Asset' vs ‘Undertaking’: NCLAT provides clarity

 The scope of shareholder approval for asset sales has long been a contested area, particularly where high-value assets are involved. A recent ruling by the National Company Law Appellate Tribunal (‘NCLAT’) provides useful clarity on when such approval is actually required.

A shareholder challenged a sale of a property by the company, arguing that the sale required prior shareholder approval by way of a special resolution. The property - was sold for ~ 9.50 crs at a time when the company's net worth stood at ~ 21 crs. The shareholder argued that since the sale value exceeded 20% of the net worth, shareholder consent was mandatory. The sale was also alleged to be undervalued and carried out in bad faith. In terms of background, the sale was not a voluntary commercial decision as the company had defaulted on a loan from Axis Bank and the bank had initiated recovery proceedings under the SARFAESI Act. The property was mortgaged to the bank and was sold to repay the outstanding loan.
Under Section 180(1)(a) of the Companies Act, 2013, the Board of Directors cannot sell, lease or dispose of the whole or substantially the whole of an "undertaking" without the shareholders' approval by special resolution. The law also prescribes a quantitative threshold - disposal ≥ 20% of net worth or generating 20% of total income qualifies as "substantially the whole of the undertaking." Critically, however, the term "undertaking" is not defined in the Act and has been interpreted by courts to mean a business activity or going concern - essentially the business itself - and not individual assets owned by the company.
In the present case, the NCLAT dismissed the appeal of the shareholder and upheld the sale of property on three grounds -

                                i.            On the question of shareholder approval, the Tribunal held that the 20% threshold becomes relevant only after it is first established that the asset in question constitutes an "undertaking." This is a qualitative assessment that must precede the numerical one. Since the property, non-revenue-generating mortgaged property that was not used in the company's business operations, it was merely an individual asset - not an undertaking. The requirement of a special resolution was therefore not triggered at all.

                              ii.            On the question of good faith, the Tribunal noted that the minority shareholders themselves had never made any allegations against the purchaser in their pleadings - all allegations of fraud were directed at the other group of directors. Further, the entire sale proceeds went directly towards loan repayment, with nothing going to any director or shareholder. The purchaser's good faith was therefore not in doubt.

                            iii.            On the question of undervaluation, the Tribunal found no irregularity. The property was valued independently, sold on an "as is where is" basis, and the sale price was above the valuer's estimate of the said property – which was reasonable given the distress circumstances

The decision of the NCLAT provides much clarity on the concept differentiating asset vis-à-vis undertaking. Not every high-value asset sale will attract the shareholder approval requirements under Section 180. Before the prescribed thresholds are applied, one must first ask whether the asset being sold constitutes an ‘undertaking’ - i.e., whether it forms an integral part of the company's business operations. If it is merely a standalone asset, the Board may sell it without a special resolution, regardless of its value. Viewed from tax lens, this ruling may also provide guidance on interpretation of “undertaking” in the context of slump sale and demergers.