TMI Blog1991 (3) TMI 329X X X X Extracts X X X X X X X X Extracts X X X X ..... of, encumbering or alienating the vessel "Boss Vishwa". This summons involves a question of interpretation of section 293(1)( a ) of the Companies Act, 1956 (1 of 1956), and the word "undertaking" used therein. Under the aforesaid section, the board of directors of a public company or a private company which is a subsidiary of a public company is prohibited from selling, leasing or otherwise disposing of the whole of the undertaking or substantially the whole of the undertaking without the consent of such company in general meeting. The section is mandatory. I shall deal with the subject-matter of interpretation of the expression "undertaking" used in this section in the later part of this judgment. The petitioners are shareholders of the first respondent-company. The petitioners and the supporting respondents belong to the Sawhney group. The petitioners and the supporting respondents hold more than 95 per cent. of the shares of the first respondent-company. The shareholding of the Sawhney group is set out in paragraph 4 of the affidavit dated 14th March, 1991, of Mr. Ramanan, Zonal Manager of Indian Bank, filed in this proceeding and there is no dispute about the same. In a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all parties concerned that on 21st May, 1990, a memorandum of agreement was executed between the first respondent-company as the seller and S. Sejersted Bodtker and Co., Oslo, as the buyers, whereunder the first respondent agreed to sell the said vessel to the said foreign buyer or its nominee at a price which was ultimately crystallised by issue of an addendum at US $ 16 million. On 26th January, 1991, another document was executed by the sixth respondent and two other members of the management committee of the first respondent in favour of the foreign buyer which is titled "minutes of agreement for mobilisation and delivery of motor vessel 'Boss Vishwa' pursuant to memorandum of agreement dated 21st May 1990". Prior to the execution of the said writing/document by the parties (a copy whereof is annexed as exhibit C to the petition), an application had already been made by the first respondent-company to the Director-General of Shipping for his approval to the sale of the said vessel in terms of the said agreement dated 21st May, 1990. The said application was made on 20th July, 1990. There is no dispute about the factum or the efficacy of the agreement dated 21st May, 1990, or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany petition filed by the Sawhney group are as under : "( a ) that this Hon'ble court be pleased : ( i )to declare the said resolution of the board of directors dated 5th February, 1991, as null, void and of no effect in law and to set aside the same ; ( ii )to direct the respondents to convene a meeting of the general body of the said company for the purposes of considering the alleged agreements with the said buyer dated 21st May, 1990, and 26th January, 1991." As this stage, it is necessary to make a reference to the composition of the board of directors of the first respondent-company. The first respondent-company is heavily indebted to the Indian Bank as well as to financial institutions and others. The first respondent-company is also liable to pay large amounts to one Deepak Fertilisers and Petro Chemicals Corporation (hereinafter referred to as "Deepak Fertilisers") under consent order dated 31st July, 1990, in Notice of Motion No. 1556 of 1990, in Suit No. 1463 of 1990, to which the first respondent is a party. By the said consent order dated 31st July, 1990, passed with the full consent of the Sawhney group, it was provided that the board of directors shall, at a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n (Zonal Manager of Indian Bank), the sixth respondent on behalf of the first respondent approached the Indian Bank for certain facilities involving financial commitment on the express representation that the first respondent shall render full co-operation in the matter of sale of the said vessel. Perhaps the bank is to be paid from the sale proceeds of the vessel. The vessel has been lying idle for a very long time. (7)The writing dated 26th January, 1991, was signed by the sixth respondent. The sixth respondent is a member of the Sawhney group. It must be presumed that all members of Sawhney group are consenting parties to each of the arrangements signed by respondent No. 6. Respondents Nos. 6, 9 and 10 have supported one another at the hearing of this summons and there is no dispute amongst them. (8)Agreement dated 2nd March, 1991, is "an agreement described by the parties as Towcon International Ocean Towage Agreement" arrived at between the first respondent and Essar International Limited for further implementation of agreement of sale dated 26th January, 1991, in implementation of agreement dated 21st May, 1990, with variation of some of the terms not prejudicial to the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . . " The impugned board resolution dated 5th February, 1991, is not extracted in the judgment as it is not annexed to the petition or any of the affidavits. Draft minutes of the meeting dated 5th February, 1991, were made available to the court. It is, however, an admitted fact that, by a majority of 4 to 3, the sale of the vessel on varied terms evidenced by writing dated 26th January, 1991, was sanctioned by the board. On 13th March, 1991, the present petition was filed. On 15th March, 1991, the first respondent, under the signature of the sixth respondent, addressed a letter to the Indian Bank stating therein as under : " Ref : Remittance of interest payment for the period 28th February, 1991, to 7th March, 1991, and 7th March, 1991, to 14th March, 1991, favouring ANZ Singapore. We are pleased to enclose the Permit No. EC : BY : TSP : 563/119 (L2) 90-91 and Permit No. EC : BY: TSP/564/119(L2) 90-91 dated 15-3-1991, for remittance of US $ 13,230 and US $ 13,113.33 respectively towards interest payment to ANZ Singapore Limited, the above remittance were to be the remitted value dated 7-3-91 and 14-3-91 res. Kindly remit the same to their account No. 000471/001 with ANZ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms of the said writing dated 26th January, 1991. Respondents Nos. 6, 7 and 8 opposed the said resolution. Respondents Nos. 9 and 10 were not present at the said meeting for reasons to which reference would be made in the later part of this judgment, to the extent necessary. Ordinarily, in any litigation concerning a company, the advocate for the company must derive his authority either under a board resolution or under an authorisation supported by the majority shareholders or at least under a vakalatnama signed by the principal officer of the company. In pursuance of the consent order dated 31st July, 1990, passed on the Notice of Motion No. 1556 of 1990, in Suit No. 1463 of 1990, a managing committee had been constituted to manage the day-to-day affairs of the company. The said management committee, inter alia , included a representative of the Indian Bank. Mr. Zaiwala, learned counsel for the petitioners, has tendered a file containing copies of the relevant minutes which I have taken on record with the consent of all parties. It appears from the said file and also from the affidavit filed by Dr. H. S. Wachha that Dr. H. S. Wachha was nominated as the chairman of the various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that a transaction duly concluded between the company represented by its board of directors preceded by the business decision of its managing committee with a foreign buyer or any other party and acted upon by the parties should be set aside at the instance of the Sawhney group for lack of prior written consent of Deepak Fertilisers thereto. Prior to the consent terms dated 31st July, 1990, the agreement dated 21st May, 1990, was already arrived at between the first respondent-company and the said foreign buyer for sale of the said vessel, of which respondents Nos. 7 and 8 must have been fully aware when they entered into the consent terms. The Indian Bank and the foreign buyer (original or its nominee) are not parties to the said consent terms. Mr. Zaiwala, learned counsel for the petitioners, has then challenged the impugned transaction of sale on the ground that the said vessel constitutes the undertaking of the first respondent-company and it cannot be disposed of without a general body resolution as required under section 293(1)( a ) of the Companies Act (1 of 1956) (hereinafter referred to as "the Act"). This argument appeared to me to be attractive at first blush. However ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same without the authority of the general body, the test to be applied would be to see whether the business of the company could be carried on effectively even after disposal of the assets in question or whether the mere husk of the undertaking would remain after disposal of the assets ? The test to be applied would be to see whether the capital assets to be disposed of constitute substantially the bulk of the assets so as to constitute the integral part of the undertaking itself in the practical sense of the term. Mr. Cooper, learned counsel for respondents Nos. 1 and 3, invited my attention to the judgment of the Mysore High Court in the case of Yallamma Cotton, Woollen and Silk Mills Co. Ltd., In re [1970] 40 Comp Cas 466. Narayana Pai J., sitting singly, held in the above-referred case that an "undertaking" was not, in its real meaning, anything which may be described as a tangible piece of property like land, machinery or equipment. It was held by the court that an undertaking within the meaning of the above provisions was an activity which in commercial or in business parlance meant an activity engaged in with a view to earn profit. In this case, a dispute arose between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3(1)( a ) of the Act. It appears to me that, for the purpose of section 293(1)( a ) of the Act, all the capital assets of the undertaking taken together would be embraced by the expression "undertaking" as, otherwise, it would be very easy to defeat the legislative intention and avoid procurement of the consent of the general body when the legislative intention is clear that the directors cannot dispose of the entire or substantially the whole business of the company without the consent of the general body. If, after disposal of practically all the capital assets of a company, what remains is only the husk of the assets, it would be perhaps difficult to take the view that, merely, assets of the undertaking were disposed of and not the undertaking itself. It is, therefore, possible to take a view that the board of directors cannot dispose of "all the capital assets of the company" taken together which will denude the company of its business or will leave merely the husk left behind. In the present case, however, the first respondent-company owns three vessels and the vessel in question was acquired only in June, 1989, and the same is lying idle. The first respondent-company is carry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aring for the Indian Bank, invited my attention to the judgment of the. High Court of Calcutta in the case of Pramod Kumar Mittal v. Andhra Steel Corporation Ltd. [1985] 58 Comp Cas 772. In this case, the court had appointed a committee of management in a petition under sections 397 and 398 of the Act. The committee of management disposed of certain assets, including plant and machinery, under orders of the court. Some of the interested shareholders challenged the said sale. It was held by the honourable Division Bench that the Dankuni unit of the company had remained closed for a period of five years. The honourable Division Bench of the Calcutta High Court rejected the application made to it for setting aside the sale on two grounds, namely, ( i ) that the committee of management appointed by the court was not subject to fetters imposed on the board of directors under section 293(1)( a ) of the Act. Accordingly, reliance on this section by the petitioners before the court was misplaced. I am in respectful agreement with the view expressed by the High Court of Calcutta on the interpretation of sections 293(1)( a ), 397 and 398 of the Act to this extent only. Secondly, it was h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving regard to the language used in section 293(1)( a ) of the Act, its legislative history and its avowed object. At any rate, the assets in question must be substantially all (if not all) the assets of the undertaking so as to leave nothing of the business or the running concern in the business sense of the term after the asset intended to be disposed of is disposed of. It is impossible to accept the wider proposition that disposal of a single asset of the company (even a vessel) would mean disposal of the undertaking itself. If the asset to be disposed of is the sole capital asset of the company with the help of which the business of the company is run, the matter may be different. I have no hesitation in rejecting the submission of the petitioners that the vessel in dispute constitutes the undertaking of the first respondent-company. It is merely one of several business assets of the company. It could, therefore, be disposed of by the board of directors and no general body consent is required. It is contended in paragraph 12( c ) of the petition that the said sale is liable to be considered as fraudulent and mala fide as it is at an undervaluation. It is alleged that the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... net. It appears that there were prolonged negotiations on 24th, 25th and 26th January, 1991. The writing dated 26th January, 1991, is signed by the sixth respondent. I put a pointed question to learned counsel for the petitioners who, in substance, represent the Sawhney group comprising 95 per cent. shareholders of the first respondent-company as to whether any offer for a higher price was available. Learned counsel was candid enough to inform the court that no higher offer was available. Even the agreement dated 26th January, 1991 is signed by all the three members of the management committee including respondent No. 6 who represents the Sawhney group. The said agreement is even partly implemented by signing of a further agreement dated 2nd March, 1991, with Essar International to which I have made a reference. Accordingly, I have no hesitation in recording a prima facie finding that no case of undervaluation is made out. After having been a willing and consenting party to the transaction, the petitioners or members of the Sawhney group cannot be allowed to approbate and reprobate at least at an interlocutory stage-where equitable considerations alone must predominantly prevail in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aiwala, learned counsel for the petitioners, submitted that the buyer was not as innocent as it looked. Whatever it may be, I am not shown any reliable cogent material on the basis of which I can record a finding that the buyer's conduct is blameworthy so as to warrant the grant of an injunction. If the statistics are to be compiled regarding the expenditure on reconditioning of the vessel already incurred, operational loss already suffered and expenses already incurred on the vessel, even though the income therefrom is nil, it would become clear that any prudent board would have or at least could have come to the same conclusion. It has then been contended by Mr. Zaiwala, learned counsel appearing on behalf of the petitioners, that the board resolution dated 5th February, 1991, itself is illegal as the notice was inadequate and no agenda papers were forwarded to the directors although it was stated in the notice of the board meeting issued on 28th January, 1991, that the agenda will follow. It was a stipulation of the writing dated 26th January, 1991, arrived at between the foreign buyer and the management committee, inter alia , consisting of respondent No. 6 representing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espondent No. 6 adopted an inconsistent stand in the board meeting dated 5th February, 1991 by opposing the resolution. Respondent No. 6 represents the Sawhney group and, therefore, the entire Sawhney group, in substance, adopted the impugned transaction on 2nd March, 1991, by taking further steps in the implementation of the transaction of sale. The petitioners and members of the Sawhney group are blowing hot and cold at the same time and adopting inconsistent stands. The petitioners and supporting respondents, are, therefore, guilty of gross improprieties. It has been argued on behalf of the petitioners and the supporting respondents that the notice of the board meeting could not be considered as a valid notice as no agenda was forwarded even though it was stated in the notice that the agenda shall follow. On this aspect, there was a debate at the Bar. Mr. Zaiwala, learned counsel for the petitioners, relied upon the judgment of Mathew J., in the case of Parmeshwari Prasad Gupta v. Union of India [1974] 44 Comp Cas 1 (SC). In this case, it was held by the Supreme Court that the resolution passed at the board meeting could not be considered as valid if no notice was given to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abilities of the first respondent towards the bank will be paid out of the sale proceeds of the vessel, it is not possible to grant any equitable relief to the petitioners alone on this ground. Respondent No. 1, the petitioners and the supporting respodents are estopped from impugning the transaction or obstructing its implementation except on the ground of a statutory prohibition or a pure legal contention based on section 293(1)( a ) of the Act. I have already held that prima facie the said section has no application to the sale of one of the unused and unoperated vessels and the impugned sale cannot be regarded as the sale of an "undertaking". Even during the pendency of the petition, respondent No. 6 who is the representative of the Sawhney group on the board and holds no shares has further supported the transaction of sale in the correspondence, i.e ., by addressing letter dated 15th March, 1991, to the Indian Bank. It is alleged by respondent No. 6 in his affidavit that he was coerced to sign the letter dated 31st December, 1990. I am not at all impressed by the allegation of coercion, the said allegation is not bona fide but is only an afterthought. If respondent No. 6 was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the variation in the terms of the agreement dated 21st May, 1990, arrived at between the parties on 26th January, 1991, is for the benefit of respondent No. 1. The said statement reads as under : Particulars of differences between memorandum of agreement dated 21st May, 1990, and mobilisation agreement dated 26th January, 1991 Item MDA dated 21st May, 1990 Mobilisation agreement dated 26th January, 1991 1. Delivery Singapore 6/46 Bombay 1/51 2. Payment Upon delivery at Singapore 3/45 Upon passing Indian territorial water 2/51 3. Price US $ 16 million (Addendum No. 2) US $ 16 million 2/51 4. Expenses for classification Seller to pay unlimited liability 6/46 As is where is 1/51 5. Expenses to and from dry dock Seller to pay unlimited liability 6/46 As is where is 1/51 6. If rudder, etc., found to be broken Seller to pay unlimited liability 6/46 As is where is 1/51 7. Classification certificate To be delivered with present certificate 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S $ 9.6 million against guarantee and indemnity of the bank. ( d )US $ 9.6 million amount of guarantee. ( e )Rs. 27 lakhs outstanding liability in respect of certain guarantees executed by the bank. ( f )An aggregate outstanding of Rs. 7.67 crores which had already become due and payable coupled with liability in relation to loan of US $ 9.6 million by the foreign bank as aforesaid, etc., ( g )Rs. 14 crores to financial institutions. In paragraph 7(1) of the said affidavit, Mr. Ramanan has referred to the "Towcon" agreement dated 2nd March, 1991, and the further steps taken in that behalf. It appears that the bank has paid a sum of Rs. 9.8 lakhs to Essar International Limited at the instance of respondent No. 1 and lots of amounts are spent on repairing and reconditioning the vessel in order to make it ready to sail. In paragraph 9 of his affidavit dated 14th March, 1991, Mr. Ramanan has set out facts and data to show that the first respondent-company and all concerned thought it fit to go ahead with the sale of the said vessel bona fide. Some of the submissions made in the said paragraph of the affidavit are as under: ( a )The first respondent could not obtain the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der of the court in case the petitioners succeed in the petition. Learned counsel for the petitioners also applies for a direction to the said foreign buyer to the effect that the said foreign buyer must undertake to bring the vessel back to Bombay in case the petitioners succeed and that there should be no change in respect of flag and registration of the said vessel in the meanwhile. Learned counsel for the petitioners emphasises the fact that the original transaction evidenced by the agreement dated 21st May, 1990, was in favour of the party named under the contract with a provision that the transaction should be completed in favour of the named buyer or its nominee and the nominee keeps on changing. Mr. Kapadia, learned counsel for respondent No. 12, opposes this application and contends that no interim relief should be granted in this matter as respondent No. 12 is a bona fide third party and it cannot be placed under a restraint order in view of my findings. Having regard to my strong prima facie findings recorded in the earlier part of this judgment, it is not possible for me to grant an injunction against respondent No. 12. The application is, accordingly, rejected. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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