Page 173 - DCOM106_COMPANY_LAW

Company Law

Notes 10.13.3 Restrictions on Powers of Directors

Section 293 provides that, the Board of directors of a public company or a private company
which is a subsidiary of a public company cannot exercise the following powers without the
consent of the shareholders in general meeting:
1. Sell, lease or otherwise dispose of the whole, 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.
However, this restriction does not apply to the case of a company whose ordinary business
is to sell or lease property.
2. Remit or give time for the re-payment of any debt due by a director except in the case of
renewal or of continuance of an advance made by a banking company to its director in the
ordinary course of business.
3. Invest, otherwise than in trust securities, the amount of compensation received by the
company in respect of compulsory acquisition of any fixed assets of the company.
4. Borrow money exceeding the aggregate of the paid-up capital of the company and its free
reserves. ‘Borrowing’ does not include temporary loans obtained from the company’s
bankers in the ordinary course of business.
The expression ‘free reserves’ mean reserves not set apart for any specific purpose.

Further, every resolution passed by the company in general meeting shall specify the
total amount up to which moneys may be borrowed by the board. Furthermore, the
expression ‘temporary loans’ means loans repayable on demand or within six months
from the date of the loan such as short term, cash credit arrangement, 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 financing expenditure of a capital nature.
5. Contribute in any year, to charitable and other funds not directly relating to the business
of the company or the welfare of its employees, any amount exceeding 50,000 or 5% of its
average net profit for the last three financial years, whichever is greater.
However, contributions to National Defence Fund or any other fund approved by the Central
Government for the purpose of national defence are exempted from the above provisions. Any
amount may be contributed without obtaining the sanction of the company in general meeting.
However, the amount contributed to these funds must be disclosed in the profit and loss account
of the company for the year in which the contribution was made.

The Companies Act does not expressly empower companies to borrow money. Therefore, most
of the companies expressly provide for such borrowing powers in the memorandum. In such a
case, where memorandum authorises the company to borrow, the articles provide as to how and
by whom these powers shall be exercised. It may also fix up the maximum which can be borrowed
by the company.

Example: The paid up share capital and free reserves of XYZ Ltd. is 100 crore as on April
1, 2008. The shareholders of the company at their general meeting held on April 4, 2008, by a
resolution authorised the board of the company to borrow money ‘exceeding the paid-up share
capital and free reserves of the company, to the extent required by the board of directors.” The
board, as a result, borrowed money to the extent of 130 crore, including 20 crore as short term
loan and 25 crore as a temporary loan for financing the construction of a building of the
company.

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