Can our company buy a property from one of its directors?

A director owns a shop, a plot or a piece of machinery. The company needs it. Or the reverse: the company wants to hand over an asset to a director and take something other than cash for it.

Is that an ordinary deal between two willing parties? Not always. The Companies Act 2013 has a section made for exactly this. It is s.192, and it sits next to the better-known related party rule in s.188. This article covers s.192 only: what it asks for, what it does not, and how the two sections fit together. It does not repeat the general related party rule in full.

Where s.192 applies

The section bites on an "arrangement" where assets move for something other than cash. There are two directions (s.192(1), Companies Act 2013).

• A director of the company, or of its holding, subsidiary or associate company, or a person connected with him, acquires or is to acquire assets from the company for consideration other than cash.
• The company acquires or is to acquire assets from such a director or connected person for consideration other than cash.

So a company buying a building from its director is covered when the price is paid in a non-cash way. Examples are shares of the company, or adjusting a loan owed to the director. A plain cash purchase is outside this section. It is still caught by s.188, which we come to below.

The section does not say who counts as a "person connected" with a director. Do not guess. Take the wide view, and confirm with your CA.

What you must do before the deal

Two things, and the order matters (s.192, Companies Act 2013).

1. Prior approval by a resolution of the company in general meeting. "Prior" means before the arrangement is entered into. A board resolution is not a substitute. A decision made at a board meeting does not meet this part of the law. The members must pass a resolution in a general meeting (s.192(1)).

If the director or connected person is also a director of the holding company, the holding company's members must pass a resolution in a general meeting as well (s.192(1)).

2. A value worked out by a registered valuer, placed in the notice. The notice of the general meeting must carry the particulars of the arrangement along with the value of the assets, "duly calculated by a registered valuer" (s.192(2)). So the valuation comes before the notice, not after the meeting.

A registered valuer is not any accountant or engineer you like. The Act asks for a person registered as a valuer, with the prescribed qualifications. The valuer is appointed by the audit committee, or if there is none, by the Board (s.247(1), Companies Act 2013). The valuer must give an impartial, true and fair valuation, must exercise due diligence, and must not value any asset in which he has a direct or indirect interest. That bar covers interest at any time during the three years before appointment, and for three years after the valuation (s.247(2), Companies Act 2013). A valuer tied to the director's other business is a problem.

Which kind of resolution

Section 192 says only "resolution of the company in general meeting". It does not say "special resolution". A resolution is an ordinary resolution when the notice has been duly given and the votes cast in favour exceed the votes cast against (s.114(1), Companies Act 2013). Because s.192 does not ask for a special resolution, read it as needing an ordinary resolution, unless your articles ask for more. Have your CA confirm this against your articles.

The notice clock

A general meeting needs not less than clear twenty-one days' notice, in writing or through electronic mode (s.101(1), Companies Act 2013). A shorter notice is possible only with written or electronic consent. For a general meeting other than the annual general meeting, a company with share capital needs the consent of a majority in number of the members entitled to vote, who must also hold not less than ninety-five per cent. of the paid-up share capital that carries a right to vote at the meeting. A company without share capital needs consent from members with not less than ninety-five per cent. of the total voting power (proviso to s.101(1), Companies Act 2013).

A statement annexed to the notice must set out the nature of the concern or interest, financial or otherwise, of every director, the manager and other key managerial personnel and their relatives, and any other facts that help members understand the scope and implications of the item (s.102(1), Companies Act 2013). A director who is selling the asset has an obvious interest. Say so plainly.

So the order is: valuation, board approval of the notice, 21 clear days, meeting, then the deal.

How s.188 sits on top

Section 188 is the related party rule. Its list includes "selling or otherwise disposing of, or buying, property of any kind" (s.188(1)(b), Companies Act 2013). A director is a related party (s.2(76)(i), Companies Act 2013), and so is a firm in which a director is a partner and a private company in which a director is a member or director (s.2(76)(iii) and (iv), Companies Act 2013).

So a purchase of property from a director can be caught by both sections. They ask different things.

• s.188: the Board's consent by a resolution at a meeting of the Board, with conditions. Larger transactions also need the company's prior approval by a resolution, and the related party member does not vote (s.188(1), first and second provisos).
• s.192: prior approval of the company in general meeting, plus a registered valuer's value in the notice (s.192(1) and (2)).

For property, the money threshold for the second step under s.188 is set by rule 15(3)(a)(ii) of the Companies (Meetings of Board and its Powers) Rules 2014. As amended in 2017 and 2019, the limit is a transaction, or transactions taken together in a financial year, "amounting to ten per cent or more of the net worth of the company". The older "or rupees one hundred crore, whichever is lower" wording was omitted by the 2019 amendment. The net worth is taken from the audited financial statement of the preceding financial year (Explanation to rule 15(3)).

Three differences matter.

First, s.188 has a carve-out for transactions in the ordinary course of business, but only if they are on an arm's length basis (s.188(1), third proviso). Section 192, as written, has no such carve-out. A company that does not deal in property will rarely be able to call a building purchase "ordinary course".

Second, s.188 allows the Board or shareholders to ratify within three months a contract made without consent, failing which it is voidable (s.188(3)). Section 192 has no ratification step. Its protection is prior approval.

Third, rule 15(1) lists what the Board agenda must disclose for a related party deal. These include the name of the party and the nature of relationship, the material terms and value, any advance paid, and how the price was worked out. The related director must not be present during the discussion on the subject (rule 15(2), Companies (Meetings of Board and its Powers) Rules 2014). Use the same discipline for the s.192 deal.

Section 188 also has its own penalty: a director or employee who entered into or authorised a contract in violation of it is liable to a penalty of five lakh rupees in a company that is not listed (s.188(5)(ii), Companies Act 2013). Section 192 can apply where s.188 does not.

Step by step

• Write down the deal: the asset, the party, and what the company will give or get. If cash alone is not the whole price, s.192 is in play.
• Check who the other side is. Director of the company, of its holding, subsidiary or associate company, or a connected person.
• Appoint a registered valuer with no interest in the asset (s.247) and get the report.
• Hold a board meeting. The interested director stays out of the discussion (rule 15(2), Meetings of Board Rules). Approve the draft notice and the s.188 consent where it applies.
• Issue notice of the general meeting with the particulars of the arrangement and the valuer's value (s.192(2)), and the statement of interest (s.102). Give clear twenty-one days (s.101(1)).
• Hold the meeting. Under s.188, a member who is a related party does not vote on the resolution (second proviso to s.188(1)). Apply the same care to s.192 if the director is also a member.
• Pass the resolution and record it in the minutes. Only then sign the transfer documents and move the asset.
• Enter the contract in the register of contracts in which directors are interested (rule 16(1)(c), Companies (Meetings of Board and its Powers) Rules 2014). Where s.188 applies, refer to it in the Board's report with the justification (s.188(2)).

Special resolutions must be filed with the Registrar within thirty days (s.117(1) and (3)(a), Companies Act 2013). If you pass an ordinary resolution, ask your CA whether any filing is needed.

What not to do

• Do not sign the sale agreement first and get the members' approval later. The section says prior approval.
• Do not rely on a board resolution alone. The section asks for the members.
• Do not use a valuer with a stake in the asset (s.247(2)(d)).
• Do not leave the value out of the notice, or put in the director's own figure.
• Do not split a deal into small pieces to stay under the s.188 threshold. Rule 15(3) counts transactions taken together within a financial year.

If it has already happened

Section 192(3) says an arrangement made against the section "shall be voidable at the instance of the company". That means the company can choose to undo it. The right to undo is lost in two cases.

• Restitution of the money or other consideration is no longer possible, and the company has been indemnified by any other person for any loss or damage caused to it; or
• Rights have been acquired in good faith, for value and without notice of the breach, by any other person (s.192(3)(a) and (b)).

The section as printed does not carry its own penalty sub-section. The general penalty for breach of the Act is a penalty of ten thousand rupees on the company and every officer in default, with a further one thousand rupees for each day after the first during which the breach continues. It is capped at two lakh rupees for the company and fifty thousand rupees for an officer in default (s.450, Companies Act 2013). Ask your CA whether s.450 is the right provision on your facts.

The practical risk is bigger than the fine. A voidable purchase leaves the company's title open to challenge.

What to do now

• Next step: list every purchase or sale between the company and any director, or a person connected with one, where payment was not wholly in cash. Check each for a general meeting resolution and a registered valuer's value (s.192(1) and (2), Companies Act 2013).
• Deadline: for a new deal, the notice of the general meeting must give not less than clear twenty-one days (s.101(1), Companies Act 2013), so start the valuation early.
• Consequence: an arrangement made without prior approval is voidable at the company's instance (s.192(3), Companies Act 2013). Penalty exposure is under s.450 of the same Act.

Have a CA review your facts before you act or file.

FAQs

Does s.192 apply if the company pays the director fully in cash?
Section 192 is about consideration "other than cash" (s.192(1)). A pure cash deal is outside it. Section 188 can still apply, as buying property from a director is a related party transaction (s.188(1)(b), Companies Act 2013). Check the s.188 steps, and note that cash plus a set-off of a loan is not a pure cash deal.

Who can act as the valuer?
A person registered as a valuer under the Act, appointed by the audit committee or by the Board if there is no audit committee. The valuer must have no direct or indirect interest in the asset, during the three years before appointment and the three years after the valuation (s.247(1) and (2), Companies Act 2013).

Can the director vote on the resolution?
Section 192 does not bar a director-member from voting. Section 188 bars a member who is a related party from voting on the resolution it requires (s.188(1), second proviso). The exemption from that bar is limited to a company where ninety per cent or more members are relatives of promoters or related parties (third proviso). Take advice before the director votes on either.

Can we ratify the deal after the meeting?
Section 192 has no ratification route. Section 188(3) lets the Board or shareholders ratify within three months, but that is for s.188 only. Treat s.192 as a prior approval rule.

Does a holding company need to approve too?
Yes, if the director or connected person is also a director of the holding company. Its members must pass a resolution in a general meeting (s.192(1)).

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See Also

• Section 118: minutes — the 30-day rule and what can be left out
• Removing a director who will not resign
• Can we pass a shareholder resolution by postal ballot instead of holding a meeting?