Special Resolution Under Companies Act Needed Only For Sale Of Undertakings, Not Individual Assets: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Delhi on Monday held that shareholder approval through a special resolution under Section 180(1)(a) of the Companies Act, 2013, is required only when a company sells an "undertaking." The provision does not apply when a company disposes of an individual asset.

Section 180 of the Companies Act restricts certain powers of a company's board of directors. It requires prior approval of shareholders through a special resolution when a company proposes to sell or dispose of the whole or substantially the whole of its undertaking.

Upholding an order of the National Company Law Tribunal (NCLT), Mumbai, the appellate tribunal dismissed appeals filed by Madhukar Anantrao Pathak, who is part of a minority shareholder group in MPTA Limited. The appeals challenged the sale of a property known as “Saakar Bungalow” by the company.

A bench of Judicial Member Justice Yogesh Khanna and Technical Member Ajai Das Mehrotra held that the statutory threshold of 20% of a company's net worth under Section 180 cannot by itself convert an individual asset into an undertaking.

“Thus, the 20% threshold operates only as a limitation upon the necessity of passing a special resolution and cannot be read to expand the meaning of 'undertaking' to cover individual assets,” the tribunal observed.

The dispute arose after MPTA Limited sold Saakar Bungalow, a property in Pune. The property had been mortgaged to Axis Bank as security for credit facilities obtained by the company.

After MPTA Limited defaulted on its loan repayments, the bank classified the account as a non-performing asset. Axis Bank then initiated recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act.

The sale was challenged before the NCLT by minority shareholders of the company. Their case was that the property accounted for more than 20% of MPTA's net worth and could not have been sold without shareholder approval through a special resolution under Section 180(1)(a) of the Companies Act.

They also questioned the price at which the property was sold. According to them, the transaction significantly undervalued the asset. Another point raised was the timing of the sale, which they said took place even as disputes relating to the company's affairs were already pending before the tribunal.

Rejecting these arguments, the NCLAT agreed with the NCLT's interpretation of the law. It held that the term “undertaking” refers to a business or operational unit functioning as a going concern.

The tribunal said the term does not refer to individual assets owned by the company. It noted that Saakar Bungalow was a passive property that was not generating revenue.

The tribunal also noted that the property was not used for the company's business operations. Therefore, it could not be treated as an undertaking.

“Therefore, the requirement of a special resolution under Section 180 was not necessitated. The Appellants' interpretation of provisions of Companies Act is wholly misplaced in law. Admittedly it was not a sole asset of the company,” the bench said.

The tribunal also noted that the sale took place in the context of financial distress after the company defaulted on bank loans. Proceedings had been initiated by Axis Bank under the SARFAESI Act to recover its dues.

The entire sale consideration from the transaction was adjusted towards repayment of Axis Bank's loan. The tribunal also upheld the NCLT's finding that there was no material irregularity in the valuation of the property.

Accordingly, both the appeals were dismissed.