seven and a half per cent of company’s average net profits during the three immediately preceding financial years. A company cannot make such contribution unless such contribution is made after a resolution is passed at a meeting of Board of Directors and such resolution is justified by law.[10]

RELATED PARTY TRANSACTIONS ARE RESTRICTED:

Board of Directors collectively have the power and are authorised to regulate the affairs of the company. Each of the directors in Board of Directors owes the duties of good faith and air dealing.

One of the duties of directors is that they don’t have to put themselves in a position where their fiduciary duties towards the company conflicts with their personal interests. In case this dispute arises then directors will look company’s interest first.[11]

CONCLUSION:

Board of Directors of any company are like the mind of the company because of which the company is running and as they majorly contributes towards the growth and development of the company, that’s why their position becomes very crucial for every company.

The Companies Act, 2013 gives certain powers to Board of directors so that they can effectively and efficiently contribute their best for the company. Alongside with powers, Companies Act also imposes certain restrictions on the exercising of such powers so that any misuse of such powers can be avoided.

  1. The Companies Act, 2013, § 149(1).

  2. The Companies Act, 2013, § 179(1).

  3. Ibid.

  4. The Companies Act, 2013, § 180(1), Cl.(a).

  5. The Companies Act, 2013, § 180(3).

  6. The Companies Act, 2013, § 180(1), Cl.(b).

  7. The Companies Act, 2013, § 180(1), Cl.(c).

  8. The Companies Act, 2013, § 180(2).

  9. The Companies Act, 2013, § 180(1), Cl.(d).

  10. The Companies Act, 2013, § 182(1).

  11. Ministry Of Corporate Affairs, Related Party Transactions,http://www.mca.gov.in/MinistryV2/related+party+transactions.html, (Last visited on August 11,2020).