Nirad Amilal Mehta vs Genelec Limited and Others

Karnik D.G., J.—Heard. By consent, the motion is heard finally at the stage of admission itself.

By this motion the plaintiff who is a shareholder of the defendant No. 1 company, seeks relief of injunction restraining the defendant No. 5, who is the purchaser of the company''s property under a deed of conveyance dated 13th December, 2007 from selling, alienating, creating third party rights, developing or carrying out any construction or parting with the possession the property purchased by it (hereinafter referred as ''suit property'') till the disposal of the suit. Though a relief for appointment of Receiver is also claimed in the motion, the same is not pressed.

The facts giving rise to the dispute are that defendant No. 1 is a company incorporated registered under the Companies Act, 1956. The defendant Nos. 2, 3 and 4 are its directors. The defendant No. 5 is the purchaser of the suit property which formerly belonged to the defendant No. 1 company. The defendant Nos. 6 and 7 are the directors of defendant No. 5. The defendant No. 1 company is said to be a Sick Industrial undertaking. In view of the accumulated losses, the defendant No. 1 approached the Board of Industrial and Financial Reconstruction (for short "the BIFR", under Sick Industrial Companies Act. The BIFR came to the conclusion that defendant No. 1 was not viable and has recommended its winding up. However, no formal order of winding up has yet been passed by the Court and the defendant No. 1 still continues to be managed by its Board of Directors which consists of 3 directors viz. the defendant Nos. 2, 3 and 4. The defendant No. 1 company has its undertaking at the suit property. On 23rd March 2007, a resolution was purportingly passed by the defendant No. 1 company in its general meeting to sell the suit property. In pursuance of the said resolution, the defendant No. 1 company sold and transferred the suit property to the defendant No. 5 for a consideration of Rs. 6 crores 95 lakhs. The defendant Nos. 2, 3, and 4 as the directors of the defendant No. 1 company signed the conveyance as vendors in favour of the defendant No. 5. The plaintiff who is a shareholder of the defendant No. 1 company has field this suit, as a derivative action, challenging the said conveyance.

The plaintiff has inter alia alleged that no resolution passed by the defendant No. 1 company, in a general meeting, on 23rd March, 2007 or on any other day authorising sale of the suit property. No general meeting of the defendant No. 1 company was ever held on 23rd March 2007. He has further alleged that no notice of the general meeting, much less notice of 21 days was ever given to him or to any other shareholder. Even the explanatory statement required to be forwarded u/s 173 of the Companies Act was not and could not have been forwarded to or attached to the alleged notice of the meeting. Though an affidavit in reply has been filed by defendant Nos. 3 and 2, these facts which have been averred by the plaintiff in paragraph No. 15 of the plaint have not been specifically denied. In fact, in paragraph Nos. 19 and 20 of the affidavit in reply, defendant No. 2 has tacitly if not expressly, admitted the facts as narrated in paragraph No. 15 of the plaint.

Strongly, placing reliance on the admission in the affidavit of the defendant No. 2 that no general meeting of the defendant No. 1 company was held on 23rd March, 2007 in accordance with law, learned Counsel for the plaintiff submitted that the sale of the undertaking and the property of the defendant No. 1 company was void. Reliance was placed on Section 293 of the Companies Act which says that the Board of Directors of a public company or a private company which is a subsidiary of the public company shall not except with the consent of the company obtain in a general meeting sale, lease or otherwise dispose of the whole or substantially whole of the undertaking of the company or where the company owns more than one undertakings the whole or substantially whole of any such undertaking. Counsel for the plaintiff submitted that the suit property was practically the whole or substantially the whole of the undertaking of the defendant No. 1 company at Mumbai and the defendant No. 1 company had no other undertaking in Mumbai. The defendant No. 1 company of which the defendant Nos. 2, 3 and 4 are the Directors of the company could not have sold the suit property which was the whole of the undertaking of the company at Mumbai without proper resolution of the company passed in a general meeting. Counsel therefore submitted that it was necessary to protect the suit property pending final decision of the suit wherein the declaration has been sought that the sale is void.

Mr. Kamdar, learned Counsel for defendant Nos. 5 to 7 submitted that Section 293 of the Companies Act is not applicable in as much as the company had undertakings not only in Mumbai but also at Aurangabad. The value of the undertaking and property and Aurangabad was nearly Rs. 10 crores which was much more than value of the Mumbai property which was Rs. 6.95 crores. The sale effected by defendant No. 1 through its directors viz. the defendant Nos. 2, 3 and 4 was not of the whole or substantially the whole of the undertaking of the company. He further submitted that the plaintiff as a shareholder of defendant No. 1 company was not entitled to maintain an action on behalf of the company for the alleged wrong done to the defendant No. 1 company. If at all the suit property was sold without the necessary resolution u/s 293 of the Companies Act, the only person aggrieved would be the company and not any shareholder and no shareholder was entitled to maintain an action against the purchaser. He further submitted the sale was a contract and since it was made in accordance with Section 46 of the Companies Act it was binding on the defendant No. 1 company. Neither the defendant No. 1 company by itself nor any of its shareholders through a derivative action was entitled to challenge the said contract. Lastly, Mr. Kamdar submitted that defendant No. 5 was the bona fide purchaser for value without notice of alleged irregularity. The sale deed itself mentions that the company was authorised to sell the property by a resolution passed in the general meeting held on 23rd March, 2007. Whether a resolution was passed or not in the general meeting on 23rd March, 2007 was an internal matter to which the defendant No. 5 had no access and it was entitled to assume that all internal formalities had been complied with by the defendant No. 1 before executing the sale deed. In the alternative he submitted that if at all the Court came to the prima facie conclusion that the sale was not binding on the defendant No. 1 or on the plaintiff, the Court should order and direct the defendants 1 to 4 the refund of the amount of Rs. 6.95 crores received by them as consideration for the sale.

Regarding derivative action by a shareholder.

The sale of the suit property was effected in the name of defendant No. 1 company by defendant Nos. 2, 3 and 4 in the capacity as its directors. It is alleged that the sale being contrary to the provisions to Section 293 of the Companies Act is void. If the sale is void, the person aggrieved is the company. The suit should therefore normally be filed by the company for setting aside the alienation. The plaintiff who is only a shareholder of the company would not normally have a right to file a suit on behalf of the company as the person aggrieved is the company and not a shareholder. More than one and a half century ago, in (Foss v. Harbottle) (1843)2 Har 461, the Court laid down the rule that normally an individual shareholder would not be entitled to bring an action for a wrong allegedly done to the company. It is the company who alone can bring an action for a wrong done to it. The rule however has been subjected to more than one exceptions. In BSN (UK) Ltd. and others Vs. Janardan Mohandas Rajan Pillai and others, , this Court while upholding the rule that it is the company who is entitled to maintain an action for wrong allegedly done to it and a shareholder has no locus standi to maintain the suit, affirmed one of the exceptions to the aforesaid rule that where a shareholder can show that the wrong doers are in control of the defendant company and hence the company would be unable to maintain the action, he can maintain an action.

In the present case, the sale has been effected though in the name of the company by defendant Nos. 2, 3 and 4 who have signed and executed the sale deed. The defendant Nos. 2, 3 and 4 are the only directors of the company. Though action for winding up is pending, no order for appointment of a provisional liquidator has been made and the defendant Nos. 2, 3 and 4 continue to be in charge of affairs of the defendant No. 1 company. The defendant Nos. 2, 3, and 4 who are the only directors of the defendant No. 1 company and in charge of the defendant No. 1 company, being the signatories to the sale deed executed in the name of the company are unlikely to maintain an action in the name of the defendant No. 1 company for setting aside the sale. The plaintiff has alleged that defendant Nos. 2,3, and 4 themselves are the wrong doers as they have wrongfully alienated and transferred the property of the company in breach of their fiduciary duty as directors of the company. Since defendant Nos. 2, 3 and 4 themselves are alleged to be wrong doers and are in charge of the defendant No. 1 company, an action by the plaintiff would be maintainable, as an exception to the rule in Foss v. Horbottle. Since it was not argued that if at all the plaintiff were to take a derivative action it should have been done in the name of the company as a plaintiff and not merely joining it as defendant No. 1, I deem it unnecessary to consider this aspect at the interlocutory stage. Suffice it to say that the plaintiff, prima facie, is entitled to maintain the action for the wrong done to the defendant No. 1 company.

Regarding violation of Section 293

Section 293 of the Companies Act puts restrictions on the powers of the Board of Directors. It provides that the Board of Directors of a public company or private company which is a subsidiary of the public company shall not, except with the consent of such public company or subsidiary in a general meeting, sale, lease or otherwise disposed of the whole of substantially the whole of the undertaking of the company or where the company owns more than one undertakings of the whole of substantially the whole of any such undertaking. Though the sale deed recites that sanction for the sale of the suit property was obtained by a resolution passed in its meeting held on 23rd March 2007 it is the case of the plaintiff that no general meeting of the company was held on 23rd March 2007 and no notice of any meeting to be held on 23rd March 2007 was given to the plaintiff. It is true that accidental omission to give notice to one or some of the members of the Company does not vitiate the notice of the meeting. However, it is not the case of the defendants that the omission to give notice to the plaintiff was on account of accidental omission. It appears to be a case where no notice was given to any member at all. This is clear from the averments made in paragraph 15 of the plaint which are not rebutted in the affidavit in reply. Furthermore, the notice of the meeting and agenda is stated to be of the same date as that of the meeting. Section 171 of the Companies Act requires notice of atleast 21 days to be given prior to a general meeting. No material has been produced on record to show that 21 days notice was ever issued before the alleged general meeting on 23rd March 2007. Furthermore, u/s 173 of the Companies Act, an explanatory statement is required to be annexed to the notice of the meeting. No explanatory statement u/s 173 of the Companies Act was attached to the alleged notice dated 23rd March 2007. In fact, the explanatory statement is dated 13th December 2007 which is long after the date of the alleged general meeting dated 23rd March, 2007. In sub-paragraph No. (iv) of paragraph No. 15, the plaintiff has stated that the place of meeting as stated in the alleged notice was an open ground. He has further stated that no arrangements for the meeting had ever been made at that open space and any such meeting was held and could not be held on the open space. Neither a register of members present at the meeting nor any other material was produced to show that any meeting was held on 23rd March 2007. No minutes appear to have been prepared and aimed by the Chairman as required u/s 193 of the Companies Act. In any event no record was produced that the Chairman signed the minutes of the alleged meeting held on 23rd March 2007. The allegations made in paragraph No. 15 of the plaint are unrebutted in affidavit in reply. It must therefore be held, atleast at this prima facie stage, that no meeting was ever held on 23rd March 2007 much less a meeting in accordance with law.

Re: Transfer not of the whole of the undertaking.

Mr. Kamdar learned Counsel for the defendant submitted that the sale was not of the whole of the undertaking of the Company and therefore it was not necessary to have a resolution u/s 293 of the Companies Act for sale of the suit property. He submitted that company had two undertakings, one at Mumbai and another at Aurangabad. The value of the undertaking at Mumbai was only Rs. 6.95 crores and value of the undertaking at Aurangabad was Rs. 10 crores or more. Therefore the undertaking at Mumbai was a smaller undertaking and not a substantial part of the undertaking of the Company. Therefore approval of the generable meeting was not necessary. Firstly, the submission that the value of the undertaking at Mumbai was Rs. 6.95 crores is factually incorrect. Though the deed of conveyance is for a sum of Rs. 6.95 crores, the market value of the suit property on the date of sale was more than Rs. 18.28 crores. Article 25 of the Bombay Stamp Act requires the Stamp duty to be paid on the true market value of the property even if the consideration is less than the true market value. The market value of the property is determined by the Stamp Authorities in accordance with the Rules framed under the Bombay Stamp Act was Rs. 18.28 crores. Stamp duty on that amount was paid by the parties without demur or without challenging the valuation. Though the consideration of sale was Rs. 6.85 crores, the true market value was much higher at Rs. 18.28 crores as for the Government valuation. Secondly, Section 293 of the Companies Act provides that where a company has more than one undertakings, the Board of Directors of a company shall not sell any of such undertakings without consent of the company in a general meeting. Therefore even if it is assumed that the defendant No. 1 company had two undertakings, one at Mumbai and another at Aurangabad, neither of the said undertakings could be sold without consent of the company obtained in the general body meeting. I have already held that there was no valid general meeting held on 23rd March 2007 and consequently there was no consent of the company obtained in a general meeting for the sale of the whole of the undertaking at Mumbai. The deed of conveyance dated 13th December 2007 is, prima facie, void and being contrary to Section 293 of the Companies Act.

Alleged protection u/s 46 of the Companies Act.

Section 46 of the Companies Act lays down the form of contract to be made by the company and provides that any contract made by the Company in accordance with Section 46 shall bind the Company. Mr. Kamdar submitted that the deed of conveyance was a kind of contract, though a completed or an executed contract. The suit property stood conveyed and transferred by the said contract. As the contract was made in accordance with the form prescribed by Section 46 the contract was binding on the company. I am unable to agree. Section 46 only prescribes the form of the contract to be made by the Company. Every contract made by a company must fulfill other conditions, if any, imposed by the other provisions of the Companies Act. Section 293 of the Companies Act imposes a condition for transfer of the whole or substantially the whole of the undertaking of a company. If the whole or substantially the whole of the undertaking is to be transferred, then consent for such transfer has to be obtained in a general meeting. It is a condition precedent for the transfer. This condition is obviously in addition to the form of contract provided u/s 46. Any other interpretation could make Section 293 nugatory. In the circumstances, the contention of Mr. Kamdar that since the conveyance is a kind of contract and was made in accordance in the form provided u/s 46 of the Companies Act, the contract is binding on the Company, notwithstanding breach of Section 293, has to be rejected.

Regarding the defence of internal management.

Mr. Kamdar submitted that whether a resolution of the general body u/s 293 of the Companies Act was passed or not was an internal matter of the company and the purchaser having no means of knowing whether such a resolution was passed was entitled to assume that the internal procedure was followed. The deed of conveyance dated 13th December 2007 recites that resolution of the general body was passed in the meeting held on 23rd March 2007 and the purchaser was entitled to assume the said statement to be true. It is true that in [Royal British Bank v. Turquand) (1856) 6 E.B 327 it has been held that a person dealing with a company is not affected by internal irregularities. He is entitles to assume that the internal procedure required by Articles of Association of the Company has been complied with. The differentiation however has to be made between the procedure prescribed by Articles of Association of a Company and the statutory restrictions imposed by the Companies Act. Where there is a clear breach of a provision of a statute, the doctrine of indoor management laid down in Royal British Bank v. Turquand (supra) cannot apply. In the event of a breach of a statutory provision, the consequences of the breach would follow and it would be no defence to hold that the person dealing with the company, including purchaser in the present case, was entitled to assume that all statutory requirements were complied with. If a statute prescribes a mandatory procedure the same must be complied with at the pevil of the action being declared void for its non compliance. There is therefore, no merit in this contention also.

Defence of Bona fide purchasers.

In my view, at this interlocutory stage, the defendant No. 5 is not entitled to any protection on the alleged ground that it is a bona fide purchasers for value without notice, for reasons more than one. Firstly, whether the defendant No. 5 at all is a bona fide purchaser is a question of fact which would be required to be determined on appreciation the evidence to be adduced at the trial. At this stage, it cannot be held that the defendant No. 5 had no knowledge of the illegality. Whether the defendant No. 5 had made appropriate enquiries before purchase of the property is also a question of fact which can be determined only at the stage of trial. Secondly, in my prima facie view the defence of bona fide purchaser would not be available in case of breach of a statutory bar on the Board of Directors from selling the undertaking of a company without permission of the company obtained in a general meeting. Hence, at this stage, in my view, the defendant No. 5 cannot claim any benefit on the ground that he is a bona fide purchaser for value without notice.

Regarding direction to defendants 1 to 4 to deposit money.

As regards the request by defendant No. 5 that the defendant No. 1 company and its directors defendant Nos. 2 to 4 be directed to deposit in the Court consideration of Rs. 6.95 crores received by them, the defendants 5 to 7 are free to take such action against the defendants 1 to 4 as they think fit. In the plaintiff''s motion for injunction such a relief cannot be granted to them. In the circumstances, this request also cannot be granted.

For these reasons, plaintiff is entitled to an injunction restraining the defendants from selling, transferring, alienating, developing or parting with the possession of the suit property. Accordingly, there shall be interim relief in terms of prayer Clause a (ii), till the disposal of the suit.