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Issue of debentures

Khushboo Maheshwari (Company Secretary) (548 Points)

27 March 2012

Hi..I have a query. In a company Fully convertible debentures were allotted based on the approval given by the Board. However as per the articles of the company the debentures can be allotted only when approval of share holders is taken in general meeting by special resolution. Is it possible to ratify the decision of the board by calling an EGM ? Is it valid

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Khushboo Maheshwari (Company Secretary) (548 Points)
Replied 23 April 2012

Originally posted by : Khushboo Maheshwari
	Hi..I have a query. In a company Fully convertible debentures were allotted based on the approval given by the Board. However as per the articles of the company the debentures can be allotted only when approval of share holders is taken in general meeting by special resolution. Is it possible to ratify the decision of the board by calling an EGM ? Is it valid

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(Guest)

Dear Khushboo,

As per Section 292 (1) of the Companies Act, 1956 (hereinafter referred to as ‘the Act’), the Board of directors of a company shall exercise certain powers on behalf of the company, and it shall do so only by means of resolutions passed at meetings of the Board. One of such powers to be exercised by the directors at it’s meeting, is ‘the power to issue debentures’ [Please refer Sec 292 (1) (d) of the Act].

Further, Section 292 (5) of the Act says that ”Nothing in this section shall be deemed to affect the right of the company in general meeting to impose restrictions and conditions on the exercise by the Board of any of the powers specified in sub-section” . This means that, shareholders have a right to pass a resolution in it’s meeting to impose restrictions and conditions regarding issue of debentures. However, only the Board has an exclusive power to issue debentures.

However, the AoA of the company in this case provides that, “the debentures can be allotted only when approval of share holders is taken in general meeting by special resolution”.

As per Section 2(2) of the Act, “Articles means the Articles of Association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act.”

Thus, it should be noted that any provision of the Articles which is contrary to the provisions of the Act or beyond the powers of the company shall be ultra vires and void.

Thus, the AoA of the concerned company is ultra vires and void to the extent of inconsistency with the Act.

The act of the Board is fully valid. So, ratification of the Board’s act by the shareholders in an EGM is not necessary.

Regards,

Veeral Gandhi