Director's Related-Party Sale of the Company's Only Asset
'Kharaatsai' LLC has three shareholders: Bat (45%), Saruul (35%), and Enkh (20%). The company charter reserves board approval for any sale of assets above 100 million MNT. On 12 January 2025, Bat, who is also the sole director, sold the company's only warehouse to 'Altai Trade' LLC, owned by his brother, for 300 million MNT. The market value was at least 450 million MNT. No board or shareholders' meeting was held, and Bat did not disclose his brother's ownership. Saruul and Enkh learned of the sale on 5 May 2025 from a land registry notice. The company's accountant says the sale proceeds were used to pay debts, leaving no cash. Enkh wants to challenge the sale, recover the warehouse or the difference in value, and remove Bat as director. Saruul is unsure whether to sue because Bat has threatened to block future financing. The company has no assets other than the warehouse and a small bank account.
1. Is the sale to Altai Trade valid, void, or voidable? Who has standing to challenge it?
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Validity. The sale is not automatically void. It violates the charter's board-approval requirement and the director's duty of loyalty, but company-law defects usually make a related-party transaction voidable rather than void. The company may affirm it through disinterested board or shareholder approval, or it may rescind it. Buyer's knowledge. Altai Trade is owned by Bat's brother. That relationship supports an inference that the buyer knew or should have known of the conflict and the charter restriction, weakening any good-faith purchaser defence. Standing. The company itself can sue. Enkh, as a 20% shareholder, can bring a derivative action on the company's behalf after demanding that the board or shareholders act, or after showing that demand would be futile because Bat controls the company. Saruul may join; her fear of Bat does not remove her standing. Conclusion. The sale is likely voidable, and Enkh has standing to challenge it derivatively.
2. What breaches of duty did Bat commit, and what damages can be claimed?
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Duties. Bat owed the company loyalty, good faith, disclosure of conflicts, and obedience to the charter. He sold the only asset to a family company without board approval, without disclosure, and at a price at least 150 million MNT below market. That is a classic conflict-of-interest transaction and a breach of the duty to act in the company's best interest. Using the proceeds to pay company debts may be legitimate, but it does not cure the failure to obtain approval or the undervalue. Damages. The company can claim the difference between market value and sale price, plus consequential losses. If the warehouse cannot be recovered, Bat and Altai Trade may be jointly liable for the undervalue. Because the company received 300 million MNT and used it for company debts, the net loss may be limited to the 150 million MNT shortfall rather than the full 450 million. The company may also seek disgorgement of any benefit Bat received and, if the elements are met, a criminal complaint for abuse of office.
3. What procedural steps should Enkh take to remove Bat and protect the company's claim? Address derivative action, limitation, and interim measures.
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Derivative action. Enkh should send a written demand to the board and shareholders to challenge the sale and recover the loss. If they refuse or do not act within a reasonable time, she may file a derivative claim in the company's name. She should join Bat and Altai Trade and plead both breach of fiduciary duty and rescission of the related-party sale. Limitation. The three-year limitation period runs from 5 May 2025, when Enkh learned of the sale, so the claim is timely. Interim measures. Request a freeze on the warehouse and the sale proceeds to prevent further transfer or dissipation; show urgency because the company has no other assets. Removal. Call a shareholders' meeting under the Company Law and the charter. Removing Bat as director requires a shareholder resolution; Bat's 45% cannot block an ordinary majority if Saruul and Enkh vote together for 55%. Enkh should also preserve the land registry file, the sale contract, and the accountant's records.