No oppression and mismanagement (‘O&M’) by directors by selling land parcels at a price lower than market value (‘MV’) when the said land is not clearly marketable.
Prefatory note
On 07.03.2024, the National Company Law Tribunal, Hyderabad (‘NCLT’) delivered the judgment in the case of Arun Kumar Kedia v Om Shiv Shakti Iron Industries (P) Ltd.[i] wherein the NCLT observed that there is no O&M on the part of directors of a company if they sell the land of the company at a price lower than the MV when (i) the price of the said piece of land is not clearly marketable, and (ii) the company is in genuine and urgent need of funds.
Factual background
The Petitioner, a shareholder of a company Om Shakti Iron Industries (P) Ltd., filed a petition under ss. 397 and 398 of the Companies Act, 1956[ii] (‘CA1956’) alleging that Respondent directors of the company had illegally sold different parcels of land at a throwaway price.
To support these claims, the Petitioner submitted a valuation report conducted by a Government-approved valuer, alleging the undervaluation of the sold properties.
Additionally, the Petitioner raised concerns regarding the allotment of equity shares to the Respondent directors without offering the same opportunity to the existing shareholders. This alleged fraudulent share allotment and manipulation of company records.
To sum up, this case involved allegations of fiduciary duty breaches and fraudulent transactions on the basis of which, a petition of O&M was filed against the Respondent directors.
Issue
The central issue revolved around whether selling company land below MV constituted O&M by the directors.
Held
The NCLT, while dismissing the petition and ruling in favour of the Respondent directors, held that the sale of land at a price lower than the MV would not amount to O&M in consideration of the facts and circumstances of the present case. The judgment emphasized the following key points regarding the marketability of the land and the company's financial needs:
Marketability of Land: The NCLT noted that the land parcels in question were not clearly marketable, as they were mortgaged to SBI. Consequently, the sale price being lower than MV was deemed reasonable given the circumstances.
Urgent Financial Need: It was established that the company was in genuine and urgent need of funds. In such cases, it is not uncommon for properties to be sold at a price below their MV, especially when the properties are encumbered or not easily marketable.
The NCLT highlighted several reasons why the valuation report submitted by the Petitioner lacked credibility. Firstly, it was filed without seeking prior permission from the NCLT, indicating a procedural oversight. Secondly, the report itself contained numerous caveats and did not specifically pertain to the properties under dispute.
Further, the report acknowledged limitations such as the lack of physical access and adjacent railway and assigned lands, which further diminished the marketability of the properties in question. These factors collectively reinforced the conclusion that the land was not readily marketable and thus could not be accurately assessed at its MV for the purpose of determining its sale price.
Moreover, the NCLT affirmed the legality of the land sale transactions, as stamp duty had been paid based on applicable valuations and rates.
Addressing the allegation of fraudulent share allotment, the NCLT referenced s. 81(3) of the CA1956, which exempted private companies from certain conditions for further issue of share capital. Consequently, the share allotment to the Respondents was deemed legal, and no rectification of the register of members was deemed necessary.
Our Analysis
The ruling by the NCLT provides insights into the complex interplay between allegations of O&M, the fiduciary responsibilities of directors, and the exigencies faced by companies.
This decision has established that merely selling a piece of land at a price lower than the MV by the directors of a company is not sufficient to prove that there has been O&M on the part of directors. The circumstances around the sale of such a piece of land would be relevant to determine the nature of such a sale.
The judgment further recognized that in cases where properties are not easily marketable, it may be justifiable for companies to sell them at a reduced price, especially when faced with genuine and urgent financial needs.
Overall, the NCLT’s analysis balanced legal considerations with practical realities, providing certain clarity on the standards expected of directors, and giving a strict interpretation of O&M under the Companies Act.
End Notes
[i] [2024] 161 taxmann.com 461 (NCLT - Hyd.).
[ii] Ss. 241 and 242 of the Companies Act, 2013.
Authored by Sanyam Aggarwal, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.