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Discuss the borrowing power of a company?

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posted Jun 16 by Prachi

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Section 180 of the Companies Act, 2013 corresponds to section 293 of the companies Act, 1956 and the said section has been brought into effect from 12th September 2013.
The earlier section 293 and the new section 180 pertained to powers of the Board of Directors which can be exercised only at a general meeting by way of special resolution to be passed for the purpose. Section 293(1)(d) pertained to borrowing powers of the companies i.e. the amount upto which the companies could borrow was laid down in the special resolution which was approved by the members in the general meeting. Companies are allowed to borrow any sums of monies upto the paid up share capital and free reserves of the company. Any borrowal in excess of the combination of these two limits i.e. paid up share capital and free reserves required approval of the members in the general meeting by way of special resolution. Typically companies passed an omnibus resolution securing approval for Rs.X amount which was way above the paid up share capital and free reserves of the company but sufficient for the purposes of the company.

Section 293 of the Companies Act, 1956 was applicable only to public companies i.e. private limited companies were exempted from this requirement and therefore they could borrow any sums of money upto any limit without the need of seeking any approval from the members of the company. Now Section 180 is applicable to all companies i.e. public as well as private. So now onwards even private companies have to seek the approval of their members if they are intending to borrow monies in excess of their paid up share capital and free reserves.

The relevant section 180(1)(c) states as follows:

(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:—
(c) to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed 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:

Provided that 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 within the meaning of this clause.

Explanation.—For the purposes of this clause, 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 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;

(2) Every special resolution passed by the company in general meeting in relation to the exercise of the powers referred to in clause (c) of sub-section (1) shall specify the total amount up to which monies may be borrowed by the Board of Directors.

(5) No debt incurred by the company in excess of the limit imposed by clause (c) of sub-section (1) shall 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.

answer Jun 17 by Mukul Chag
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