1985 (8) TMI 314 - HC - Companies Law

Appointment of directors and proportion of those who are to retire by rotation, Inter-corporate investment, Spot delivery contract, Stock exchange

Issues Involved:
1. Validity of the agreement under Section 372 of the Companies Act, 1956.
2. Compliance with the Securities Contracts (Regulation) Act, 1956.
3. Authority of respondent No. 2 to sign the agreement on behalf of respondent No. 6.
4. Specific performance and enforceability of the agreement.
5. Balance of convenience and interim relief.

Detailed Analysis:

1. Validity of the Agreement under Section 372 of the Companies Act, 1956
The appellant argued that the agreement dated September 11, 1984, for the sale of shares does not fall within the purview of Section 372 of the Companies Act, 1956, and that the board resolution or Central Government approval is not a condition precedent to the sale and purchase of shares. The respondents contended that the agreement violates Section 372, which mandates that no investment in shares exceeding 10% of the subscribed capital of another company can be made without a resolution and Central Government approval. The court noted that the investment by the appellant exceeded 10% of the subscribed capital of respondent No. 7, and there was no evidence of a board resolution or Central Government approval. The court concluded that the agreement prima facie contravenes Section 372 of the Companies Act, rendering it unenforceable.

2. Compliance with the Securities Contracts (Regulation) Act, 1956
The respondents argued that the agreement violates the Securities Contracts (Regulation) Act, 1956, as it is not a "spot delivery contract" and lacks the necessary permissions from the Central Government. The appellant contended that the agreement is a spot delivery contract and thus not subject to the restrictions of the Securities Act. The court found that the agreement did not provide for the actual delivery of securities and payment on the same day or the next day, as required for a spot delivery contract. Consequently, the agreement was deemed prima facie illegal under the Securities Act.

3. Authority of Respondent No. 2 to Sign the Agreement on Behalf of Respondent No. 6
The appellant claimed that respondent No. 2 signed the agreement on behalf of respondent No. 6. However, the court found no evidence of such authorization. Respondent No. 6 explicitly denied authorizing respondent No. 2 to sign the agreement on his behalf. The court concluded that the question of authority is a disputed fact that cannot be resolved based on the affidavit evidence available at this stage.

4. Specific Performance and Enforceability of the Agreement
The appellant sought specific performance of the agreement, arguing that the shares constituted a controlling block and were of special value. The court noted that the agreement provided for alternative remedies, such as the return of the consideration money if the sale could not be completed. The court also found that the agreement was vague, uncertain, and unworkable, with no clear identification of the shares or their holders. The court concluded that the agreement could not be specifically enforced.

5. Balance of Convenience and Interim Relief
The appellant argued that the balance of convenience favored granting an interim order to prevent respondents from acting contrary to the agreement. The court found that the order sought would affect the management and assets of the company, which was not a party to the agreement. The court also noted that the appellant's interest was protected by the existing order restraining the sale or transfer of shares. The court concluded that the balance of convenience did not favor granting further interim relief.

Conclusion:
The court dismissed the application, finding that the agreement contravened the Companies Act and the Securities Contracts (Regulation) Act, and that the balance of convenience did not favor granting further interim relief. The trial judge was directed to dispose of the pending application on its merits.

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