Extent of the powers of Board of Directors and How are They Restricted as per The Companies Act, 2013?

Abstract

This article shall explain the extent of the powers of the Board of Directors under the Companies Act, 2013. As the Board is the highest panel of executives on a company, it is necessary to impose certain restrictions on it, as the Board represents the company and its shareholders. This article will also explain the restrictions imposed on the Board by the Act, though the Act itself, and the Shareholders also placing these said restrictions on them.

Introduction

The Board of Directors are essentially a panel of people who represent the shareholders in a company. The directors are individuals who are appointed to this board. The Companies Act, 2013[1] makes it mandatory for all companies to have a Board of Directors[2]. There are Directors and Independent Directors, these are the ones on the Board who are a managing director or a whole-time director or a nominee director. The Board, as the representative of the representative of the company, enjoys a vast array of powers. However, these powers also have certain limitations to them, both from the legislation and the company itself[3].

Importance of a Director

The term Director is defined under section 2(34) of the Companies Act 2013[4], which states  “director means a director appointed to the Board of a company”. Section 149(1)[5] of The Companies Act makes it compulsory for all companies to have a Board of Directors. According to this, there must be a minimum of three directors in the case of a public company, two directors in case of a private company, and one director in the case of a One Person Company. There can be a maximum of 15 directors.

The powers of the Board of Directors

The Powers of the Board of Directors are mentioned in the section 179(1)[6] of the Companies Act. These powers however are subject to restrictions imposed under this Act or in Memorandum or Articles or any regulations made, including regulations made by the company in general meeting. The Board also shall not exercise any power which is required to be exercised by the company in general meeting.

Under section 179 (2)[7]The Act specifies that acts done by the Board of Directors is not invalidated by new regulations made by a company through a General Meeting. This means that the Board of Directors has powers where their acts cannot be affected retrospectively.

Broadly the powers of the Board of Directors, which are exercised through a resolution in the Board of Directors meeting mentioned under section 179(3)[8] are-

(a) to make calls on shareholders in respect of money unpaid on their shares;

(b) to authorize 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.

Restrictions on The Board of Directors

The restrictions on the powers of the Board of Directors are first specified in Section 179 (4)[9] of The Act. It says that no power provided to the Board under section 179 can affect the right of the company in general meeting to impose restrictions and conditions on the exercise by the Board.

Section 180(1)[10] of the Companies Act furthers the restrictions laid down in section 179 (4). This section specifies the restrictions on the Board of Directors. There are particular powers, which come under the ambit of the Board, however, can only be exercised through the General Meeting of the Company, through a special resolution.

(a) To sell, lease or otherwise dispose of the undertaking;

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

(c)  To borrow money; where  together with the money already borrowed by the company will exceed aggregate of its paid-up share capital and free reserves; and

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

(a) To Sell, Lease otherwise Dispose of Undertaking

A special resolution passed in the General Meeting is required for the BoD to sell, lease or dispose of the undertaking. The definitions to this restriction is laid out in section 180 (1) (a) (i) and (ii).

“Undertaking” shall mean an undertaking 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 an undertaking which generates twenty per cent of the total income of the company during the previous financial year.

The expression “substantially the whole of the undertaking” in any financial year shall mean twenty per cent or more of the value of the undertaking as per the audited balance sheet of the preceding financial year.

The expression “substantially the whole of the undertaking” in any financial year shall mean twenty per cent or more of the value of the undertaking as per the audited balance sheet of the preceding financial year.

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

This provision ensures that the amount received by the company as a result of an amalgamation or a merger, is invested back into the company, to further the interests of the company. The amount of compensation received by it as a result of any merger or amalgamation, as provided by this section must be invested in trust securities.

(c) To borrow money; where together with the money already borrowed by the company will exceed aggregate of its paid-up share capital and free reserves-

The approval of the company by the way of a special resolution is required for the Board of Directors to perform this power.  Together with the money already borrowed by the company will 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.

The expression ‘temporary loan’ is also further defined in the section 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 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.”

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

Every special resolution passed in general meeting with respect to borrowings under this section, must specify the total amount up to which monies can be borrowed by the board of directors. This provision restricts the Board’s powers, and makes sure that the Directors are not able to take advantage of the powers provided.

The National Law Tribunal bench in the Principal Bench at New Delhi, in the case of Hardev Singh Akoi & Ors vs Andrea Aftab Pauro & Ors[11]  had also reiterated the importance of section 180 in making sure that certain mandatory restrictions are laid onto the Board of Directors. Especially for the powers to borrow money under section 180 (1) (c), the tribunal made it clear that there has to be exceptionally good grounds to waive this provision. In the judgement, it was quoted that “The requirement of the said provision is that the directors shall so restrict their borrowings that the amount for the time being remaining undischarged shall not exceed the limit specified. There has to be exceptionally very good grounds for waiving such restrictions imposed under the provisions of a statute.”

Conclusion

The Board of Directors are empowered by the Companies Act through various sections, and is a group that performs a crucial role for a company. However, to check the powers of the Board, the Act also has mechanisms in place to make sure that these powers can only be utilised through special resolutions in a general meeting, ultimately placing the shareholders and the company itself to restrict the powers of the Board.


[1]  Companies Act 18 of, 2013, https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf(India).

[2]  id. §149, cl. 1.

[3]  id. §180, cl. 1.

[4] Id. §2, cl. 34

[5] id. §149, cl. 1.

[6] id. §179, cl. 1.

[7] id. §179, cl. 2.

[8] id. §179, cl. 3.

[9] id. §179, cl. 4.

[10] id. §180, cl. 1.

[11] 2016 SCC OnLine NCLT 329

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