96.Powers of Board-FAQ

Is it possible for a Director to borrow money in excess of the net worth of a Company?

The Companies Act, 1956 does not put any restrictions on Companies to borrow money up to its paid up capital and free reserves. Working capital loans and short-term temporary loans do not fall under this category.

If the Company wants to borrow above the prescribed limit, it should be get approved in general meeting. Such a resolution should clearly state the upperlilmit of borrowing (Section 293(1)(d). Hence the Act does not allow directors to borrow money in excess of its net worth.

What will happen, if a lender advanced in excess of the limits?

When a Company incurred debt in excess of prescribed limits, the debt is valid only if the lender proves that he advanced the loan in good faith and without knowledge that the limit of borrowing has been exceeded (Section 293(5). That is, the burden of proof is on lender to show that he acted in good faith.

Whether a Company can contribute to charitable trusts?

Companies can contribute to charitable funds or other funds (Section 293(1)(e) provided:- ·         Which are not directly connected with the business of the Company; ·         Contribution is limited (higher of the following) to Rs. 50,000.00 or 5% of the average net profit of preceding three financial years. ·         Profit should be calculated after allowing all expenditure and providing depreciation as in Section 349 and 350. ·         This limit is not applicable to funds which are directly related to the business of the Company. Eg:- gratuity fund for employees, welfare funds for workmen. ·         Not applicable to contributions made to national defence fund or any other fund approved by Government of India (Section 293B(1) and such disclosures should disclosed in annual accounts of the Company (Section 293B(2). To contribute in excess of the prescribed limits, a resolution in General Meeting is required. Such resolution should clearly specify the total amount that can be contributed to Charitable or other funds in any financial year.