L.M.L. Limited vs Saraswati Trading Company ...
1995 Latest Caselaw 811 Del

JUDGMENT

S.K. Mahajan, J.

(1) The Lml Limited is a company engaged in manufacturing of scooters. A proposal for conversion of the company into a joint venture of the Indian Promoters and Piaggio was prepared and placed before the financial institutions and banks and more particularly to the Industrial Finance Corporation of India. Lml Fibres and Prakati Synthetics Limited (PSL) were the subsidiary companies of Lml Limited. Lml Limited - the plaintiff No.1 also had a fibre division besides the main business of manufacturing of scooters. The proposal of the plaintiff No.1 company for conversion of the company into a joint venture was approved by the Industrial Finance Corporation of India by its letter dated 13th August, 1990 on the terms and conditions contained in the said letter. It appears at the relevant time and for sometimes even thereafter defendant No.4 continued to be a Director of the plaintiff No.1. The institutions and banks also conveyed approval to the proposal for transfer/sale of L.M.L. Fibres Limited to Shri Sitaram Singhania, defendant No.4 and/or his nominee and transfer of ownership in Prakati Synthetics Limited in favor of L.M.L. Fibres Limited on the following lines : -

We also hereby convey approval, in principle, on behalf of the Institutions/Banks to the proposal for transfer/sale of Lmlf to Shri Sitaram Singhania and/or his nominees and transfer of ownership in Psl in favor of Lmlf on the following lines : - i)The consideration/transfer price in respect of LMLF/PSL shall be Rs.7,103 lakhs. ii)The consideration/transfer price shall be paid/amortised in the following manner : - Rs.in Lakhs Equity share capital to be subscribed by Shri Sitaram Singhania and/or his nominees 1400.00 Transfer/reassignment of Rupee Loans sanctioned by the Institutions/Banks in connection with indigenisation Programme/Refund Assistance from Lml to Lmlf Institutions 2018.00 Banks 981.00 2999.00 Balance consideration money to be converted into unsecured loans and payable to Lml over a period of 7 years in 28 quarterly Installments 2704.00 7103.00

(2) As a consequence to the said arrangement, the amount of Rs.2,704 lakhs as mentioned in this letter of 13th August, 1990 was the balance consideration money which was payable by L.M.L. Fibres Limited to Lml for transfer to it of fibre divisions by LML. This amount of Rs.2,704 payable by L.M.L. Fibres Limited to Lml as part of sale consideration/transfer price was to comprise of two components, namely, Rs.9.45 crores which was interest free and was to be repaid from out of the sale proceeds of the public issue to be made by L.M.L. Fibres Limited and the balance Rs.17.59 crores was to carry interest at the rate of 12.5% p.a. w.e.f. 1st September, 1990. The dispute in the present case is confined to the amount of Rs.9.45 crores which was interest free and was to be repaid from out of the amount of the public issue to be made by L.M.L. Fibres Limited. Three Memorandum of Understandings were entered into between Lml, L.M.L. Fibres Limited, Sitaram Singhania and Prakati Synthetics Limited. Presently, we are concerned with the third Memorandum of Understanding dated 17th August, 1990. This Memorandum of Understanding was subject to approval of the Industrial Finance Corporation of India and the Board of Directors of Lml, L.M.L. Fibres Limited, Prakati Synthetics Limited and after approval it was to be a binding agreement between the parties. Defendant No.4 had joined this Memorandum of Understanding in confirmation of the liabilities/obligations agreed and undertaken by L.M.L. Fibres Limited and Prakati Synthetics Limited. The amount of Rs.9.45 crores mentioned above was to be paid by L.M.L. Fibres Limited to Lml towards part payment and satisfaction of the aforesaid total liability, from out of sale proceeds of a public issue of 94,50,000 equity shares of Rs.10.00 each fully paid up to be made on or before 31st March, 1992. It is the admitted case of the parties that L.M.L. Fibres Limited did not raise public issue and consequently 94,50,000 equity shares of Rs.10.00 each were not issued resulting in non-receipt of the amount of Rs.9.45 crores by Lml from L.M.L. Fibres Limited. It is also mentioned in this Memorandum of Understanding that this amount of Rs.9.45 crores shall remain secured by a personal guarantee of Sitaram Singhania, the confirming partner.

(3) On 17th August, 1990 itself a letter was written by Saraswati Trading Company - defendant No.1 to plaintiff Nos.2 & 3 and defendant No.4. Saraswati Trading Company Limited is a company in which defendant No.2 holds 90% shares. Defendant No.2 is the father-in-law of defendant No.4. Defendant No.1 was at the relevant time holding 20,46,529 equity shares in the plaintiff No.1 company. On the terms and conditions which had been entered into between the parties, it appears that the companies which were held by and in which plaintiff Nos.2 & 3 and defendant No.4 had controlling shares, were being reconstituted. As a result of reconstitution while the fibre divisions of Lml were given to defendant No.4, the said defendant in turn had agreed to ensure the management stability and smooth working of the plaintiff No.1 company. It was in this background that defendants 1 and 2 in letter dated 17th August, 1990 wrote to plaintiff Nos.1 & 2 and defendant No.4 that with a view to ensure the management stability and smooth working of the company and to remove any apprehension from their side, they were glad to confirm that they will abide by the terms and conditions in respect of the aforesaid holdings of 20,46,529 equity shares in the company, the terms and conditions as have been contained in the said letter. It was also agreed that voting rights in respect of the aforesaid shares was to be exercised jointly by defendant No.4 or his nominee, a nominee of Sitc and Goldrock Investments Limited and a nominee of Piaggio of Italy. Pursuant to this understanding, defendant Nos.1 and 2 also executed a power of attorney constituting defendant No.4, Mr.D.K.Singhania, nominee of Sitc and Goldrock Investments Limited and Mr.Ashok C Pratap a nominee of Piaggio of Italy to act jointly as the true and lawful attorneys to exercise voting rights in respect of aforesaid shares at all the meetings of the company. It was further agreed that they intended to make specific investments in L.M.L. Fibres Limited and for purposes of making such investment, defendant Nos.1 and 2 stated that they will have a right to sell the whole or any part of the aforesaid equity shares in L.M.L. Limited to the extent they were to be utilised for repayment of 9.45 crores or any part thereof provided that the sale was in accordance with the procedure specified in the said letter dated 17th August, 1990. In terms of the said letter, the shares which were proposed to be sold were in the first instance to be offered to Sitc, Goldrock Investments Limited and Piaggio in the ratio of 34%, 16% and 50% respectively and such sale was to be made at average of the closing rates of the shares of L.M.L. Limited as quoted in the stock exchange at New Delhi for the immediately preceding 14 working days of the Delhi Stock Exchange before the date of offer. The offeree or its nominee was entitled to accept the offer and purchase the shares so offered or any part thereof at the offered price within seven days and the amount was to be deposited in terms of the said letter. It is further stated in the said letter that notwithstanding anything contained therein, on 31st March, 1992 a sum of Rs.9.45 crores or any part thereof remaining unpaid by L.M.L. Fibres Limited to Lml, then and in such an event, defendant Nos.1 and 2 agreed and undertook to sell in accordance with the procedure specified in paragraph 2 of the said letter, such shares as may be required to pay the amount then outstanding towards the unpaid sale consideration of Rs.9.45 crores.

(4) Subsequent to the writing of said Memorandum of Understanding and the letter dated 17th August, 1990, defendant Nos.1 and 2 acquired additional 6,82,177 shares being the rights shares offered by the company and w.e.f. 18th July, 1991 defendant Nos.1 and 2 were the recorded holders of 27,28,706 shares in the plaintiff No.1 company. On L.M.L. Fibres Limited having failed to make payment of the aforesaid amount of Rs.9.45 crores by 31st March, 1992 the plaintiffs filed the present suit for a declaration that 27,28,706 equity shares of plaintiff No.1 and belonging to defendant No.1 were validly charged and constituted a security for payment to the plaintiff No.1 of a sum of rs.9.45 crores with interest thereon and the aforesaid security and charge be enforced by or under the decree and directions of the Court by sale of the said shares. Grant of permanent injunction restraining the defendants from alienating, transferring, creating any charge or encumbering or otherwise dealing with said shares or exercise voting rights therein have also been prayed in the suit.

(5) Defendant Nos.1 and 2 have filed written statement, while no written statement has been filed by defendant Nos.3 and 4. Instead defendant No.3 has filed an application under Section 15 and 16 read with Section 22 of the Sick Industrial Companies (Special Provisions) Act 1985 as amended by the Sick Industrial Companies (Special Provisions) Amendment Act (12) of 1994. Defendant No.3 by way of said application states that the said defendant had become a sick industrial company and a reference to that effect has already been made to the Board for Industrial and Financial Reconstruction (In short BIFR) for determining measures to be adopted with respect to defendant No.3. The reference is stated to have been duly acknowledged and registered as case No.32/94 and an order dated 22nd February, 1995 was passed in the said proceedings by the Board of Industrial and Financial Reconstruction taking cognizance of the said reference. In the hearing held on 22nd February, 1995, Company Secretary of plaintiff No.1 company was also present. It is, therefore, submitted that since the reference has been duly registered with Bifr and an enquiry has commenced the provisions of the Section 22 of the Act have become applicable to defendant No.3. In view of this provision no suit for recovery of money or for enforcement of any security against the company or of any guarantee in respect of any loans or advance granted to the company shall lie. The stay of the proceedings before the Court has, therefore, been requested. In its written statement, defendant Nos.1 and 2 have also taken the plea that as the plaintiffs had themselves participated in the proceedings before Bifr, they were aware of pendency of such proceedings and not only that the suit is barred by Section 22 of the Act but the plaintiffs have also not come to the Court with clean hands and have suppressed material facts from the Court. It is stated that ad-interim injunction granted in favor of the plaintiff merits to be vacated for the reasons that the plaintiffs have suppressed material facts from the Court and had not come to the Court with clean hands. The disclosure which the plaintiffs were required to make, according to the defendants, and on account of non-disclosure of which facts the ex-parte order granted in favor of the plaintiffs is liable to be vacated, have been incorporated in paragraph 4 of the preliminary submissions of the written statement.

(6) The contention of the defendants is that letter dated 17th August, 1990 is a communication not even addressed to plaintiff No.1 and was never intended to create any right in favor of any person. It is also contended that this letter will be hit by Sections 13 and 14 of Securities Contract Regulations Act because direct sale of shares is not permissible in respect of company which is listed with the stock exchange and that Memorandum of Understanding dated 17th August, 1990 which was subject to approval of the Ifci stood superseded by the agreement dated 28th December, 1990 which was entered into between the financial institutions and L.M.L. Limited and L.M.L. Fibres Limited.

(7) The first question to be decided is whether the suit is barred by Section 22 of the Sick Industrial Company (Special Provisions) Act. To appreciate the arguments of the parties it will be useful to reproduce Section 22 of the Sick Industrial Company (Special Provisions) Act. "WHERE in respect of an industrial company, an inquiry under Section 16 is pending or any scheme referred to under Section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under Section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956) or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding-up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof [and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans, or advance granted to the industrial company] shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority."

(8) In terms of the provisions of Section 22 of the Act, the suit which is barred is a suit for recovery of money or for the enforcement of any security against the industrial company or of any "guarantee" in respect of any loans or advances granted to the industrial company. In case, the amount sought to be recovered was a loan or advance granted to the said industrial company, the suit will definitely be barred by the said Section. The contention of learned counsel for the plaintiff is that an unpaid sale consideration can never be said to be a loan within the meaning of Section 22 of the Act. It is contended that in terms of the approval given by Ifci by letter dated 13th August, 1990, the total sale consideration of Rs.7,103 lakhs for transfer/sale of L.M.L. Fibres Limited to defendant No.4 and transfer of ownership of Fibre Division of L.M.L. in favor of L.M.L. Fibres Limited, the said company shall be paid by Lml Fibres Limited, the above said amount of Rs.7,103 lakhs. This amount was to be paid in the manner mentioned in the said letter. Out of the said amount, a sum of Rs.27.04 crores was to be converted into unsecured loans and paid to Lml in terms of the said agreement. The said amount of Rs.27.04 crores was comprised of two components. The first component of Rs.9.45 crores was to be repaid from out of the sale proceeds of public issue to be made by Lml by 31st March, 1992 and balance of Rs.17.59 crores with interest at the rate of 12.5% p.a. was to be repaid in installments. The contention, therefore, is that the amount of Rs.9.45 crores which is required to be paid, cannot by any stretch of imagination be said to be a loan or advance granted to the L.M.L. Fibres Limited which is now a sick company and as this amount was neither a loan nor an advance granted to the said company, there was no question of the suit being barred by Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985. He submits that this money being the consideration for transfer of fibre division from plaintiff No.1 to defendant No.3 is not covered by the definition of loan or advances. According to him, it was a consideration which was deferred and a deferred consideration is not a loan. Reference has been made to the Words and Phrases Dictionary volume 25 (a) page 92 to support the contention that a deferred consideration is not a loan. Reference has also been made to Sardar Nichal Singh Vs. Ganesh Dass reported as and Laxmi and Company Vs. I.T Commr. that consideration which is deferred, cannot be said to be a loan. According to him, a statute by which the jurisdiction of the Court is barred must be strictly construed and unless the jurisdiction is not specifically taken away, it cannot be said that by implication the jurisdiction has been taken away. Reference has also been made to page 251 of the 12th edition of Maxwell on interpretation of Statutes.

(9) MR.RAJIV Sahni, Sr.Advocate appearing on behalf of the defendants has drawn my attention to various clauses of the Memorandum of Understandings as well as letter dated 17th August, 1990 to stress the point that in the said letter as well as Memorandum of Understanding it is clearly mentioned that the amount which is now sought to be recovered by way of present suit is unsecured loan. According to him, Memorandum of Understanding is not a binding agreement unless it was approved by the financial institutions and such approval was given only by entering into of the agreement dated 28th December, 1990 which was a multipartite agreement between the financial institutions, the banks, plaintiff No.1 and defendant No.3. He states that though the plaintiff has in paragraph 7 of the plaint mentioned that the time for payment was extended from 31st March, 1990 to 31st December, 1990 but it has not been stated as to how this time is extended. According to him, the extension up to 31st December, 1990 was given by the agreement dated 28th December, 1990. However, submission is that in terms of paragraph 7 of the said agreement, the plaintiff did not have a right to claim the amount till such time the defendant No.3 was able to repay the loan of financial institutions and the banks and according to him, a sum of Rs.29.17 crores was due to the financial institutions and 9.82 crores to the banks which is evident from paragraph 3 of the application bearing IA.No.7440/95. The contention, therefore, is that not only that the suit was barred by Section 22 of Sick Industrial Companies (Special Provisions) Act but was also pre-mature. He has also referred to certain other paragraphs of the plaint to contend that the only dispute which has been raised by the plaintiff in the plaint is not that it is not a loan but whether it was unsecured or secured. It is further contended that as the plaintiffs had not disclosed the fact of signing of the agreement dated 28th December, 1990 and also the pendency of the proceedings before Board for Industrial and Finance Reconstruction, it was a clear case of suppression of material facts and not coming to the Court with clean hands and as such the ex-parte order of injunction granted in favor of the plaintiff was liable to be vacated.

(10) The points involved in the present case are : - 1. Whetherthe amount which is now sought to be recovered from the defendants is unpaid sale consideration or loan and in case it is a loan whether the suit is barred by Section 22 of Securities Contract Regulations Act? 2.Whether the plaintiffs are entitled to stay in respect of entire lot of shares or only in respect of that number of shares by the sale of which the amount of Rs.9.45 crores will be secured ?) Under Section 22 of the Sick Industrial Companies (Special Provisions) Act, no suit or proceedings for enforcement of any guarantee in respect of any loan or advance granted to the industrial company shall lie or be proceeded with further except with the consent of the Board or, as the case may be, appellate authority. The present suit filed by the plaintiffs is for enforcement of guarantee which is alleged to have been given by defendants 1 & 2 for payment of the amount allegedly due from defendant No.3. However, for stay of this suit, it has to be proved that this guarantee was in respect of any loan or advance granted to the industrial company. In case the guarantee given by defendants 1 & 2 was not in respect of any loan or advance granted to the sick company, the present suit can proceed and the provisions of Section 22 of the Act will not apply. The guarantee given by defendants 1 & 2 was pursuant to the memorandum of understanding arrived at between the plaintiffs and defendant No.3. By way of this memorandum of understanding, it was agreed between the parties that in consideration of the transfer of fibre unit of Lml Limited to defendant No.3, a sum of Rs.71.03 crores will be paid by the said defendant to the plaintiffs. Out of the said amount, a sum of Rs.14 crores was to be paid in cash, institutional loans to the extent of Rs.29.99 crores were to be transferred from the plaintiff No.1 company to defendant No.3 and the balance consideration money of Rs.27.04 crores was to be paid in the manner mentioned earlier. The present dispute is only in respect of the amount of Rs.9.45 crores about repayment of which a guarantee had been given by defendants 1 & 2. By means of the said guarantee, the said defendants, in the event of the said Rs.9.45 crores not being paid by defendant No.3 to the plaintiff company on or before 31st March, 1992, had undertaken to sell equity shares held by defendant No.1 in the plaintiff No.1 company. Can this balance sale consideration of Rs.9.45 crores be said to be a loan or an advance granted by the plaintiffs to defendant No.3 company? This is the question which arises for consideration in the present case. A loan is, undoubtedly, a debt but every debt may not be a loan liability. In Bombay Steam Navigation Vs. Commissioner of Income Tax , , it was held that "an agreement to pay the balance of consideration due by the purchaser does not in truth give rise to a loan. A loan of money undoubtedly results in a debt, but every debt does not involve a loan. Liability to pay a debt may arise from diverse sources and a loan is only one of such sources. Every creditor who is entitled to receive a debt cannot be regarded as a lender."

(11) The defendant has placed reliance upon the judgments reported as Shree Ram Mills Vs. Commissioner of Excess Profits Tax, where it was held that an amount which is originally not a loan may, by an agreement between the parties, be treated as a loan. However, in the present case, the question is whether the parties have treated this deferred sale consideration of Rs.9.45 crores as a loan. The answer, in my opinion, is in the negative. I do not find any agreement between the parties whereby they had agreed to treat this deferred sale consideration of Rs.9.45 crores as loan. In Beninson Vs. Shiber, Air 1945 Pc 145, relied upon by the defendant, the purchaser had authorised the builder to borrow some money at his behest to construct flats on the plot of land purchased by him. The builder, on such authorisation from the purchaser, borrowed certain money for construction of flats. It was in these circumstances that the Privy Council had held that the amount borrowed by the builder was a loan. To my mind, the said judgment is not applicable to the facts of the present case. No doubt, in the memorandum of understanding as well as in the agreement dated 28th December, 1990 as well as in the letter of approval dated 13th August, 1990 written by the Industrial Finance Corporation of India, the said amount has been described as unsecured loan. However, merely by describing the said amount as unsecured loan by the financial institutions will not make the same as a loan.

(12) In terms of Section 22 of the Act, this loan must have been granted to the sick company. There is nothing on record to indicate that this amount of Rs.9.45 crores was at anytime granted by any of the plaintiffs to defendant No.3. It appears that the financial institutions had mentioned the said amount to be unsecured loan only for the purpose of ensuring that the institutions had the first charge on the assets of defendant No.3 company irrespective of said amount of Rs.9.45 crores being payable by the said defendant as deferred sale consideration to plaintiff No.1. Perhaps, it was in these circumstances that the plaintiff company insisted upon a guarantee. Defendant No.4 had originally given guarantee for repayment of the loan and defendants 1 & 2 being closely related to defendant No.4 gave the guarantee agreeing to sell their shares to the plaintiff company in case of non-payment of the said amount by the stipulated date by defendant No.3. Prima facie, I am of the opinion that deferred sale consideration cannot be a loan or an advance. In case it is not a loan or an advance granted to the company, the provisions of Section 22 of Sick Industrial Companies(Special Provisions) Act, 1985 will not be applicable, and consequently, the suit is not barred by the said Act.

(13) I am not in agreement with Mr.Rajive Sawhney that till such time defendant No.3 was liable to repay the loan of the financial institutions and the banks, the plaintiff did not have a right to claim the suit amount. It will be useful to quote paragraph 7 of the agreement dated 28th December, 1990 reliance upon which has been placed by the plaintiff. "LML and Lmlf hereby agree and confirm that the part of sale consideration agreed to be payable by Lmlf to Lml in Installments over a period of seven years i.e. Rs.1,759 lakhs and interest thereon, notwithstanding anything to the contrary contained in the deed of conveyance or any other documents or undertaking executed or any understanding arrived at between Lml and Lmlf, shall be subordinated on a year to year basis to the loans of the lenders. Lmlf shall not pay and Lml shall not demand/receive any part of the unpaid consideration or interest thereon so long as any monies remain due and payable by Lmlf to the lenders."

(14) A plain reading of the said paragraph shows that plaintiff No.1 and defendant No.3 had agreed that a part of the sale consideration amounting to Rs.1,759 lakhs and interest thereon was payable in Installments over a period of seven years, notwithstanding anything to the contrary contained in the deed of conveyance or any other documents or undertaking entered into between the parties and such payment shall be subordinated on a year to year basis to the lands of the lenders. Defendant No.3 was not to pay and the plaintiff No.1 was not to receive any part of the unpaid consideration so long as any monies remain due and payable by Lmlf to the lender. In my opinion, paragraph 7 mentions only about the payment of Rs.1,759 lakhs by Lmlf to Lml and the same will not apply to the payment of Rs.9.45 crores which is in dispute in the present case. The sum of Rs.1,759 lakhs was one of the component of the amount of Rs.2,704 lakhs, the second component being the amount of Rs.945 lakhs. In case, it was the intention of the parties that the plaintiff No.1 will not be entitled to receive the said amount of Rs.9.45 crores from defendant No.3 till such time all the amount payable by defendant No.3 to the financial institutions had been paid, there was no difficulty in mentioning the same in paragraph 7 of the said agreement. The amount of Rs.9.45 crores, prima facie, does not appear to have been covered by paragraph 7 of the agreement dated 28th December, 1990 and the suit, therefore, cannot be said to be pre-mature.

(15) The question now remains is whether the plaintiff is entitled to the grant of stay restraining the defendants 1 & 2 from alienating, transferring, creating any charge, encumbering or otherwise, dealing with the aforesaid 27,28,706 equity shares of the plaintiff No.1 company. The argument of the defendants is that there was no concluded contract arrived at between the parties and the memorandum of understanding clearly says that the same was subject to approval of the financial institutions. It is submitted that no such approval has, however, been given by the financial institutions to the memorandum of understanding and, consequently, the only agreement which had been arrived at between the parties was the agreement of 28th December, 1990. Under the said agreement, there is no bar upon the defendants 1 & 2 to deal with the said shares. It is stated that the said guarantee is even otherwise without consideration and the plaintiffs cannot take any benefit of the same. Moreover, letter dated 17th August, 1990 is stated to be a unilateral document and is otherwise void in view of the law laid down in V.B. Rangaraj Vs. V.B.Gopalakrishnan and Ors. reported as .

(16) The defendant No.2 is the father-in-law of defendant No.4. The plaintiff No.1 company was, in fact, earlier being managed by plaintiffs 1 & 2 and defendant No.4. Defendant No.3 and one Prakati Synthetics Limited were the subsidiary companies of plaintiff No.1. Plaintiff No.1 also had a fibre division besides its main business of manufacturing scooters. Plaintiff No.1 company entered into a joint venture with Piaggio of Italy which was approved by the Industrial Finance Corporation of India by its letter dated 13th August, 1990. After approval had been given, the fibre division of plaintiff No.1 company was agreed to be transferred to defendant No.3. Out of the total sale consideration of Rs.71.03 crores, which was agreed for transfer of the fibre division as the consequence of the arrangement entered into between the parties, a sum of Rs.9.45 crores was agreed to be paid from out of sale proceeds of the public issue of defendant No.3 by 31st March, 1992. It was the payment of this amount which was guaranteed by defendants 1 & 2 by their letter dated 17th August, 1990.

(17) Prima facie, I am unable to agree with the contention of learned counsel for the defendants that no approval has been given to the memorandum of understanding dated 17th August, 1990 and as such the letter of guarantee executed by defendants 1 & 2 cannot be enforced. In furtherance of the memorandum of understanding for the sale of the Fibre Divisions of Lml Limited to Lml Fibres Limited. a conveyance deed was executed by Lml Limited on 27th December, 1990 in favor of Lml Fibres transferring the Fibre Divisions to Lml Fibres Limited. In the said deed, a reference has been made as to how the sale consideration was to be paid by Lml Fibres for transfer of the Fibre Divisions to it which also included the amount pof Rs.9.45 crores which is the subject matter of the present suit. The said conveyance deed clearly mentions that this amount was liable to be paid by 31st March, 1992. Even in the agreement dated 28th December, 1990, reliance upon which has been placed by the defendant, it is clearly mentioned that the said agreement was pursuant to the scheme which had been approved by the financial institutions and the bank and the Fibre Divisions of Lml had already been transferred to Lml Fibres by conveyance deed dated 27th December, 1990. I am, therefore, prima facie of the opinion that approval to the said memorandum of understanding had been given by the Financial Institutions and the banks and it was subject to such approval that the deed of conveyance was executed by Lml transferring Fibre Divisions to Lml Fibres on 27th December, 1990. The letter of guarantee dated 17th August, 1990 written by defendants 1 & 2 to plaintiffs 2 & 3 as well as defendant No.3 clearly shows that with a view to ensuring management stability and smooth working of the plaintiff company, the said defendants had agreed to abide by the terms and conditions in respect of their holdings in the plaintiff company. Pursuant to this letter the said defendants also executed a power of attorney nominating, constituting and appointing Mr.Sitaram Singhania and Mr.Deepak Kumar Singhania, joint nominees of Sarvodaya Investment and Trading Company Limited (SITC) and Goldrock Investments Limited (GR) and Mr.Ashok C. Palta nominee of the Piaggio, Italy to act jointly as their attorneys to do all or any of the acts mentioned in the said power of attorney which included the power to exercise voting rights in respect of the shares of the said defendants in the plaintiff No.1 company. Prima facie, I am, therefore, not inclined to agree with the learned counsel for defendant that the said document was only a unilateral letter and cannot be acted upon. In my opinion, the defendants 1 and 2, prima facie, will be bound by the said agreement.

(18) The last contention of the learned counsel for the defendant was that this letter is violative of Securities Contract Regulations Act and is otherwise void in view of the law laid down in the judgment reported as V.B. Rangaraj Vs. V.B.Gopalakrishnan and Ors. reported as . He, therefore, submits that as this contract was entered into between the plaintiffs 2 & 3 and defendants 1 & 2 regarding shares of plaintiff No.1 company, the same is illegal in view of the Sections 14 of the Act. Under Section 2(A) of the Act, a contract means a contract for a relief to the purchase or sale of the securities. In my opinion, the said provisions may not be applicable to the facts of the present case.

(19) In V.B. Rangaraj Vs. V.B.Gopalakrishnan and Ors. reported as , it was held that shareholders right of transfer was only subject to restriction, if any, contended in Articles of Association of the company and any agreement among the shareholders placing restrictions on the right of transfer which was contrary to or inconsistent with the provisions of the articles would not be binding on the shareholders or on the company. In that case there were only two shareholders, they were alleged to have orally agreed that if anyone of them wished to sell his share/shares, he would give the first option of purchase to the members of that branch and only if the offer was not accepted, the shares would be sold to others. The Articles of Association of the said company provided that no new member shall be admitted except with the consent of the majority of the members and on the death of any member, in case, his heirs or nominees are unwilling to become members, such share capital shall be distributed at par among members equally or transferred to any new member with the consent of the majority of the members. On the death of both the shareholders, son of one of the shareholder sold the shares of the deceased to sons of the other shareholders which was stated to be contrary to the oral agreement alleged to have been arrived at between the original directors and it was in that context that the Supreme Court held that any such agreement between shareholders which was contrary to the Articles of Association of the company would not be binding on the company or on the shareholders. In my opinion, the said judgment is not applicable to the facts of the present case.

(20) What has been agreed between the parties in the present case is that in case defendants 1 & 2 intend to sell the shares of the plaintiff No.1 company, they will first offer the same to the companies mentioned in the letter dated 17.8.1990. This letter was issued with a view to ensure management stability of plaintiff No.1 compny. In my opinion, therefore, this cannot be said to be barred by the provisions of aforesaid Act nor can the same said to be void. At this stage, what is sought to be restrained is the sale by defendants 1 & 2 of the shares which they had agreed to sell to the persons mentioned in the agreement for payment of sale consideration of Rs.9.45 crores as mentioned in the said letter.

(21) As I have mentioned above, there was reconstitution of the companies and as a result of reconstitution while the fibre division of Lml was given to defendant No.4, the said defendant in turn had agreed to ensure the management stability and smooth working of the plaintiff No.1 company. The letter of 17th August, 1990 also clearly mentions that "in the interest of ensuring management stability and smooth working of the company and to remove any apprehensions from our side, we are glad to inform that as agreed with you, we shall abide by the following terms and conditions in respect of aforesaid holding of 20,46,529 equity shares in the company". The terms and conditions were that in case of repayment of the aforesaid amount of Rs.9.45 crores if the defendants 1 and 2 were to sell all or any part of the said shares, the same were to offered first to the companies mentioned in the said letter. The purpose of offering the said shares to the companies as mentioned in the said letter was that said shares should not fall in the hands of an outsider who was not connected with the management of the company which may result in the management instability. Such a large lot of shares can never be available in the market and in case the said shares are transferred to a third party, it may result in the instability of the management of the company. In my opinion, therefore, in case the said shares are allowed to be sold, the same may result in management instability of plaintiff No.1 company resulting in irreparable loss and injury to the present management. Balance of convenience will, therefore, clearly lie in favor of the grant of an injunction restraining the said defendants from transferring the said shares to any person other than those mentioned in the letter dated 17th August, 1990. The voting rights in respect of said shares are being exercised by the representatives of the said company, as a power of attorney has already been executed by defendant Nos.1 and 2 in favor of the said representatives. In my opinion, it will not be proper to destabilise the present management of plaintiff No.1 company by allowing defendant Nos.1 and 2 to transfer the shares to a third party. The whole purpose of the said agreement was not only to ensure payment of the aforesaid sum of Rs.9.45 crores but also to ensure the management stability of plaintiff No.1 company.

(22) In view of the above discussions, I hereby restrain defendant Nos.1 and 2 from in any manner transferring, creating any charge, encumbering or exercising voting rights in respect of the aforesaid shares held by them to any person other than M/s.Sarvodaya Investment and Trading Company Limited (SITC), M/s.Goldrock Investments Limited and Piaggio of Italy in the proportion mentioned in the agreement dated 17th August, 1990 till the disposal of the suit.

(23) Any opinion expressed in this order will not affect the merits of the case.