SECTION 181 – DONATION BY LOSS-MAKING COMPANY
Section 181 of the Companies Act, 2013 talks about the power of the board of directors of the company to contribute in the bonafide charitable organization. This section restricts the power of board of directors by inserting a cap of 5% of net profit. However, the Act is silent about contribution to bonafide charitable organization in case the company is in loss.
A comparative analysis of the provisions of the Companies Act, 2013 vis a vis Companies Act, 1956 including our approach/opinion is as below:
The Board of Directors of a company may contribute to bonafide charitable and other funds.
Provided that prior permission of the company in general meeting shall be required for such contribution in case of any amount the aggregate of which, in any financial year, exceeds 5% of its average net profits for the three immediately preceding financial years.
ANALYSIS OF THE PROVISION
In order to analysis the provision of section 181 as per CA, 2013, we have to analysis the corresponding provision of CA, 1956.
As per CA, 1956, section 293(1)(e) deals with the corresponding provisions, here in the old act the BOD was having the power to contribute up to Rs. 50,000/- even though the company working at a loss.
However, in the CA, 2013 the limit of Rs. 50,000/- has not been provided. Accordingly, confusion arises whether the company can contribute in case of losses.
- Liberal approach
Situation 01: OR is not required in case 5% criteria is fulfilled.
Situation 02: In “all other cases” OR is required.
Since the law is silent whether a company can or cannot contribute in case of loss and considering the stand of CA, 1956, we can conclude that making contributions in case of loss can fall into “all other cases” as mentioned above and by passing OR the company can contribute even in case of losses.
- Conservative Approach
There is no provision in the act where the board is expressly permitted to contribute in case of losses. Therefore, we can interpret that the company cannot make any contribution in case of loss. Further, the section doesn’t provide any provision where contribution can be made out of any reserves/security premium account/any other specific reserve account, and accordingly it can be interpreted that the contribution cannot be made in case of losses even if the company is having a positive general or specific reserve.
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