Companies Act Section 192

Companies Act, Section 192: Restriction on Non-Cash Transactions Involving Directors

Section 192 of the Companies Act, 2013, is a safeguard against the misuse of corporate assets through non-cash transactions that involve company directors or persons connected to them. It aims to prevent conflicts of interest and self-dealing by ensuring that any such transactions are conducted transparently, with the informed approval of shareholders and proper valuation of assets involved.

1. Prohibition on Certain Non-Cash Transactions Without Shareholder Approval

Under sub-section (1), a company is prohibited from entering into non-cash arrangements involving the acquisition or transfer of assets to or from a director or connected person, unless the prior approval of the shareholders is obtained through a resolution passed in a general meeting.

This prohibition applies to two specific scenarios:

(a) Director or Connected Person Acquires Assets from the Company:

Where a director of the company, or of its holding company, subsidiary, or associate company, or a person connected with such a director, acquires or is to acquire any assets from the company, and
The consideration for such acquisition is not in the form of cash (e.g., shares, other assets, services, or any form of barter).
(b) Company Acquires Assets from Director or Connected Person:

Where the company acquires or is to acquire assets from a director or connected person, and the consideration is not cash, but another form of payment.
Requirement for Dual Approval:

If the director involved is from the holding company, then both the company and the holding company must obtain approval by passing a resolution in their respective general meetings before entering into such a transaction.

This dual approval mechanism ensures that holding company directors cannot misuse their position to influence transactions in subsidiaries for personal benefit.

2. Mandatory Disclosure and Valuation Requirements

According to sub-section (2), the notice of the general meeting where approval is sought for such a non-cash arrangement must include:

Full particulars of the proposed arrangement, including:
Description of the asset(s) being transferred or acquired,
Identity of the director or connected person involved.
The value of the assets involved in the arrangement, which must be:
Duly calculated by a registered valuer, as defined under the Companies Act, 2013 and relevant rules.
This provision ensures that shareholders make decisions based on an objective and professionally-determined value, and not on speculative or undervalued representations.

3. Consequences of Non-Compliance- Transaction Voidable

Sub-section (3) states that any arrangement entered into in violation of the provisions of Section 192 shall be voidable at the discretion of the company.

This means:

The company has the right to cancel or declare such transaction null and void, but it is not automatically void. It depends on the company’s decision.
However, this voidability is subject to two exceptions:

(a) Restitution Not Possible and Company is Indemnified:

If the company is unable to recover or restore the asset, money, or other consideration involved in the transaction, and if it has been adequately indemnified for any resulting loss or damage by another party, then the transaction may be allowed to stand.

This prevents unnecessary disruption of corporate operations when a remedy has already been provided.

(b) Rights Acquired in Good Faith by Third Parties:

If a third party, acting in good faith, acquires legal rights or interests in the asset or subject matter of the arrangement:

For consideration of value, and
Without knowledge of the violation of Section 192,
Then those rights shall be protected and the transaction will not be voided to the extent that it affects such bona fide third-party interests.