Section 180: Restrictions on Powers of the Board

Section 180 restrictions on powers of the Board is the provision that decides which corporate decisions the directors can take on their own and which have to go to shareholders. Four powers are listed, each exercisable only with the consent of the company by special resolution. For an investor, the section is why a notice of a general meeting carrying an asset sale or a borrowing limit exists at all.

The four restricted powers

Section 180(1) sets them out.

(a) Selling, leasing or otherwise disposing of an undertaking. The whole or substantially the whole of the undertaking of the company, or where the company owns more than one undertaking, the whole or substantially the whole of any such undertaking.

(b) Investing merger compensation otherwise than in trust securities. The compensation received by the company as a result of any merger or amalgamation.

(c) Borrowing above the ceiling. Where the money to be borrowed, together with the money already borrowed by the company, will exceed the aggregate of its paid-up share capital, free reserves and securities premium, apart from temporary loans obtained from the company's bankers in the ordinary course of business.

(d) Remitting, or giving time for the repayment of, any debt due from a director.

The words "paid-up share capital, free reserves and securities premium" in clause (c) were substituted by Act 1 of 2018, section 59, with effect from 9 February 2018, for the earlier "paid-up share capital and free reserves". Securities premium was added to the base, which raised the ceiling for companies carrying a large premium account.

The two twenty per cent tests

Clause (a) turns on the word "undertaking", and the Explanation to the clause defines both that word and the phrase that qualifies it. They are two separate tests and they are measured against different things.

An "undertaking" means 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.

"Substantially the whole of the undertaking" in any financial year means twenty per cent or more of the value of the undertaking as per the audited balance sheet of the preceding financial year.

So the first test asks whether the thing being sold is an undertaking at all, measured against the company. The second asks how much of that undertaking is going, measured against the undertaking. A disposal has to clear both before clause (a) bites.

What a temporary loan is

Clause (c) excludes temporary loans obtained from the company's bankers in the ordinary course of business, and the Explanation to the clause defines the term rather than leaving it open.

"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. It does not include loans raised for the purpose of financial expenditure of a capital nature.

A proviso to clause (c) deals with banking companies: 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, is not a borrowing of monies by that banking company within the meaning of the clause.

What the resolution has to say, and what it can add

Section 180(2) puts a content requirement on the borrowing resolution: every special resolution passed in relation to clause (c) shall specify the total amount up to which monies may be borrowed by the Board. A blanket authorisation without a number does not satisfy the sub-section.

Section 180(4) allows the resolution consenting to a clause (a) transaction to stipulate conditions, including conditions regarding the use, disposal or investment of the sale proceeds. The proviso is a limit on that power: the sub-section is not to be read as authorising the company to effect any reduction in its capital except in accordance with the Act.

What happens if the section is not followed

The consequences differ between the two main clauses, and the asymmetry is deliberate.

For clause (a), the buyer is protected. Section 180(3) provides that nothing in clause (a) affects the title of a buyer or other person who buys or takes on lease any property, investment or undertaking in good faith. The same sub-section also puts outside clause (a) the sale or lease of any property where the ordinary business of the company consists of, or comprises, such selling or leasing.

For clause (c), the lender bears the risk. Section 180(5) provides that no debt incurred by the company in excess of the limit imposed by clause (c) shall be valid or effectual, unless the lender proves that he advanced the loan in good faith and without knowledge that the limit had been exceeded. The burden sits on the lender, which is why lenders ask to see the borrowing resolution.

Section 180 against section 186

Both sections restrict what a Board can do with money, and both use a special resolution as the release valve. They are not the same restriction.

Section 186 loans and investments covers the outbound side in full.

Where this sits in the disclosure picture

A section 180 special resolution reaches the market as a document before it reaches it as a number. The notice of the general meeting, with its explanatory statement, is where the proposed borrowing limit or the proposed disposal is described. The voting result is filed after the meeting.

• What is a postal ballot is one of the routes by which a section 180 special resolution is put to members.
• What is a voting results filing is the disclosure that records whether the resolution carried.
• Section 186 loans and investments is the companion ceiling on outbound exposure.
• What is a scheme of arrangement is the route a larger restructuring takes when a clause (a) disposal is not the right instrument.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.