2008 (4) TMI 503 - HC - Companies Law

Relief of injunction - restraining defendant No. 5 who is the purchaser of the company s property under a deed of conveyance dated December 13 2007 from selling alienating creating third party rights developing or carrying out any construction or parting with the possession the properly purchased by it till the disposal of the suit Held that - 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 till the disposal of the suit.

Summary

Issues Involved:
1. Derivative action by a shareholder
2. Violation of Section 293 of the Companies Act, 1956
3. Transfer not constituting the whole of the undertaking
4. Alleged protection under Section 46 of the Companies Act, 1956
5. Defense of internal management
6. Defense of bona fide purchasers
7. Direction to deposit sale consideration

Issue-wise Detailed Analysis:

1. Derivative Action by a Shareholder:
The plaintiff, a shareholder of defendant No. 1 company, filed a suit challenging the sale of the company's property to defendant No. 5. The court recognized that typically, a company should file such a suit. However, an exception exists when wrongdoers control the company, preventing it from acting. Here, defendants Nos. 2, 3, and 4, the directors who executed the sale, were alleged wrongdoers. Therefore, the plaintiff's derivative action was deemed maintainable as an exception to the rule in Foss v. Harbottle [1843] 2 Hare 461.

2. Violation of Section 293 of the Companies Act, 1956:
Section 293 restricts the board of directors from selling the whole or substantially the whole of the company's undertaking without consent from a general meeting. The plaintiff alleged no such meeting occurred on March 23, 2007, and no notice was given. The defendants failed to rebut these claims. The court found no evidence of a valid meeting, notice, or explanatory statement as required by Sections 171 and 173 of the Companies Act. Thus, the sale was prima facie void for violating Section 293.

3. Transfer Not Constituting the Whole of the Undertaking:
Defendants argued the sale did not involve the whole of the company's undertaking since the company had another property in Aurangabad valued higher than the Mumbai property. The court rejected this, noting the Mumbai property's market value was Rs. 18.28 crores, not Rs. 6.95 crores as claimed. Even if the company had multiple undertakings, Section 293 required consent for selling any undertaking, which was not obtained.

4. Alleged Protection Under Section 46 of the Companies Act, 1956:
Defendants contended the sale was binding under Section 46, which prescribes the form of contracts made by a company. The court disagreed, stating Section 46 does not override other statutory conditions, such as those in Section 293. Compliance with Section 293 was a condition precedent for the sale, and its breach rendered the sale void despite adherence to Section 46.

5. Defense of Internal Management:
Defendants argued the purchaser could assume internal procedures were followed, citing Royal British Bank v. Turquand [1856] 6E & B 327. The court differentiated between internal procedures and statutory requirements, stating the doctrine of indoor management does not apply to breaches of statutory provisions. Thus, the purchaser could not assume compliance with Section 293.

6. Defense of Bona Fide Purchasers:
The court held that at the interlocutory stage, defendant No. 5 could not be deemed a bona fide purchaser without notice. This determination required factual evidence to be assessed at trial. Moreover, the defense of bona fide purchaser does not apply in cases of statutory breaches, such as the violation of Section 293.

7. Direction to Deposit Sale Consideration:
Defendant No. 5 requested the court direct defendants Nos. 1 to 4 to deposit the sale consideration of Rs. 6.95 crores. The court denied this request, stating defendants Nos. 5 to 7 could pursue separate legal action for this relief, but it could not be granted in the plaintiff's motion for injunction.

Conclusion:
The court granted an interim injunction restraining the defendants from selling, transferring, alienating, developing, or parting with possession of the suit property until the suit's disposal.