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2018 (3) TMI 645 - HC - Companies LawValidity of the Sale Agreement - Suit filed for Specific Performance of the Agreement for Sale - Whether the third defendant and other Directors obtained consent from the plaintiff before entering into the Sale Agreement dated 14.07.2005, being a major shareholder in the company? - applicability of Doctrine of Indoor Management - Held that - This Court is of the considered view that the sale and lease of immovable properties of the third defendant company in favour of the first defendant company is not in compliance of Section 293(1)(a) of the Companies Act. No doubt, under Ex.P22-Minutes of the Board Meeting dated 24.06.2005, plant and machineries were also directed to be sold and for effecting such sale, the plaintiff in C.S.No.877 of 2005 has no objection and thus it appears that he has taken a contradictory stand. In the considered opinion of the Court, the sale of immovable properties as well as the plant and machineries either individually or collectively would fall within Section 293(1)(a) of the Companies Act and for effecting such a sale, consent/approval of the shareholders of the company is required. Contention by the first defendant/plaintiff in that since major shares are being held by Manging Director and Directors of the company, their decision to sell the land and properties would amount to consent of majority shareholders, this Court is of the view that the said submission lacks merit in the light of mandatory nature of Section 293(1)(a) of the Companies Act and that apart, in the event of holding General Body Meeting, explanatory statement under Section 173 of the Companies Act is also to be enclosed with the notice for the meeting and as such, both the provisions have not been adhered to. Also when there is a clear breach of a provision of a Statute, the Doctrine of Indoor Management cannot apply If a Statute prescribes a mandatory procedure, the same must be complied with at peril of the action being declared void for its non compliance. Third defendant and other directors did not obtain consent from the plaintiff/Thakur J. Bakshani before entering into Ex.P6/Agreement for Sale dated 14.07.2005 No doubt, then Chairman of M/s. Nova Dyeing and Printing Mills Ltd. - Jagadish A. Sadrangani and other Directors, namely the defendants 4 and 5 had interest in the third defendant company at the time of entering into Ex.P6/Agreement for Sale, but the fact remains that the statutory mandates cast upon the third defendant company/M/s. Nova Dyeing and Printing Mills Ltd. under Section 293 (1)(a) of the Companies Act, have not been adhered to/complied with de hors their interest and in the light of the findings recorded by this Court regarding Issue No.1 in both the Suits, Issue No.3 has no relevance. The findings given by this Court in respect of Issue No.1 in both the Suits, and Issue No. 2 had sustained the legal plea that the procedures contemplated under Section 293(1)(a) of the Companies Act, have not been followed/adhered to. The plaintiff, being a founder of the company, cannot question the validity of the Agreement for Sale/Ex.P6 dated 14.07.2005 and a shareholder is entitled to question the same on the ground that the mandates cast upon M/s. Nova Dyeing and Printing Mills Ltd./third defendant under Section 293(1)(a) of the Companies Act, have not been followed and the remedy, if any available at that point of time was that the approval/ratification by the General Body of the shareholders under Ex.P22 should have been obtained and admittedly, it was not done so. If the Board Meeting under Ex.P22 would amount to signing of the shareholders of the company in the General Body Meeting for the reason that majority of the shareholders represent in their capacity as Director and Managing Director respectively, is of the considered view that they are entitled to presume that as per the Doctrine of Indoor Management, everything has taken place as per law and procedure and this Court is of the considered view that it is obligatory on the part of the first defendant as per the Memorandum and Articles of Association, to exercise due diligence and it has not been done. Admittedly, in the case on hand, consent of the shareholders in the General Body Meeting has not been obtained and that by subsequent ratification also, the exercise done by the Board of Directors in that regard under Ex.P22 has not been ratified/approved. Adherence to Section 173 of the Companies Act is also mandated. In the considered opinion of the Court, the resolution passed by the company as per Section 192(4)(eee)(i) of the Companies Act requires ratification at the hands of the Registrar of Companies and it has not been done.
Issues Involved:
1. Compliance with Section 293 of the Companies Act, 1956. 2. Consent of the major shareholder before entering into the Sale Agreement. 3. Interest of the then Chairman and Directors in the company. 4. Empowerment of the founder to question the validity of the Sale Agreement. 5. Bonafides of the Agreement Holder to buy the property. 6. Contravention of Article 54 of the Articles of Association. 7. Validity of the Sale Agreement under Section 23 of the Indian Contract Act. 8. Contravention of Section 192(4)(ee) of the Companies Act. 9. Prejudicial nature of the Sale Agreement to the interest of the company. 10. Readiness and willingness for specific performance. 11. Entitlement to damages as an alternative relief. Detailed Analysis: Issue 1: Compliance with Section 293 of the Companies Act, 1956 The court found that the sale of immovable properties of the third defendant company was not compliant with Section 293(1)(a) of the Companies Act, 1956. The resolution to sell the properties was taken in a Board Meeting and not in a General Body Meeting of the shareholders, which is mandatory. The sale of plant and machineries was also done through a Board Resolution, which was not challenged by any shareholder, thus raising questions about the legality of the sale of immovable properties. Issue 2: Consent of the Major Shareholder The court determined that the third defendant and other directors did not obtain consent from the plaintiff, a major shareholder, before entering into the Sale Agreement dated 14.07.2005. The plaintiff had raised objections orally, which were not documented, and the agreement was executed without addressing these objections. Issue 3: Interest of the then Chairman and Directors The interest of the then Chairman and Directors in the company was acknowledged, but the court emphasized that the statutory mandates under Section 293(1)(a) of the Companies Act were not followed, thus rendering their interest irrelevant in this context. Issue 4: Empowerment of the Founder to Question the Validity The court held that the plaintiff, being a founder and major shareholder, is entitled to question the validity of the Sale Agreement. The statutory mandates under Section 293(1)(a) were not followed, and the agreement was not ratified by the shareholders in a General Body Meeting. Issue 5: Bonafides of the Agreement Holder The court found that the first defendant showed bonafides as an Agreement Holder to buy the property but failed to comply with the statutory mandate under Section 293(1)(a) and did not exercise due diligence. The Agreement for Sale was executed without ensuring compliance with the necessary statutory requirements. Issue 6: Contravention of Article 54 of the Articles of Association The court noted that Article 54 of the Articles of Association, which requires compliance with Sections 292 and 293 of the Companies Act, was not adhered to. The first defendant failed to exercise due diligence, and the sale agreement was executed without ensuring compliance with the Articles of Association. Issue 7: Validity of the Sale Agreement under Section 23 of the Indian Contract Act The court concluded that the Sale Agreement was unenforceable due to non-compliance with Section 293(1)(a) of the Companies Act. The agreement was not ratified by the shareholders, making it void under Section 23 of the Indian Contract Act. Issue 8: Contravention of Section 192(4)(ee) of the Companies Act The court found that the resolution passed by the company was not ratified by the shareholders or the Registrar of Companies, thus contravening Section 192(4)(ee) of the Companies Act. Issue 9: Prejudicial Nature of the Sale Agreement The court held that the plaintiff failed to establish that the clauses in the Sale Agreement were prejudicial to the interest of the company. However, the agreement was unenforceable due to non-compliance with Section 293(1)(a). Issue 10: Readiness and Willingness for Specific Performance The court determined that the plaintiff in C.S.No.627 of 2008 was not ready and willing to perform its part of the obligation under the Sale Agreement. The suit for specific performance was filed just before the expiration of the limitation period, indicating a lack of readiness and willingness. Issue 11: Entitlement to Damages as an Alternative Relief The court found that the claim for damages was not substantiated with adequate evidence. The properties purchased by the sister concern of the plaintiff were agricultural and not capable of commercial exploitation without conversion. The claim for damages was also made belatedly, nearly eight years after the agreement. Conclusion: - C.S.No.877 of 2005: Decreed as prayed for, but without costs. - C.S.No.627 of 2008: Dismissed without costs. The plaintiff is entitled to withdraw the deposited amount of ?2.50 Crores with accrued interest.
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