Board of Directors act on the basis of enabling powers instead articles of association

Can the Board of directors act on the basis of enabling powers in the absence of powers in the articles of association of a company ? [2017] 136 CLA (Mag.) 35 - T V Narayanaswamy Board of directors - Can it act on the basis of enabling powers spelt out in the Act in the absence of powers in the articles of association of a company - Board of directors cannot exercise a power on the ground that it is an enabling power in the Act, unless there is a suitable provision in the articles of association. Query Whether a company can act on the basis of enabling powers in the Companies Act, 2013 in the absence of corresponding powers in its articles of association ? Reply Number of enabling powers is spelt out in the Companies Act, 2013 ('the Act'). It is possible that in the articles of association of most of the companies to which the provisions of the Act apply, there are no regulations conferring such powers on its Board of directors. In the light of the above a question would naturally arise as to whether under such circumstances the Board of directors of a company can act on the basis of the enabling powers in the Act without any corresponding powers conferred on them by its articles of association ? As has been held by the Supreme Court of India in Smt. Claude Lila Parulekar v. Sakal Papers (P.) Ltd. [2005] 65 CLA 317, the articles are a source of power of the directors who can as a result exercise only those powers conferred by the articles in accordance therewith. Any action referable to the articles and contrary thereto would be ultra vires'. In view of the law laid down as above by the Supreme Court of India, unless a power is conferred on the Board of directors of a company by its articles of association, it cannot exercise that power on the ground that such a power is one of the enabling powers conferred on the Board of directors of a company by the Act. Further the aforesaid question came up for the consideration of the Supreme Court of India in Tin Plate Dealers Association (P.) Ltd. v. Satish Chandra Sanwalka [2016] 134 CLA 435 In, inter alia, a matter arising out of issue of bonus shares from out of revaluation reserve under sub-section (3) of section 205 of the Companies Act, 1956. The Supreme Court answered the question in the following words : "Specifically, so far as the issue of bonus shares is concerned, the arguments laid down before us would require a consideration whether section 205(3) of the Act, particularly, the proviso thereto permits issue of bonus shares out of revaluation reserves of a company. The further question that would arise is the correct interplay between the provisions of the Act and those contained in the articles of association of a company. Sofar as the issue with regard to utilisation of reserves arising from revaluation of assets for the purpose of issuing fully paid bonus shares is concerned, the same has been held to be permissible in Bhagwati Developers v. Peerless General Finance & Investment Co. [2005] 6 SCC 218. However, it has to be noticed that in Bhagwati Developers (supra) the articles of association (article 182) specifically permitted/contemplatedsuch a course of action. In the present case, the articles of association of the company do not empower the directors to so act. No such situation, i.e., issue of bonus shares out of revaluation reserve is contemplated.When the articles of the company do not confer any such power in the Board exercise thereof on the basis that the Act so provides would be impermissible." The aforesaid decision would equally apply in regard to similar provisions in the Act and as such the Board of directors of a company cannot exercise a power on the ground that it is an enabling power in the Act, unless a suitable provision is inserted therefor in its articles of association.



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