Let’s Start with Example of Section 180(1) (c) 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. 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 Private Limited Copanies 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 w.e.f. 12th September, 2013 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:
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, 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:
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; So after reading of the above section implies that it has become Mandatory for private Companies to obtain approval of their members by way of Special Resolution passed at the general meeting that the company is allowed to borrow monies in excess of the paid up share capital and free reserves of the company, specifying thereby the maximum amount upto which monies could be borrowed by the company.
Since the section has been made effective from 12th September 2013, it would be imperative for private companies to get such special resolution passed at the earliest, since sub-section (5) above clearly stipulates that the onus of complying the provisions of this section is upon the private company since the lender can claim that he has acted in good faith.
