Remedies Available to Directors/Share holders and Company in Sale of Immovable Property of Company by Director



Any sale of company property by a director who goes beyond his fiduciary capacity and sells company property to make personal gains at the cost of the company is an act of oppression and the same could be challenged. Further, in order to sell a company property, there has to be a valid Board Resolution passed by the Board of Directors authorizing the sale of company property, giving justifiable reasons for the sale in the interest of the Company. In the absence of a valid Board Resolution, the sale transacted by some directors is void and is of no consequence.

Section 180 (1) (a)

states that, “the Board of Directors shall not, except with the consent of the company by a special resolution, to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings“. Sec 180 mandates that for sale of company undertaking, the prior consent by a special resolution is mandatory. Although the word “undertaking” as laid down in this section does not necessarily include company property, the test to be applied would be to see whether the capital asset proposed to be disposed of constitutes substantially the bulk of the asset of the company, so as to constitute the integral part of the undertaking of the company.

Hence the Board of Directors do not have authority to pass a resolution for sale of company property without taking the consent of the general body as mandated under section 180(1) (a), for which it will have to be shown that the company property that has been sold falls within the meaning of the term “undertaking” as mentioned above.

Company property can be sold only in the interest of the company and for the benefit of the company. The need or benefit derived by the company has to be clearly stated before authorizing sale of company property. The sale of company property must be in the paramount interest of the company. In the absence of there being a valid reason for sale of company property, the sale transaction is liable to be set aside.

The Hon’ble Company Law Board, Chennai in the case of P. Narayanasamy v. Neela Spinning Mills P. Ltd., Manu/CL/0042/2009, held that, “the need or the benefit derived by the company from and out of such borrowing is not established and lacks bona fides on the part of the respondents. The need for sale, adequacy of consideration or the valid authority for effecting sale of the properties is not borne out by any material. The benefit derived by the company has not been established by the respondents. The sale transactions which have come to the knowledge of the petitioners only after filing of the company petition, must be set aside, considering the paramount interest of the company”.

Remedies available to the Directors/Share holders and Company whose interest has been affected

The remedy available to the Directors/Share holders whose interest has been affected due to the oppressive act of the other directors in unilaterally selling the company property, is twofold, they can challenge the sale transaction by filing a comprehensive suit for declaration before the Civil Court to declare that the board resolution and the sale are illegal and seek for setting aside the illegal sale deed. Further the aggrieved parties could also approach the Tribunal under the provisions of Section 241 r/w 242 (g) on the grounds of mismanagement and oppression by the board of directors, provided the said application is made within three months from the date of sale.

The company may approach to the NCLT under the provision of Section 166 (4) which says- A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company. Sub-section (7) of section 166 of Companies Act, 2013 describe the punishment- If a director of the company contravenes the provisions of  section 166 such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

Interim orders

In case of Anand Prasad Agarwalla v. State of Assam vs. Tarkeshwar Prasad & Ors. AIR 2001 SC 2367

Interim order is passed on the basis of prima facie findings, which are tentative. Such order is passed as a temporary arrangement to preserve the status quo till the matter is decided finally, to ensure that the matter does not become either infructuous or a fait accompli before the final hearing. The object of the interlocutory injunction is, to protect the plaintiff against injury by violation of his right for which he could not be adequately compensated in damages recoverable in the action if the uncertainty were resolved in his favour at the trial.

A temporary injunction is an order by which a party to an action is required to do, or refrain from doing, a particular thing until the suit is disposed of or until further orders of the court.

Rule 1 of Order XXXIX of the Cpc provides that where in any suit it is proved by affidavit or otherwise

(a) That any property in dispute in a suit is in danger of being wasted, damaged or alienated by any party to the suit, or wrongfully sold in execution of a decree, or

(b) That the defendant threatens, or intends, to remove or dispose of his property with a view to defrauding his creditors,

(c) That the defendant threatens to dispossess the plaintiff or otherwise cause injury to the plaintiff in relation to any property in dispute in the suit, the court may, by order, grant a temporary injunction to restrain such act, or make such other order for the purpose of staying and preventing the wasting, damaging, alienation, sale, removal or disposition of the property or dispossession of the plaintiff, or otherwise causing injury to the plaintiff in relation to any property in dispute in the suit as the court thinks fit, until the disposal of the suit or until further orders.

An injunction can be granted to a party on establishing:

(1) That he has a prima facie case;

(2) that the balance of convenience requires granting of the same; and (3) that he would suffer irreparable injury in case injunction is not granted. For proving all the aforesaid three points, the burden is on the plaintiff praying for the relief.

Written By: Komal Kaur Lamba
A student of faculty of law Delhi University, having interest in real estate laws.


Add a Comment

Your email address will not be published. Required fields are marked *