D.R. Dhanuka, J.@mdashThis is a judge''s summons taken out by the petitioners for an interim injunction to restrain the respondents "from, in any manner, acting in furtherance of the agreements dated 21st May, 1990, and 26th January, 1991, and acting in furtherance of the purported resolution of the board of directors of the 1st respondent company dated 5th February, 1991". By this judge''s summons, the petitioners are also seeking an interim injunction restraining the respondents from selling, dealing with, disposing of, encumbering or alienating the vessel "Boss Vishwa".
2. This summons involves a question of interpretation of section 293(1)(a) of the Companies Act, 1956 (1 of 1956), and the word "under-taking" 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.
3. 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 share-holding 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 petition filed under sections 397 and 398 of the Companies Act (1 of 1956) (Company Petition No. 144 of 1991), the petitioners are complaining of mismanagement of the affairs of the company by respondents Nos. 2 to 5 who are directors of the first respondent-company as nominees of public financial institutions.
4. On 13th November, 1982, the first respondent-company was incorporated and registered as a private limited company. On 13th August, 1988, the first respondent became a public limited company. The authorised share capital of the first respondent-company is Rs. 10 crores. The present issued, subscribed and paid-up share capital is Rs. 5,00,50,000 comprising 50,05,000 fully paid-up equity shares of Rs. 10 each. The Indian Bank is the banker of the first respondent-company.
5. The first respondent-company is engaged in the activity of oil exploration and off-shore drilling of oil. It is averred in the petition that respondent No. 1 actively assists the Oil and Natural Gas Commission (ONGC) in its oil exploration and off-shore drilling projects whenever contracts are awarded to the first respondent-company by the ONGC. The first respondent-company owns three vessels for the purpose of its business, i.e., Boss-1, Boss Prithvi and Boss Vishwa. Some time in the month of June, 1989, respondent No. 1 acquired the vessel in dispute known as "Boss Vishwa" for the price of US $ 12 million. A foreign bank advanced a term loan of US $ 9.6 million to respondent No. 1 under an agreement dated 15th December, 1989. The Indian Bank executed a deed of guarantee and indemnity in respect of the obligations of the first respondent in favour of the said foreign bank known as ANZ Singapore Ltd. for repayment of the said amount and also accruing interest. The Indian Bank has advanced large amounts to the first respondent-company under various heads. Financial institutions also have advanced large amounts to respondent No. 1. Right from the beginning, the said vessel could not be operated or used in the business of the first respondent-company as no contract was awarded by the ONGC and it had to remain idle creating problems of operational expenditure, etc., as more particularly set out by the first respondent in its application dated 20th July, 1990, to the Director-General of Shipping for his approval under the Merchant Shipping Act and its enclosures. It is admitted by 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 the statements made in the application to the Director-General of Shipping and the enclosures appended thereto like viability report, valuation reports, etc. Along with the said application, the first respondent-company itself forwarded various documents like valuation reports, etc., showing that the price of US $ 16 million was a fair price as, according to the two valuation reports enclosed with the said application, the said vessel was of the value of US $ 15.5 million and US $ 15 million respectively. Along with the said application, a statement was forwarded by the first respondent-company to the Director-General of Shipping labelled as viability report prepared by the first respondent-company signed by its authorised signatory stating therein that, in spite of the best efforts, the first respondent was unable to obtain a job for the said vessel from the ONGC and the said vessel could not be utilised and that the company was incurring massive standing operational expenses. It was stated in the said application by respondent No. 1 and the enclosures thereto that the first respondent shall be heading for a financial crisis in case permission for the sale of the said vessel for US $ 16 million was not granted, as sought. Ultimately, permission was granted by the Director-General of Shipping after examining all the necessary material as contemplated u/s 42(1) of the Merchant Shipping Act, 1958, by his letter dated 1st November, 1990.
6. It is being contended on behalf of the petitioners that the said writing dated 26th January, 1991, is in the nature of a fresh agreement and it is being wrongly described by the members of the management committee which included the representative of the Indian Bank and the sixth respondent, as if the said writing was in the nature of a further document towards implementation of the original agreement dated 21st May, 1990. The said writing dated 26th January, 1991, for sale of the said vessel for US $ 16 million was made subject to passing of a board resolution by the board of directors of the sellers as well as by the board of the buyers by 5th February, 1991. On 5th February, 1991, a resolution was in fact passed by the board of directors of the first respondent-company and necessary intimation thereof was also given to the foreign buyer of the said vessel by telex as well as a letter. The prayers made in the company 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 all times, inter alia, include nominees of Deepak Fertilisers. At all material times, the board of directors consisted of four nominees of financial institutions, i.e., respondents Nos. 2 to 5, three nominees of the Sawhney group, i.e., respondents Nos. 6, 9 and 10 and two nominees of Deepak Fertilisers, i.e., respondents Nos. 7 and 8.
Before I refer to the submissions of learned counsel on either side and deal with the same and also refer to the documents and facts at some length, it is necessary to set out certain admitted facts, right at the outset. The said admitted facts which are required to be highlighted, at the outset, are as under :
"(1) The agreement dated 21st May, 1990, was arrived at with the full consent of the Sawhney group and was signed by respondent No. 6 on behalf of respondent No. 1. The said agreement was duly approved by the board of directors of the first respondent-company without any protest from any of the directors.
(2) Application for approval of the sale of the vessel made to the Director-General of Shipping was signed by the vice-president of the first respondent-company and it is nobody''s case that the said application contains any misstatement.
(3) The valuation reports forwarded by the first respondent-company to the Director-General of Shipping indicated that the price of US $ 16 million was a fair price. This statement was supported by two of the valuation reports forwarded by the first respondent to the Director-General with the said application.
(4) In the said application for approval of the sale of the vessel, several difficulties were pointed out by the first respondent-company in operating the said vessel and the factual justification was put forward for making of the business decision by the company to dispose of the said vessel in the interest of the company with elaborate details.
(5) The first respondent-company was unable to pay the amount of interest to the foreign bank, i.e., ANZ Singapore Ltd. which had fallen due in the month of March, 1990. The said bank had advanced a term loan of US $ 9.6 million to the first respondent-company on guarantee and indemnity given by Indian bankers. The first respondent-company approached the Indian Bank to make the said payment and debit the first respondent in this behalf.
(6) By a letter dated 31st December, 1990 (exhibit-8), to the affidavit of Mr. V. Ramanan (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 first respondent-company. The said agreement was also signed by respondent No. 6 on behalf of respondent No. 1 and the said agreement is obviously liable to be considered as an agreement in implementation of the agreement of sale dated 26th January, 1991, duly authorised by the board resolution dated 5th February, 1991. It follows that respondent No. 6 did so with the consent, knowledge and authority of all members of the Sawhney group.
7. On 27th June, 1990, the board of directors of respondent No. 1, under the chairmanship of Mr. Prem Sawhney, passed the following resolution :
"Resolved that the company do sell its vessel Boss Vishwa at a price of US $ 16 million and Mr. Prem Sawhney and Mr. Gurinder Kahlon, be and are hereby severally authorised to do all such acts, deeds and things as may be necessary to give effect to this resolution, including execution of documents of transfer.
Further resolved that the sale proceeds of US $ 16 million, when received, be appropriated with the consent of ICICI - the lead financial institution."
8. In the meeting of the board of directors dated 28th December, 1990, attended by six directors including Mr. Prem Sawhney and Mr. Gurinder Kahlon, it is recorded as under :
"The Chairman briefed the directors on the discussions at the Management Committee Meetings on the proposed sale of Boss Vishwa. He informed the directors that the Management Committee had decided to proceed with the proposed sale, provided that the company gets a net realization of US $ 16 million. The Chairman then briefed the directors about the negotiations being carried out with the buyers. After a discussion, the status was noted by the board. During the course of discussions, Shri Gurinder Kahlon highlighted the reasons which had compelled the company to initiate the sale in the first place and subsequent changes in the circumstances. The Chairman said that the resolution to sell Boss Vishwa had already been passed and there was no need to pass any further resolution."
The Sawhney group is a willing party to this resolution. The resolution was unanimous.
9. The notice dated 28th January, 1991 in respect of the board meeting dated 5th February, 1991, reads as under :
"A meeting of the board of directors will be held at 15.30 hrs. on Tuesday 5th February, 1991, at the registered office of the company.
The agenda papers will be sent to you shortly ..."
10. 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.
11. 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 Bank, New York, U.S.A., by debiting our account with your goodselves.
This overdrawn amount would be met from the sale proceeds of the vessel Boss Vishwa.
Kindly do the needful and oblige."
Thus, it would be clear that, even by this letter, the first respondent induced the bank to remit the amount of interest payable to ANZ Singapore on the representation that the overdrawn amount would be met from the sale proceeds of the said vessel.
12. I have heard learned counsel for the parties at some length. I must state that prima facie there are no equities in favour of the petitioners. Even the maintainability of the petition is doubtful. I have, however, decided to deal with the contentions urged on merits and record a prima facie finding on each of the grounds of challenge urged in the petition. The grounds of challenge not to be found in the petition but evolved during the course of arguments will have to be ignored. In a petition under sections 397 and 398 of the Companies Act (1 of 1956), all material facts must be set out in the petition itself and allegations of fraud, coercion, mala fides, if any, must be supported by particulars.
13. Mr. K. S. Cooper, learned counsel instructed by Arun Sakpal and Co., argued on behalf of the first respondent-company. Mr. Cooper also made submissions on behalf of respondent No. 3, a director, nominated by one of the financial institutions and, in this capacity, he was instructed by Messrs. Amarchand Mangaldas, solicitors. An objection was raised on behalf of the petitioners and on behalf of the supporting respondents that Arun Sakpal and Co., did not have the requisite authority in law to represent the company and had, accordingly, no authority to brief learned counsel to appear on behalf of the first respondent-company. This objection will have to be viewed in the context of the peculiar facts of this case and not too theoretically. The Sawhney group represents 95 per cent. of the shareholding of the company and is in substance the petitioner. The substantial challenge in this petition is to the board resolution dated 5th February, 1991. In the Board meeting dated 5th February, 1991, seven directors were present. Four of the directors who were representatives of financial institutions, i.e., respondents Nos. 2 to 5, supported the resolution in connection with the sale of the said vessel in terms 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.
14. 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 meetings. When the concerned board members who are nominees of public financial institutions came to know about this litigation, some of them decided to engage solicitors on behalf of the first respondent-company to support the decision which was taken in the board meeting dated 5th February, 1991. The appearance of Arun Sakpal and Co. is supported by respondents Nos. 3, 8 and Mr. Ramanan, nominee of the Indian Bank on the managing committee. Arun Sakpal and Co. have filed appearance on behalf of the first respondent-company at the instance of these three persons in good faith. There is some lacuna in the procedure followed. It is for the interested parties to request the board of directors of the first respondent-company to pass the necessary resolution and for the board to take its own decision. The ultimate authority in the matter is the board. For the moment, the contention urged is kept open for being considered at the final hearing of the petition. The preliminary contention urged by the petitioners is of no practical consequence as Mr. Cooper is also briefed by the advocates on record for respondent No. 3 and there is no lacuna whatsoever in this behalf.
15. I must state that I will have to restrict my prima facie enquiry to the grounds set out in paragraph 12 of the petition and I cannot allow the parties to travel beyond the petition and reply to the contentions urged in the petition. It has been submitted that the impugned resolution dated 5th February, 1991, is assailable by the petitioners as it could not have been passed in the absence of prior consent of Deepak Fertilisers in view of the clause in the consent terms that the company shall not enter into any long-term or abnormal contract or undertake any obligation whatsoever except such as are in the usual, necessary, ordinary and proper course of its business or enter into any capital transaction either as tender/purchaser without the prior written consent of the said party. At the board meeting dated 5th February, 1991, respondent No. 7 had opposed the said resolution dated 5th February, 1991. At the hearing, Mr. J. B. Chinai, learned counsel for respondents Nos. 7 and 8, has submitted to the orders of the court. In other words, respondents Nos. 7 and 8 have no particular objection or contention if the impugned sale is allowed to go through. It is not possible to accept the ground of challenge 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.
16. 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 u/s 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, after hearing learned counsel for some time, and after having gone through the authorities and relevant provisions of the Act with the assistance of learned counsel, I have come to the prima facie conclusion that section 293(1)(a) of the Act is not at all attracted to the facts of this case and no interim relief of the kind sought can be granted at the instance of the Sawhney group which was a willing consenting party to the transaction till recently. In my opinion, the contention urged is not even reasonably or fairly arguable. If, however, under law, the board has no power to sanction the sale of the vessel and it is a mandate of law that the sanction of the general body must be obtained before any such transaction is concluded, the petitioners may succeed notwithstanding the lack of equities on their side.
17. The expression "undertaking" has not been defined in the Act. Before I refer to the dictionary meanings and the authorities cited on the subject, it is desirable to reproduce the section. Section 293(1)(a) of the Companies Act (1 of 1956) reads as under :
"293. (1) The board of directors of a public company, or a private company which is a subsidiary of a public company, shall not, except with the consent of such public company or subsidiary in general meeting, -
(a) sell, lease or otherwise dispose of the whole, or substantially the whole of the undertaking of the company, or where the company owns more than one undertaking, of the whole or substantially the whole, of any such undertaking,".
Thus, the Companies Act, 1956, restricts the powers of the board, by the above-referred provisions, to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company.
18. In my judgment, the expression "undertaking" used in this section is liable to be interpreted to mean "the unit", the business as a going concern, the activity of the company duly integrated with all its components in the form of assets and not merely some asset of the undertaking. Having regard to the object of the provision, it can, at the most, embrace within it all the assets of the business as a unit or practically all such constituents. If the question arises as to whether the major capital assets of the company constitute the undertaking of the company while examining the authority of the board to dispose of the 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.
19. 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 the official liquidator of the company under liquidation and a secured creditor who was the mortgagee in respect of practically all the assets of the company and the question arose as to whether the security created was in respect of the "undertaking" and was liable to be treated as void for want of resolution of the general body of the company. It was held by the court that section 293(1)(a) of the Act was not applicable. During the course of the judgment, the learned judge referred to the meaning of the expression "undertaking" given in Webster''s Dictionary as under (page 484) :
"An undertaking, according to Webster''s Dictionary, only means something that is undertaken or a business, work or project which one engages in or attempts, or an enterprise."
20. This judgment was approved by the Division Bench of the same High Court in International Cotton Corporation P. Ltd. v. Bank of Maharashtra [1970] 40 Comp Cas 1154.
21. A somewhat similar question arose in a different context in the case of
"In reality the undertaking is a complete and complex weft and the various types of business and assets are threads which cannot be taken apart from the weft."
22. It appears that the undertaking means a "unit", a business or a project. Each factory of a company may be considered as a separate undertaking. In the above-referred case, the Supreme Court was considering the meaning of the word "undertaking" as used in the Bank Nationalisation Statute of 1969. The above-referred observation, though not directly an interpretation of section 293(1)(a) of the Act is of some assistance in finding out the true meaning of the word "undertaking" used in section 293(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 carrying on its business with the help of the other two vessels. The company itself was a party to the transaction in respect of the disposal of one of its vessels in the ordinary course of its business for the reasons stated in the application seeking approval of the Director-General of Shipping signed by its vice-president. If the company had owned only one vessel and the result of the sale of the said vessel had been to wind up the company or to wind up the business of the company in entirety or substantially, different criteria would have applied. This is a case of a business decision taken by the board of directors of the company as far back as on 21st May, 1990, in respect of sale of one of its assets which was lying idle in respect whereof operational expenses were mounting. The various reasons given by the first respondent itself in the viability report and in the justification put forward in the application made to the Director-General of Shipping for approval of the sale of the vessel cannot be ignored while considering the question as to whether one of the three vessels by itself, without anything more, can be considered as an undertaking. It is impossible for me to treat merely one of the assets of the company as an "undertaking". Several judgments have been cited by Mr. Zaiwala on behalf of the petitioners as well as by Mr. Cooper on behalf of respondents Nos. 1 and 3 under the Industrial Disputes Act, 1947, where the question arose as to how the expression "industrial undertaking" was to be interpreted in industrial law. Mr. Zaiwala relied on the judgment of our High Court in the case of National Union of Commercial Employees v. M. R. Meher, AIR 1960 Bom 22 , and the judgments of the Supreme Court in
23. Mr. S. D. Parekh, learned counsel appearing 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 u/s 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 held in this case that section 293(1)(a) did not apply to the proposed sale of the Dankuni unit of the company as it could not be considered as an undertaking because of its having remained closed for more than five years. With great respect to the honourable Division Bench of the High Court of Calcutta, I am unable to persuade myself to agree with this part of the enunciation of law. I respectfully differ. In my humble view, section 293(1)(a) makes no distinction whatsoever between a running undertaking and a closed undertaking. It is, however, not necessary to pursue this discussion further as having regard to the facts of this case, even if the vessel under sale constituted about 50 per cent. of the capital asset of the first respondent company acquired in June, 1989 (the company having been incorporated in November, 1982), it is not possible for me to record even a prima facie finding to the effect that the transaction amounts to sale of the undertaking within the meaning of section 293(1)(a) of the Act.
24. Mr. Aspi Chinai, learned counsel appearing for respondents Nos. 9 and 10, invited my attention to the meaning of the word "undertaking" from Words and Phrases Legally Defined by Butterworths, second edition, pages 240-241. The relevant extract from the various meanings of the expression "undertaking" given therein relied on by learned counsel reads as under :
"Australia - ''undertaking'' is a word of variable meaning ... Basically the idea which it conveys is that of a business or enterprise ... The word ''undertaking'', like the word ''business'' ... will commonly embrace, when used dispositively, the property or some property which is used in connection with the undertaking, and it may be too, the debts and liabilities, or some debts and liabilities, which have arisen in relation thereto."
25. For the sake of brevity, I am not extracting all the meanings of the expression "undertaking" given in the said standard work.
26. I am in agreement with the meaning given in the above standard work to the effect that an undertaking means a business or an enterprise. It is, however, not possible for me to agree that the word "undertaking" as used in section 293(1)(a) of the Act can mean or embrace within itself even one of the several capital assets used by the owner in connection with the undertaking. To this limited extent, I disagree, having 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.
27. 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 anunder valuation . It is alleged that the foreign buyer himself had forwarded a valuation certificate dated 1st October, 1990, (a copy whereof is annexed as exhibit ''G'' to the petition) valuing the vessel at US $ 20-22 million. It is contended that an important national asset is likely to be lost by the first respondent-company and the impugned sale is not for the benefit of the company and not in the ordinary course of the business of the company, but with a view to oblige the bank and the financial institutions. The entire superstructure of the allegation appearing in paragraph 12(c) of the petition is made on the footing that the court ought to accept the valuation report dated 1st October, 1990, as the correct report. The first respondent-company acquired the vessel in question for US $ 12 million. The agreement dated 21st May, 1990, was ultimately crystallised for the price of US $ 16 million. Along with the application for approval made to the Director-General of Shipping, two valuation reports forwarded by the company valued the vessel at US $ 15.50 and US $ 15 millions respectively. The Director-General of Shipping granted his approval for disposal of the vessel at the price of US $ 16 million. As far as the report dated 1st October, 1990, is concerned, I must refer to the affidavit of Mr. Peter Plint, Solicitor of London, who has filed the said affidavit on behalf of the foreign buyer. It appears from the contents of the said affidavit that, by letter dated 14th March, 1991, Mr. Jon Skabo of Jan Sundt A/S has clarified that the 1st October valuation was given on the basis of the vessel being in a fully operable condition, having satisfied all classification society and Lloyds Register requirements. It is stated in the said affidavit that in her present condition on "as is where is" basis at Bombay, the vessel is liable to be valued at a price between US $ 15.5 - US $ 16.5 million. Under the terms of the agreement dated 21st May, 1990, the first respondent-company had agreed to deliver the said ship at Singapore. Now the sale is on "as is where is" basis and on somewhat different terms beneficial to the first respondent-company. I have gone through the minutes of the management committee of the first respondent-company with the help of learned counsel appearing for the parties. It was the view of the sixth and ninth respondents themselves that the vessel should fetch at least US $ 16 million 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 percent 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 the absence of a statutory prohibition. It is true that Mr. Ramanan is the representative of the Indian Bank on the managing committee. It is true that respondents Nos. 2 to 5 represent financial institutions. It is not possible for me to hold that they have not acted reasonably or fairly or that they have acted fraudulently or mala fide or that they have committed breach of any fiduciary duty. There is no material on record to justify the allegation made.
28. Mr. Aspi Chinai, learned counsel for respondents Nos. 9 and 10, was right in propounding a proposition of law that the directors must look after the interest of the company and even if they are nominee directors of a company, they cannot sacrifice the interest of the company. Mr. Aspi Chinai relied on a judgment of the Privy Council in the case of EBM Co. Ltd. v. Dominion Bank (1937) 7 Comp Cas 448. This principle has no applicability to the facts of this case as no such blameworthy conduct on the part of respondents Nos. 2 to 5 or on the part of the Indian Bank or its nominee is proved to the satisfaction of the court at this prima facie stage.
29. At one of the managing committee meetings, respondent No. 6 was not present. Two of the representatives postponed the consideration of the item of sale of the vessel so that the matter could be fully discussed. There were prolonged negotiations with the buyers and there was hard bargaining and various terms have been evolved for the benefit of the company. As against that, the company has been writing letter after letter to the bank to release more and more funds for the discharge of its various liabilities on the representation that some of these liabilities will be discharged out of the sale proceeds of the vessel. In this state of affairs, can the court hold that the financial institutions or the bank are guilty of mala fides or fraud even if indirectly their interests also are safe-guarded in the sense that out of the sale proceeds of the vessel some of the liabilities of the company are likely to get discharged ? If the sale is with the full consent or with the full deliberations of the Sawhney group and at a fair price, no blame can be attached to the conduct of respondents Nos. 2 to 5 or the Indian Bank. It cannot be forgotten that there is a third party buyer in the picture who is a bona fide third party for value without notice. Mr. Zaiwala, 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.
30. 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 Sawhney group that the board resolution of both sides, namely, the seller-company and the buyer-company, must be made available by 5th February, 1991, and that the entire arrangement was made subject to the said condition. Respondent No. 6 used to keep respondents Nos. 9 and 10 duly informed of the steps taken in relation to the sale of the said vessel as he was a nominee of the Sawhney group on the board and on the management committee without holding any share of the company. It is not the case of respondent No. 9 or respondent No. 10 that they were not made aware of the developments regarding the renegotiation and finalisation of the agreement dated 26th January, 1991, subject to the sanction of the board by 5th February, 1991. In the circumstances, the notice of the meeting had necessarily to be a short notice. Respondent No. 10 received the notice of the board meeting within two or three days of 28th January, 1991. At the material time, respondent No. 10 was at Delhi. Respondent No. 10 ought to have attended the board meeting which was scheduled to be held on 5th February, 1991. Respondent No. 10 could have sent a letter or a telegram expressing his view. Respondent No. 9 was undoubtedly at London. Respondent No. 9 left India for London presumably with a view to negotiate with the new financier and with full knowledge of the meeting. In this context, the directors must have known even in the absence of the agenda that the meeting of the board was convened in an endeavour to comply with the stipulation of the writing/agreement dated 26th January, 1991, to the effect that it was made subject to board resolution. On this aspect, Mr. Cooper, learned counsel for respondents Nos. 1 and 3, has invited my attention to section 286 of the Act, which provides that no notice need be served on a director who is abroad. Having regard to the totality of the facts and after taking an overall view of the matter, I am prima facie satisfied that the decision taken by the majority of the directors at the said board meeting was a bona fide business decision in the interest of the company. The view taken by the majority of the directors was at least one of the two reasonably possible views. Respondent No. 6 representing the Sawhney group supported the transaction evidenced by the writing/agreement dated 26th January, 1991, and in various meetings of the managing committee. Respondent 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.
31. 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
32. Mr. Zaiwala, learned counsel for the petitioners, submitted that a third party foreign financier was willing to provide a bank guarantee to the Indian Bank and provide funds for restructuring of the first respondent-company. I am not concerned in this summons with this aspect. The sale of the vessel arrived at fairly and with the consent of the Sawhney group, financial institutions, Indian Bank, etc., cannot be stopped on a mere expectation of restructuring of the company and additional finance becoming available to the first respondent sometime in future. The fact remains that if interim relief is granted and, subsequently, the petition is dismissed, it would be impossible for respondent No. 1 to compensate the respondents who will suffer irreparable loss by grant of such injunction. The transaction which is being implemented is the very same transaction with variation of some of the terms beneficial to the first respondent-company, to which the Sawhney group was a party. In my judgment, there is no justification for seeking an injunction to stop the sale. Mr. Parekh, learned counsel for the Indian Bank, who has opposed this judge''s summons urged in the alternative that, in case per chance any interim relief is to be granted to the petitioners, the petitioners must be put on terms. It is not necessary to deal with this contention as the petitioners have not made out any prima facie case whatsoever. The hearing of the petition is expedited. Liberty to the parties to apply for a fixed date of hearing after pleadings are completed and the matter is ripe for hearing.
33. Mr. S. D. Parekh, learned counsel for Indian Bank, has tendered a statement showing that 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 Mobilisation
May, 1990. agreement dated
26th January, 1991.
----------------------------------------------------------------------
1. Delivery Singapore Bombay
6/46 1/51
2. Payment Upon delivery at Upon passing Indian
Singapore territorial water
3/45 2/51
3. Price US $ 16 million US $ 16 million
(Addendum No. 2) 2/51
4. Expenses for Seller to pay As is where is
classification unlimited 1/51
liability 6/46
5. Expenses to and Seller to pay As is where is
from dry dock unlimited 1/51
liability
6/46
6. If rudder, etc., found Seller to pay As is where is
to to be broken unlimited 1/51
liability
6/46
7. Classification To be delivered As is where is
certificate with present 1/51
certificate
11/47
8. Under-water parts Inspection at Limited to
Singapore. US $ 100,000
Defects to be to be paid
made good by by seller
seller. 6/53
Liability
of seller is
unlimited
6/46
9. Expenses of taking rig Seller to deliver 1) USD 250,000
from Bombay to at Singapore and buyer to pay
Singapore meet transport
expenses 2) Between
USD 250,000
1/3rd buyer
to pay,
subject to
maximum of
150,000
3) Seller to
bear 2/3rd
of expenses
up to USD
8,00,000
4) Above USD
800,000
buyers to
pay 5/53
----------------------------------------------------------------------
34. Prima facie, learned counsel for the bank, appears to be right in his contention.
35. Mr. Aspi Chinai, learned counsel for respondents Nos. 9 and 10, has invited my attention to letter dated 31st December, 1990 (exhibit 8 to the affidavit dated 14th March, 1991, by Mr. V. Ramanan), and contended that respondent No. 1 suffered at all material times from economic duress caused by the Indian Bank. Mr. Chinai has submitted that respondent No. 1 had no choice but to agree to the sale of the vessel as desired by the Indian Bank as, but for the consent of the first respondent-company to sell the vessel, the Indian Bank would not have extended the Bid Bond already issued in favour of the ONGC and the first respondent would have suffered the risk of losing the multi-core contract awarded by the ONGC to the vessel Boss Prithvi. No such allegation of duress is to be found in the petition. I must, therefore, refuse to examine this ground of challenge. In any event, there is no merit in the contention of learned counsel. Banks and other financial institutions are expected to take bona fide business decisions to safeguard the recovery and/or not to incur further financial commitments except on terms.
36. In paragraph 7 of his affidavit, Mr. V. Ramanan, Zonal Manager of the Indian Bank, has set out that the following amounts were outstanding by the first respondent to the bank on the date of filing of the said affidavit :
(a) Rs. 3.15 crores overdraft account.
(b) Rs. 2.65 crores advance bill facility.
(c) Rs. 1.87 crores paid to ANZ Singapore Ltd. in respect of interest payable by the first respondent-company. In relation to the very same vessel, the ANZ Singapore Ltd. had granted foreign currency loan of US $ 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.
37. In paragraph 7(1) of the said affidavit, Mr. Ramanan has referred to the "Towage" 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.
38. 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 contemplated contract from the ONGC and the business purpose for which the vessel was acquired stood frustrated.
(b) The company was required to spend large amounts for keeping the said vessel in hot stacked condition.
(c) A sum of Rs. 27.64 lakhs was spent merely on repairs and to bring the vessel to the condition where it could be towed. About 5 million US dollars will have to be spent before the vessel could be put to commercial use.
39. Prima facie, the decision to sell the vessel was made by respondent No. 1 with the consent of the mortgagee in good faith and the interest of the company and the allegations of alleged fraud or mala fides are not established.
40. Mr. Zaiwala, learned counsel for the petitioner, has contended that the agreement dated 21st May, 1990, was terminated and the agreement dated 26th January, 1991, must be viewed as a totally new agreement. Mr. Zaiwala has invited my attention to certain correspondence between the parties in support of his contention. In my judgment, it is not necessary to probe into this controversy and I must proceed on the footing that the writing/agreement dated 26th January, 1991, and its contents are prima facie binding on the first respondent-company. Prima facie the same are also binding on the Sawhney group as the said writing/agreement is signed by each of the members of the management committee, including respondent No. 6. Prima facie, I am not prepared to view the said agreement dated 26th January, 1991, as a totally new transaction independently of the transaction dated 21st May, 1990.
41. In the result, the judge''s summons is dismissed with costs as there is neither justice nor any legal merit in the case of the petitioners. Costs to be paid by the petitioners to the contesting respondents in different sets, each set Rs. 3,000.
42. At this stage, Mr. Zaiwala, learned counsel for the petitioners, makes an oral application for passing of an order to the effect that Novel Shipping Inc. (respondent No. 12), the ultimate foreign buyer of the vessel, should be restrained from entering into any transaction of sale of the said vessel with any third party after the sale in favour of the said foreign buyer by the first respondent-company is completed in terms of the writing dated 26th January, 1991, or encumber the same without obtaining prior leave of the court in order to ensure compliance with the ultimate order 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.
43. 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.
44. The petitioners are, however, entitled to some protection for a short time in order to enable them to approach the Hon''ble Appellate Court, if they so desire. Since 15th March, 1991, there has been no order of injunction restraining the completion of the sale and there will be none even now. By its orders dated 15th March, 1991, this court vacated and interim orders dated 13th March, 1991. By its order dated 18th March 1991, this court refused to extend the ad interim relief granted earlier on 13th March, 1991. Novel Shipping Inc., respondent No. 12, are restrained from entering into any transaction of sale of the said vessel Boss Vishwa with any third party or encumber the same without obtaining prior leave of the court. The sale of the said vessel in favour of respondent No. 12 may be completed in terms of the writing/agreement dated 26th January, 1991. This order shall be operative up to 12th April, 5 p.m. In case the petitioners or the supporting respondents file any appeal, the petitioners and the supporting respondents shall give 48 hours'' notice to the learned advocates for the contesting respondents.
45. Mr. Kapadia, learned counsel for respondent No. 12, invited me to impose a condition on the petitioners and the supporting respondents to the effect that the petitioners and the supporting respondents must co-operate with respondent No. 12 in the matter of sailing of the vessel and completion of the sale. It is reasonably expected that the petitioners and the supporting respondents shall not obstruct the sale or sailing of the vessel unless the sale itself is stayed by an order of the Hon''ble Appellate Court. No direction in this behalf appears to be necessary or feasible.
46. Mr. Kapadia, learned counsel for respondent No. 12, makes application for a direction to the effect that respondent No. 12 should be allowed to create an encumbrance in favour of its bankers, NMB Postrank group, N. V. Rotterdam. Respondent No. 12 cannot be permitted to create such an encumbrance unless the bank is willing to give a suitable undertaking to abide by the ultimate orders of this court or of the appeal court or is put on some terms whatever deemed fit keeping in mind the objective of providing an opportunity to the petitioners and the supporting respondents to test this order in appeal, if so desired. Liberty to respondent No. 12 to make the necessary application in this behalf for permission of the court to create the said encumbrance on affidavit without taking out a judge''s summons, after 24 hours'' notice to the petitioners.
47. On Mr. Zaiwala''s application, Judge''s Summons No. 88 of 1991 is adjourned for two weeks.
