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Impact of notified provisions of Companies Act, 2013 on financing transactions

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After having been passed by both houses of the Parliament, the Companies Bill, 2012 received the President’s assent on 29th August 2013. The Ministry of Corporate Affairs (“MCA“) via its notification dated 12th September 2013 notified 98 Sections of the Companies Act, 2013 (“2013 Act”) for implementation. On 26th March 2014, the MCA has notified 183 additional sections of the 2013 Act and the rules for various Chapters under the 2013 Act, effective as on 1st April 2014. We have discussed below the impact of some of such provisions of the 2013 Act and rules on a financing transaction involving an Indian corporate as borrower or security or guarantee provider:

 

  1. Requirement of a special resolution of shareholders for exercise of borrowing and other powers by the Board of Directors:

Section 180(1) of the 2013 Act provides that the Board of Directors of a company could exercise certain powers, including the power to borrow money and create security on undertakings of the company, only with the consent of the company by a special resolution.

Section 180(1) of the 2013 Act corresponds to Section 293(1) of the Companies Act, 1956 (“1956 Act”).

While under Section 293 of the 1956 Act, the Board of Directors could exercise such powers once an ordinary resolution was obtained from the shareholders, Section 180 of the 2013 Act requires a special resolution to be passed by the shareholders. Further, Section 180 of the 2013 Act is applicable to all private companies and not only subsidiaries of public companies, which was the case with section 293 of 1956 Act.

The MCA had notified Section 180 on 12th September 2013. On 18th September 2013, it issued a clarification that the relevant provisions of the 1956 Act, which correspond to provisions of the 98 sections of the 2013 Act brought into force on 12th September 2013, cease to have effect from that date. The effect of this clarification was that Section 293 of 1956 Act stood repealed due to the new Section 180 which mandated a special resolution. However, the savings clause in the 2013 Act which provides for resolutions passed under the 1956 Act to continue to be valid, had not been notified.

Another notification dated 13th September 2013, probably aimed at ensuring smooth transition from the application of Section 293 of the 1956 Act to Section 180 of the 2013 Act, stated that if notice for any general meeting was issued prior to 12th September 2013, then such resolution may be passed in accordance with the requirement of the 1956 Act. However, it only purported to afford a remedy for companies that had already issued a notice for a general meeting to be held after 12th September 2013, leaving the companies that had passed resolutions under 1956 Act before 12th September 2013, to wonder about whether they were now required to pass fresh resolutions under Section 180.

Finally, the MCA issued a further clarification on 25th March 2013 stating that the resolutions passed under section 293 of the 1956 Act prior to 12th September 2013 with reference to borrowings (subject to the limits prescribed) and/ or creation of security on undertakings of the company will be regarded as sufficient compliance of the requirements of section 180 of the 2013 Act for a period of one year from the date of notification of section 180 of the 2013 Act, i.e., till 12th September 2014.

Therefore, any ordinary resolution with reference to borrowings or the creation of security on the undertakings of the company, passed prior to 12th September 2013 will be regarded to be sufficient compliance of the requirements of Section 180 of the 2013 Act until 12 September 2014. Further, any notice issued prior to 12th September 2013 for any general meeting, the ordinary resolution passed at such meeting will also be regarded to be sufficient compliance of the requirements of Section 180 of the 2013 Act.

 

  1. Requirement to register a pledge:

Pledges, which were earlier exempted from registration requirements under the 1956 Act, will now have to be registered with the Registrar of Companies. All subsequent procedures relating to entry in the register of charges and filing of forms for the modification and/ or satisfaction of charges will also need to be followed for pledges.

Section 125(4) of the 1956 Act provided a list of charges requiring registration, which specifically excludes a pledge. However, the 2013 Act does not list the charges that require registration. Section 77(1) of the 2013 Act, effective since 1st April 2014, provides that a company creating a charge within or outside India, is required to register the charge with the Registrar, in the manner prescribed, within thirty days of its creation. The 2013 Act defines the term “charge” in an inclusive manner, to include an interest or lien created on the property or the assets of the company or any of its undertakings.

The Companies (Registration of Charges) Rules, 2014, notified by the Ministry of Corporate Affairs on 27th March 2014 has dispensed with the list of charges requiring registration, which had initially been included in the draft rules. In the absence of the list, it is assumed that all charges would now require registration with the Registrar.

 

  1. Restrictions on loans/guarantees/security to directors etc.:

Please see our previous post at:  https://pxvlaw.wordpress.com/2014/03/31/rules-notified-by-mca-ease-up-restrictions-on-inter-corporate-loans/

 

  1. Restrictions on loans/guarantees/security by companies:

Additionally, financing transactions will be affected by the implementation of Section 186 of the 2013 Act with effect from 1st April 2014. Section 186 of the 2013 Act corresponds to Section 372A of the 1956 Act.As per Section 372A, public companies intending to make investments by way of subscription or acquisition of shares, or to extend loan to other corporates, or guarantee, etc. to other persons could do so with shareholders’ approval by a special resolution, wherever the prescribed threshold of higher of (a) 60% of paid up share capital and free reserves and (b) 100% of free reserves, was exceeded. All private companies enjoyed an exemption from the application of this provision of the 1956 Act. However, with Section 186 of 2013 Act coming into effect, this exemption has been withdrawn and all private companies will now need to comply with it.

However, the Companies (Meetings of Board and its Powers) Rules, 2014 have brought some respite as well. While Section 186 does not exempt from the requirement of approval by shareholders, a holding company’s investment in a wholly owned subsidiary, loan or guarantee given or security provided to its wholly owned subsidiary company, as its predecessor did, the said rules have provided this exemption, additionally exempting loans or guarantees given to joint venture companies, provided that the company providing the loan, guarantee or security shall disclose the details of such loans or guarantee or security in the financial statement as provided under sub-section (4) of Section 186. Section 186(4) requires the company providing the loan, guarantee, security or making the investment to disclose to its members in the financial statement, the full particulars of the loans, investment, guarantee or security, including the purpose for which it is proposed to be utilised by the recipient.

 

Neha Vijayvargiya (neha.vijayvargiya@pxvlaw.com)

Anjali Viswamohanan (anjali.viswamohanan@pxvlaw.com)

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