2020 (9) TMI 174 - HC - Companies Law

Specific performance of agreements for sale - Principles of Indoor Management - respondent contended that the appellants had not made out any prima facie case to obtain any order of temporary injunction in their favour; that balance of convenience is in fact in favour of the 1st respondent because it was a real estate Company and doing business successfully - HELD THAT - It is a settled principle in Company Law that if a person deals with a Company or any other representative of a Company who is exercising the powers of Management and directing its business and affairs, that person is not affected by the lacuna of procedure within the Company or by its failure to fulfill conditions which are required by the Company's Memorandum or Articles to be fulfilled before the transaction. Such outsider is not bound to enquire whether acts of internal management have been regular. This doctrine of indoor management protects the persons dealing with the Company. Prima facie the appellants, while dealing with the 2nd respondent in good faith, are entitled to assume that the 2nd respondent, who was the Managing Director of the 1st respondent, while executing Ex. P1 agreements of sale was acting within the scope of his powers by the Articles of Association and they were not bound to enquire whether his actions had been properly and regularly performed - The very admission by respondents 1, 3 and 4 of execution of Ex. R9 resolution by the 2nd respondent implies that in the normal course of business of the Company, he did have the authority to enter into agreements of sale of plots and only after Ex. R9 dt. 14.07.2016 this practice changed. In our opinion, the appellants were entitled to assume prima facie that he continued to have such powers and were not bound to enquire into such issues of internal management. The view of the court below that a doubt arises as to whether the 2nd respondent could have executed the respective agreements of sale on 21.11.2016 in favour of the appellants, and they should have filed prima facie some material to show that the 2nd respondent had all the powers to execute the respective agreements of sale in favour of the appellants, or that they ought to have questioned the 2nd respondent for signing Ex. P1 independently without the signature of the 3rd respondent because the rubber stamp used mentioned both Chairman and Managing Director, and therefore the balance of convenience tilts in favour of respondents 1, 3 and 4, is in our opinion, prima facie erroneous. Use of 2014 stamp papers purchased by the 1st respondent in the State of Andhra Pradesh for the suit agreements of sale Ex. P1 dt. 21.11.2016 - HELD THAT - In regard to this aspect, it was held by the Court below that the appellants should have given an explanation and that they did not do so - There is no dispute that the stamp papers on which the Ex. P1 agreements of sale were drafted had been purchased by the 1st respondent. The fact that the respondents 1, 3 and 4 now allege that they were stolen by the 2nd respondent from the office of the 1st respondent proves this fact. The Court below cannot doubt the authenticity of Ex. P1 agreements of sale, particularly when the 2nd respondent, who was then Managing Director of 1st respondent, admits to their execution, merely on the ground that they were drafted on stamp papers purchased by the 1st respondent in 2014. Stamp papers on which Ex. P1 agreements of sale were executed, having been purchased in the State of Andhra Pradesh in 2014 and not in the State of Telangana, which was created with effect from 02.06.2014 - HELD THAT - This plea is also not tenable prima facie. There was no necessity for the appellants prima facie to again prove payment of advance amounts to the 2nd respondent on account of the 1st respondent, when the 2nd respondent admits to have received it and there are clear recitals in Ex. P1 agreements of sale also to that effect - Even if the rubber stamp affixed on Ex. P1 agreements of sale mentions that the 2nd respondent is both the Managing Director and also the Chairman, that will not invalidate the documents if, as Managing Director, the 2nd respondent had authority to execute the said agreements of sale. The very admission by respondents 1, 3 and 4 of execution of Ex. R9 resolution by the 2nd respondent implies that in the normal course of business of the Company, he did have the authority to enter into agreements of sale of plots and only after Ex. R9 dt. 14.07.2016 this practice changed. The appellants were entitled to assume prima facie that he continued to have such powers and were not bound to enquire into such issues of internal management. Appeal allowed with costs.

Summary

Issues Involved:
1. Validity of the agreements of sale.
2. Authority of the 2nd respondent to execute the agreements.
3. Use of old and out-of-state stamp papers.
4. Payment of consideration and the impact of demonetization.
5. Allegations of collusion and conspiracy.
6. Balance of convenience and irreparable injury.
7. Conduct of respondents in alienating the suit properties.

Issue-wise Detailed Analysis:

1. Validity of the agreements of sale:
The appellants contended that the agreements dated 21.11.2016 were executed for the sale of plots, and they paid part of the consideration. The respondents argued that the agreements were false and created by the 2nd respondent. The court noted that the agreements were executed by the 1st respondent Company through the 2nd respondent and prima facie supported the appellants' claims.

2. Authority of the 2nd respondent to execute the agreements:
Respondents 1, 3, and 4 contended that the 2nd respondent had authorized the 3rd respondent to execute sale deeds, questioning the 2nd respondent's authority. The court held that the appellants, dealing in good faith with the 2nd respondent as Managing Director, were protected by the doctrine of "indoor management" and were not bound to inquire into internal management issues.

3. Use of old and out-of-state stamp papers:
The respondents argued that the use of stamp papers from 2014 and from Andhra Pradesh invalidated the agreements. The court referred to the Supreme Court's decision in Thiruvengada Pillai v. Navaneethammal, which held that old stamp papers do not invalidate agreements. The court also cited V. Giridhar Kumar v. Sellammal, which allowed the use of out-of-state stamp papers, provided the proper duty is paid.

4. Payment of consideration and the impact of demonetization:
The respondents doubted the payment of ?20,00,000 and ?10,00,000 due to demonetization. The court found that the 2nd respondent admitted receiving the amounts on behalf of the 1st respondent, making the issue of demonetization irrelevant. The appellants were not required to prove the payment again.

5. Allegations of collusion and conspiracy:
The respondents alleged collusion between the appellants and the 2nd respondent. The court held that mere allegations without trial cannot be used to doubt the agreements. The criminal complaints regarding theft of stamp papers were not sufficient to presume conspiracy.

6. Balance of convenience and irreparable injury:
The court found that the appellants had made out a prima facie case, and the balance of convenience was in their favor. It held that irreparable injury would be caused if the respondents were allowed to alienate the suit properties pending the suit.

7. Conduct of respondents in alienating the suit properties:
The court noted that the respondents executed sale deeds after the trial court's decision and before the appeal time expired, indicating a lack of bona fides. The court deemed these transactions collusive and suspended the transfer of rights pending the disposal of the suits.

Conclusion:
The appeals were allowed, and the orders of the trial court were set aside. The respondents were restrained from alienating the suit properties pending the disposal of the suits. The court also impleaded Dr. Kilaru Panduranga Prasad and M/s. A.K. Estates and Construction Private Limited as necessary parties. The appellants were awarded costs of ?20,000 each.