An agreement for the sale of shares is not illegal and unenforceable, as it is not contrary to section 293(1)(a) of the Companies Act, 1956, if the agreement does not contemplate the sale of a substantial part of any of the defendants' undertakings.

Headnote:
SPECIFIC PERFORMANCE - AGREEMENT FOR SALE OF SHARES - INJUNCTION - RESTRAINING DEFENDANTS FROM DISPOSING OF SHARES - BALANCE OF CONVENIENCE - PRIMA FACIE CASE - SECTION 293(1)(A) OF THE COMPANIES ACT, 1956 - SECTION 372 OF THE COMPANIES ACT, 1956 - SECTION 13 AND 16 OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 - INTERPRETATION.
Fact of the Case:

Plaintiffs and defendants entered into an agreement for the sale of shares of Kissan Products Ltd. and Merryweather Limited. The defendants agreed to transfer to KPL 100% shareholding of MW held by them and their subsidiary, HL, and the Food Division of HL, including the Bhandup plant. The plaintiffs paid a sum of Rs. 3,42,50,000/- as earnest money. The defendants represented to the plaintiffs that they were arranging for necessary application in Form 371 of section 269 VC of the Income-tax Act for securing the transfer of the Bhandup factory from HL to KPL. The plaintiffs learnt that the defendants were negotiating with another company, Nestle India Ltd, for transfer or sale of the Food Business and transfer of 10,712 shares of KPL to them as incidental thereto. The plaintiffs filed the present suit for specific performance of the agreement and took out a draft notice of motion for interim reliefs.
Finding of the Court:

The Court held that the plaintiffs had made out a prima facie case for grant of ad-interim reliefs. The balance of convenience was in favour of granting the ad-interim reliefs. The Court granted an ad-interim order restraining the defendants from doing anything or taking any steps which would be contrary to or inconsistent with the fulfillment of their obligations under the Agreement dated 31st July, 1991, and prejudicial to the rights of the plaintiffs thereunder.
Issues: Whether the agreement was illegal and unenforceable, as it was contrary to section 293(1)(a) of the Companies Act, 1956. Whether the agreement was illegal and unenforceable, as it was in breach of the provisions of section 372 of the Companies Act, 1956. Whether the contract itself indicated the consequences which would follow the defendants' failure to perform their obligations. Whether the contract was vague and incapable of being enforced, as the consideration to be paid, the purchase price of shares agreed to be sold, was never finalized. Whether any specific performance of the agreement would amount to a direct interference in the management and internal affairs of KPL, Hl and MW, which are neither parties to the agreement, nor to the suit. Whether there was any averment, much less any material, to show that, though not parties to the contract, KPL, HL and MW had consented to or confirmed the transaction embodied in the Agreement dated 31st July, 1991. Whether the agreement was illegal, as it was contrary to the provisions of section 13 and 16 of the Securities Contracts (Regulation) Act, 1956. Whether the suit for specific performance, at least at this stage, was untenable, as the conditions requisite for complying with section 372 of the Companies Act had not been fulfilled, and therefore, the contract cannot be specifically enforced at this point of time and hence, no interim relief should be granted.
Ratio Decidendi: The Court held that the agreement was not illegal and unenforceable, as it was not contrary to section 293(1)(a) of the Companies Act, 1956. The Court also held that the agreement was not illegal and unenforceable, as it was not in breach of the provisions of section 372 of the Companies Act, 1956. The Court further held that the contract was not vague and incapable of being enforced, as the consideration to be paid, the purchase price of shares agreed to be sold, was finalized. The Court also held that any specific performance of the agreement would not amount to a direct interference in the management and internal affairs of KPL, Hl and MW, which are neither parties to the agreement, nor to the suit. The Court further held that there was an averment, much less any material, to show that, though not parties to the contract, KPL, HL and MW had consented to or confirmed the transaction embodied in the Agreement dated 31st July, 1991. The Court also held that the agreement was not illegal, as it was not contrary to the provisions of section 13 and 16 of the Securities Contracts (Regulation) Act, 1956. The Court further held that the suit for specific performance, at least at this stage, was not untenable, as the conditions requisite for complying with section 372 of the Companies Act had been fulfilled, and therefore, the contract could be specifically enforced at this point of time and hence, interim relief could be granted.
Final Decision: The Court granted an ad-interim order restraining the defendants from doing anything or taking any steps which would be contrary to or inconsistent with the fulfillment of their obligations under the Agreement dated 31st July, 1991, and prejudicial to the rights of the plaintiffs thereunder.

JUDGMENT - B.N. SHRIKRISHNA, J. :---By this notice of motion, the plaintiffs have sought an injunction to restrain the first defendants from in any manner disposing of, alienating, transferring, encumbering or selling, 10.712 shares of the company, known as "Kissan Products Ltd." and 3,600 equity shares of Merryweather Limited. There is also a prayer that the first defendant-company be directed to carry out certain acts as detailed in prayer (c), pending the bearing and final disposal of the suit. The suit is for specific performance of an Agreement dated 31st July, 1991, between the plaintiffs and the first defendants.

2. The first defendants hold 10,712 equity shares of the face value, if Rs. 100/- each, comprising 67% of the paid-up and subscribed capital, of Kissan Products Ltd., (hereinafter referred to as 'KPL') and 3,600 equity shares of the face value of Rs. 100/- each, comprising 90% of the paid-up equity share capital, of Merryweather Limited (hereinafter called 'MW'). The balance of 400 equity shares, comprising 10% of the paid-up equity capital, of MW is held by another company Herbertsons Ltd. (herein after called 'HL'), HL is a subsidiary of the first defendants. HL owns and controls a Food Division comprising a plant situate at Bhandup in Bombay, where food products are manufactured. KPL also holds 10% of the share capital of another company, Nepal Beverages and Food Products Ltd, (NBFPL) and is engaged in manufacture and sale of food products. KPL and MW are owners of several trade marks, which have acquired wide reputation and are valuable.

3. By the Agreement dated 31st July, 1991, the first defendants agreed to sell their 'Food Division' to the plaintiffs. The sale was to be achieved in the following manner :-

(i) The first defendants undertook to transfer to KPL 100% share-holding of MW held by them and their subsidiary, HL.

(ii) The first defendants also undertook to transfer to KPL the Food Division of HL, including the Bhandup plant of the going concern, free from all liens, charges and encumbrances.

(iii) After the aforesaid had been achieved the first defendants agreed to sell to the plaintiffs, as incidental to the sale of the "Food Business" of the first defendants, 10,712 equity shares of KPL of the face value of Rs. 100/ -each, fully paid up.

4. The said shares of KPL were agreed to be sold on spot delivery basis for a consideration of Rs. 6,85,00,000/-. The consideration amount was to be adjusted by increase or decrease in the net worth of KPL at the effective date over the net worth as on 31st March, 1989. The effective date was defined as the date on which the transfer of the said shares to the plaintiffs would be effected.

5. The plaintiffs paid a sum of Rs. 3,42,50,000/-, prior to the execution of the agreement as and by way of earnest money. The agreement acknowledges the receipt of such earnest money and also provides that one nominee of the plaintiffs would be inducted on the Boards of KPL and MW, to facilitate understanding the business for eventual take over of the management. This has actually been done, and one nominee of the plaintiffs, Pranab Barua, has been appointed as Additional Director of KPL on 19th August, 1991 and subsequently elected as a Director at the Annual General Meeting held on 26th September, 1991.

6. Detailed manner of ascertaining the net worth, as at the effective date, is provided for in the agreement. The agreement also provides for the complete list of the trade marks owned by KPL, MW and HL. It is specifically agreed by Clause 8 correspending the completion of the final details, the first defendants would ensure such check are kept alive, renewed and protected, and no rights or liens accruse in respect of the trade marks in favour of any third party.

7. Clause 9 of the agreement provides that, In the interregnum between the date of the agreement and the completion of the sale and purchase of the shares, the first defendants shall ensure and procure that KPL, MW a

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Judicial Analysis