Companies Act_Practical problems_15

Premier Housing Finance Company Ltd. is prepared to give housing loans to the employees of Supreme Chemicals Ltd. subject to the condition that the loans are guaranteed by Supreme Chemicals Ltd. Supreme Chemicals Ltd. is not a listed company and the company will be exceeding the limits prescribed under the Companies Act, 1956 by providing such guarantee. The company desires to give the guarantee early as part of employees’ welfare measure without waiting for the next annual general meeting, which is due only after eight months. Advise the company about the legal requirements under the Companies Act, 1956 to give effect to the above proposal. What would be your advice, if the company was required to provide security instead of guarantee?

Supreme Chemicals Ltd. proposes to give guarantee to a body corporate and as such it attracts section 372 A of the Companies Act, 1956. Where the aggregate of bonus and investments so far made the amounts for which guarantee or security so far provided along with the proposed investment guarantee etc. exceeds the limits prescribed under Section 372 A(i), such investments, guarantee etc. are required to be authorised by a special resolution passed in a general meeting. Only after the special resolution is so passed, such investments, etc. can be made [First proviso to Section 372 A(1)]. However the second proviso to Section 372 A(1) provides an exception in the case of guarantee. The Board may give guarantee without being previously authorized by a special resolution, subject to the following condition:

(i) Unanimous resolution is passed in the meeting of the Board authorizing to give guarantee

(ii) Obtaining shareholders previous approval by special resolution is prevented by exceptional circumstances. In this case there is an urgent necessity.

(iii) The Board resolution for providing the guarantee is confirmed at a general meeting (annual or extraordinary) within 12 months from the date of the Board Meeting.

(iv) The special resolution must be specify the particulars prescribed in the 3rd proviso to Section 372 A(1) such as the Limit, particulars of the Company to which guarantee is proposed to be given, purpose of the proposed guarantee, and other relevant details. Subject to this above conditions, Supreme Chemicals Ltd. may give guarantee to Premier Housing finance Co. Ltd. without obtaining previous approval of the shareholders by special resolution. This exception is available in the case of guarantee only. The board cannot provide security unless it is previously authorized by a special resolution, as the prescribed limits are likely to be exceeded.