1991 (12) TMI 246 - HC - Companies Law

Court upholds share sale agreement, allows specific performance, dismisses third-party volition argument.

Brooke Bond India Ltd. Versus UB. Ltd.

The court found the agreement for the sale of shares not in violation of sections 293(1)(a) and 372 of the Companies Act. It held that specific ... Directors – Power of, Inter-corporate investment, Short title extent and application Issues Involved:1. Legality and enforceability of the agreement u/s 293(1)(a) and 372 of the Companies Act.2. Specific performance of the contract.3. Vagueness and enforceability of the contract.4. Impact of third-party volition on contract performance.5. Applicability of the Securities Contracts (Regulation) Act, 1956.Summary:Legality and Enforceability of the Agreement u/s 293(1)(a) and 372 of the Companies Act:The defendants argued that the agreement was illegal and unenforceable as it violated section 293(1)(a) of the Companies Act, which prohibits the board of directors of a public company from selling or disposing of the whole or substantially the whole of the undertaking without the consent of the company in a general meeting. They also contended that the agreement breached section 372, which imposes restrictions on intercorporate investments. The court found that the agreement was for the sale of shares and not the undertaking itself, and thus section 293(1)(a) was not applicable. Regarding section 372, the court held that the prohibition applied to the actual investment and not the agreement to invest, and the plaintiffs could comply with the section when the time for investment arose.Specific Performance of the Contract:The defendants contended that the contract did not reserve the right of specific performance and only provided for the refund of the earnest money with interest in case of a breach. The court rejected this argument, stating that the absence of a stipulation for specific performance did not preclude the plaintiffs from seeking it, as there was no express stipulation barring it.Vagueness and Enforceability of the Contract:The defendants argued that the contract was vague and unenforceable as the consideration for the sale of shares was not finalized. The court found that the consideration was specified in the defendants' letter dated November 13, 1991, which confirmed the purchase price and its apportionment, making the contract enforceable.Impact of Third-Party Volition on Contract Performance:The defendants argued that the contract depended on the volition of third parties (KPL, HL, and MW) and could not be specifically performed. The court found this argument to be a ruse to back out of the contract, as the defendants had controlling interests in the companies and were capable of fulfilling the terms of the contract.Applicability of the Securities Contracts (Regulation) Act, 1956:The defendants contended that the contract was illegal under sections 13 and 16 of the Securities Contracts (Regulation) Act, 1956, as it was not a 'spot delivery contract.' The court held that the Act was intended to regulate transactions on the stock exchange and not private transactions of shares of a public limited company unlisted on the stock exchange. The court relied on judgments of the Bombay High Court, which supported this view.Conclusion:The court concluded that the plaintiffs had made out a prima facie case for the grant of ad interim reliefs and that the balance of convenience was in favor of granting such reliefs. The defendants were restrained from taking any steps contrary to or inconsistent with their obligations under the agreement dated July 31, 1991, pending the hearing and disposal of the notice of motion. The motion was made returnable on January 13, 1992.