Companies Act Section 192 — Restriction on non-cash transactions involving directors
CHAPTER XII MEETINGS OF BOARD AND ITS POWERS
Commercial / Corporate
Summary
Sub-section (1) sets the main rule. A company cannot enter into an arrangement where a director of the company, or of its holding, subsidiary, or associate company, or a person connected with that director, either buys assets from the company or sells assets to the company, if the payment is not in cash. This is not allowed unless the arrangement is approved in advance by a resolution passed at a general meeting of the company. If the director or connected person is a director of the company's holding company, the holding company must also pass its own resolution at a general meeting approving the arrangement.
Under clause (a) of sub-section (1), the restriction covers a director or connected person acquiring assets from the company for non-cash consideration. Under clause (b) of sub-section (1), the restriction also covers the company acquiring assets from such a director or connected person for non-cash consideration. In both cases, prior approval by a resolution in a general meeting is required, and if the director is from the holding company, that holding company must also approve it by its own resolution.
Sub-section (2) requires that the notice for the general meeting where the approval resolution is to be passed must include the details of the arrangement and the value of the assets involved, with that value calculated by a registered valuer.
Sub-section (3) states that if a company or its holding company enters into an arrangement that violates this section, the arrangement is voidable at the option of the company. However, this voidability does not apply in two situations. Under clause (a), it does not apply if returning the money or other consideration involved in the arrangement is no longer possible, and the company has been compensated by another person for any loss or damage caused. Under clause (b), it does not apply if some other person acquired rights in good faith, for value, and without knowing about the violation of this section.
Official Text
(1) No company shall enter into an arrangement by which—
(a) a director of the company or its holding, subsidiary or associate company or a person connected with him acquires or is to acquire assets for consideration other than cash, from the company; or
(b) the company acquires or is to acquire assets for consideration other than cash, from such director or person so connected, unless prior approval for such arrangement is accorded by a resolution of the company in general meeting and if the director or connected person is a director of its holding company, approval under this sub-section shall also be required to be obtained by passing a resolution in general meeting of the holding company.
(2) The notice for approval of the resolution by the company or holding company in general meeting under sub-section (1) shall include the particulars of the arrangement along with the value of the assets involved in such arrangement duly calculated by a registered valuer.
(3) Any arrangement entered into by a company or its holding company in contravention of the provisions of this section shall be voidable at the instance of the company unless—
(a) the restitution of any money or other consideration which is the subject matter of the arrangement is no longer possible and the company has been indemnified by any other person for any loss or damage caused to it; or
(b) any rights are acquired bona fide for value and without notice of the contravention of the provisions of this section by any other person.