THE HONOURABLE SRI JUSTICE N.V. RAMANA AND THE HONOURABLE SRI JUSTICE K.S. APPA RAO C.M.A. No. 615 of 2011 O r d e r: (Per N.V. Ramana, J.) The appellants, aggrieved by the order dated 07.06.2011 passed by the III Additional Chief Judge, City Civil Court, Hyderabad, allowing the petition in O.P. No. 2599 of 2010, filed by respondent No.1 under Section 9 of the Arbitration and Conciliation Act, 1996, praying to grant injunction restraining it or any person acting for it or on its behalf from removing or shifting or transferring or alienating the “acquired assets” from the premises bearing Plot No. 20, Sy. No. 50, Industrial Development Area, Phase-III, Jeedimetla, Ranga Reddy District, until the completion of arbitration proceedings, filed the present C.M.A. Respondent No.1-company filed the present O.P. stating that they are in the business of manufacturing and distribution of mechanical seals and have proprietary technical know-how and intellectual property for the manufacture of mechanical seals and had been carrying the said business for several years. That respondent Nos. 2 and 3, who promoted respondent No.1-company, entered into tripartite agreement dated 03.09.2008, both in their individual capacity as well as on behalf of respondent No.1-company for selling the assets and business of respondent No.1-company. Respondent Nos. 2 and 3 did not disclose about the entering into either to the Board of Directors or to the shareholders and that it is a void agreement. According to the said tripartite agreement, respondent Nos. 2 and 3 agreed to sell certain assets of respondent No.1-company, including technical know-how and intellectual property for the manufacture of mechanical seals and transfer certain employees to the appellants-company, for Rs.17,20,00,000/-. Out of the said amount, the appellants-company paid an amount of Rs.12,90,00,000/- to them and they have to pay balance amount of Rs.4,30,00,000/- by 03.09.2011. The appellants-company agreed that during the currency of the tripartite agreement, respondent Nos. 2 and 3 shall remain in the employment of the appellants-company and that they will not terminate their services, while respondent Nos. 2 and 3 in their individual capacity agreed that they will not leave their employment before expiry of the tripartite agreement. Respondent Nos. 2 and 3 with a view to make unlawful gain of the balance sale consideration of Rs.4,30,00,000/-, agreed for the payment of the same belatedly, and as the same is not binding on respondent No.1-company, because they have not authorized respondent Nos. 2 and 3, for agreeing to such a clause. When respondent No.1-company objected to the manner in which the matter is being dealt with, respondent Nos. 2 and 3 tendered their resignation, which was accepted by the Board of Directors of respondent No.1-company. Respondent No.1-company, contending that the appellants- company was contemplating to close its unit, as stated above, filed the present petition under Section 9 of the Arbitration and Conciliation Act, 1996, seeking interim measures to safeguard the “acquired assets”, pending disposal of the arbitration proceedings to be initiated by them as per the arbitration clause in the tripartite agreement. The appellants-company filed counter stating that appellant No.1 and appellant No.2 are one and the same with Registered Office at Pune and Branch Office at Jeedimetla, and that the O.P. filed by respondent No.1-company is not maintainable due to lack of jurisdiction because the “acquired assets” are situated outside the jurisdiction of the Court and that the agreement was entered into and the stamp papers were purchased outside the jurisdiction of the Court. That the Directors of respondent No.1-company, who filed the present petition are none other than the spouses of respondent Nos. 2 and 3 and that they in collusion with them filed the present petition. At the time of entering into the tripartite agreement for purchase of the “acquired assets”, they were not concerned with the day to day affairs of respondent No.1-company. The Board of Directors of respondent No.1-company authorized respondent Nos. 2 and 3 to enter into the tripartite agreement. Respondent No.1- company received Rs.12,90,00,000/-, which is 80% of the sale consideration of Rs.17,20,00,000/-, and they will pay the balance sale consideration of Rs.4,30,00,000/- by 03.09.2011. Respondent No.1- company having received 80% of the sale consideration and having benefited out of the tripartite agreement, now cannot contend that they have not authorized respondent Nos.2 and 3 to enter into tripartite agreement and that the conduct of respondent Nos. 2 and 3 is not in conformity with the assurances given by them at the time of entering into agreement. May be respondent Nos. 2 and 3 were suspended for gross misconduct by respondent No.1-company, but respondent No.1- company is bound by contractual obligations. Respondent No.1- company, on the one hand is stating that the tripartite agreement is void, and on the other hand, is seeking recovery of the balance sale consideration. The claim of respondent No.1-company is with mala fide intention to enrich themselves unjustly in violation of Clause 5.2(b) of the tripartite agreement. Thus, respondent No.1-company prayed for dismissal of the O.P. Respondent No. 2 also filed counter stating that he had not acted against the interests of respondent No.1-company. He admitted about the entering into tripartite agreement and payment of 80% of the sale consideration by the appellants-company to respondent No.1- company, and the liability of the appellants-company to pay balance amount of Rs.4,30,00,000/- . He further contended that the appellants-company with a mala fide intention to avoid payment of the balance sale consideration, had terminated him from service and are taking steps to terminate the services of respondent No.3. That himself and respondent No.3 are taking steps to initiate arbitration proceedings by invoking the arbitration clause, and that the appellant-company is taking steps to wind up its operations and remove the assets from the premises. Respondent No.3 adopted the stand taken by respondent No.2 in his counter. The Court below having heard the learned counsel for respondent No.1-company, the learned counsel for the appellants- company and the learned counsel for respondent Nos. 2 and 3, and considering the materials placed by them and the stand taken by the appellants-company that they will not remove the plant, machinery and equipment, specifically mentioned in the asset purchase agreement and in the annexures thereto, granted interim injunction restraining the appellants-company from removing the assets, as noted in the preliminary paragraph of this order. The learned counsel for the appellants-company submitted that the appellants-company purchased the assets of respondent No.1- company as per the asset purchase agreement dated 03.09.2008 by paying 80% of the sale consideration i.e. Rs.12,90,00,000/-, and they have to pay the balance sale consideration of Rs.4,30,00,000/- by 03.09.2011, as provided in clause 5.2 of the agreement. Hence prima facie case and balance of convenience lies in their favour. Respondent No.1-company having received 80% of the sale consideration, its Directors, who are no other than the spouses of respondent Nos. 2 and 3, started the present litigation. He submitted that even though the injunction order restrains the appellants-company from removing the acquired assets, purchased by them under the asset purchase agreement, yet respondent No.1-company is restraining them from removing the other machinery assets of the appellants- company, which they make use of in their day to day working of the company. He further submitted that if they have any dispute with respect to the working of the agreement, respondent No.1-company can initiate arbitration proceedings by invoking arbitration clause 15.13 of the agreement, but without initiating arbitration proceedings, they are stalling the shifting of the other machinery assets, which is causing irreparable loss to them. At any rate, he submitted that the appellants- company have already initiated arbitration proceedings and respondent No.1 and respondent Nos. 2 and 3 can agitate their grievance in the arbitration proceedings. He thus prayed that the impugned order be suspended pending disposal of the C.M.A. On the other hand, the learned counsel for respondent No.1- company admitted receipt of 80% of the sale consideration i.e. Rs.12,90,00,000/-. However, he contended that the sale transaction of the assets of respondent No.1-company has taken place in collusion with respondent Nos. 2 and 3. He submitted that respondent No.1- company has not given any authorization to respondent Nos. 2 and 3 to agree to clause 5.2(b) of the agreement, according to which the balance sale consideration of Rs.4,30,00,000/- will go to respondent Nos. 2 and 3 and not respondent No.1-company. Therefore, to protect their interest, respondent No.1-company has filed the present O.P., and the Court below has rightly allowed the same and no interference is called for therewith by this Court. The learned counsel for respondent No.2 supported the stand taken by the learned counsel for respondent No.1. He admitted that in terms of the agreement, respondent No.1-company has received 80% of the sale consideration. He contended that clause 5.2 of the agreement is not invalid. Relying on the averments made by the appellants-company in the counter-affidavit and additional counter-affidavit, he submitted that the appellants-company have themselves agreed that they will not remove the plant, machinery and equipment mentioned in the asset purchase agreement and its annexures, and as such, no fault can be found with the order passed by the Court below, restraining the appellants-company from removing the “acquired assets”. The learned counsel for respondent No.3 submitted that the appellants-company with a view to avoid payment of Rs.4,30,00,000/- have issued letter dated 12.08.2010 suspending respondent No.3. We have heard the learned counsel for the appellants- company, the learned counsel for respondent No.1-company and the learned counsel for respondent Nos. 2 and 3 and perused the order under appeal. As can be seen from the materials placed before the Court, the Court below initially passed status quo order on 13.12.2010. Thereafter, clarification was sought as to what are the acquired assets that are bound by the status quo order. At that point of time, the appellants-company filed additional counter affidavit dated 09.03.2011, inter alia asserting in para 20 as follows: … if so directed by this Hon’ble Court, these respondents shall not remove plant, machinery and equipment which is specifically mentioned in Asset Purchase Agreement and its annexures. These respondents have every right to remove the other machinery which they have subsequently bought over and which is not subject matter of Asset Purchase Agreement. From the above, it is evident that the appellants-company have agreed not to remove the plant, machinery and equipment, which is specifically mentioned in the agreement and its annexures, if the Court directs, but they contended that they have every right to remove the other machinery which they subsequently brought and which is not covered by the agreement. Be that as it may, bas on assertion made by the appellants- company, as noted above, the Court below passed orders dated 08.04.2011 clarifying the status quo order as follows: However, the learned counsel for the petitioner tentatively agreed that the assets in respect of the orders of status quo referred as these acquired assets referred in the asset purchase agreement dated: 03.09.2008 and described in its annexures. So, when put it in simple, the acquired assets means, the acquired assets referred in the asset purchase agreement dated: 03.09.2008. With the above direction posted for hearing on 11.04.2011. Thereafter, the Court below after hearing the parties, passed the order under appeal granting injunction in favour of respondent No.1- company and against the appellants-company. The law is well settled that before granting injunction, the Court must satisfy for itself whether the person seeking injunction has made out prima facie case, balance of convenience is in his favour for grant of injunction and irreparable loss would be cause if no injunction is granted. A reading of the order under appeal would disclose that the Court below while dealing with the present petition filed by respondent No.1-company for grant of injunction, did not consider the same in the light of the principles governing the grant of injunction, namely prima facie case, balance of convenience and irreparable loss. The Court below, merely considering the assertions made by appellants- company in para 20 of the counter affidavit dated 09.03.2011, observed that the appellants-company also agreed not to remove the plant, machinery and equipment, specifically mentioned in the asset purchase agreement and in its annexures, and observing so, granted the relief of injunction as prayed for by respondent No.1-company. Therefore, we shall notice whether the Court below before passing the impugned order granting injunction in favour of respondent No.1-company, has satisfied the principles governing the grant of injunction As can be seen from clause 5 of the agreement, the total sale value of the assets is fixed at Rs.17,20,00,000/-. The consideration is divided into three components, namely (1) Rs.82,00,000/- towards plant, machinery and equipment; (2) Rs.2,00,00,000/- towards stocks and; (3) Rs.14,38,00,000/- towards goodwill. From the contents of clause 5 of the agreement, it is evident that major portion of the sale consideration i.e. Rs.14,38,00,000/- is fixed towards goodwill, while paltry amounts of Rs.82,00,000/- and Rs.20,00,000/-, are fixed towards plant, machinery and equipment and towards stocks respectively. It is the contention of respondent No.1-company that they have not authorized respondent Nos. 2 and 3 to enter into agreement with the appellants-company for the sale of the assets of respondent No.1- company and therefore, the agreement entered into by respondent Nos. 2 and 3 with the appellants-company for sale of the assets of respondent No.1-company, being without their authority or authorization is not binding on them, particularly when it was neither disclosed to the Board of Directors nor the shareholders. Though respondent No. 1-company has taken this stand, it is the admitted case of both respondent No.1-company and respondent Nos. 2 and 3 that as per the terms and conditions of the agreement entered into by respondent Nos. 2 and 3 with the appellants-company, for sale of the assets of respondent No.1-company, respondent No.1-company from out of the total sale consideration of Rs.17,20,00,000/-, has received 80% of the sale consideration amounting to Rs.12,90,00,000/-, and that the balance 20% sale consideration, amounting to Rs.4,30,00,000/-, as per clause 5.2(b) of the agreement, has to be paid by the appellants-company to them by 03.09.2011. It is also their admitted case that they having received 80% of the sale consideration, which includes the cost of plant, machinery and equipment, also delivered the property covered by the agreement to the appellants- company, and that the appellants-company also consumed the stocks. Considering the admitted stand taken by respondent No.1- company, as noted above, it is evident that respondent No.1-company has received 80% of the sale consideration, covering the cost of plant, machinery and equipment and stocks and major portion of the good will. That being so, the contention of respondent No.1-company that the agreement entered into by respondent Nos. 2 and 3 with the appellants-company for sale of the properties of respondent No.1- company is without authority and not binding on them cannot be accepted. Since respondent No.1-company has received 80% of the entire sale consideration, which includes the cost of plant, machinery and equipment, and as appellants-company have time to pay the balance 20% sale consideration, which relates to the goodwill, till 03.09.2011, we are of the considered opinion that respondent No.1- company, who sought the relief of injunction, failed to make out prima facie case, balance of convenience and irreparable loss. Hence, the Court below was not justified in granting injunction as prayed for by respondent No.1. No doubt, respondent No.1-company agreed not to remove the plant, machinery and equipment, but they have only agreed not to remove the plant, machinery and equipment covered by the agreement and its annexures if the Court directs, and it is their specific case that they have every right to remove the other machinery which they bought subsequently and are not covered by the agreement. That being the case of the appellants-company, the Court below ought to have considered as to what are the assets covered by the agreement. Further, The Court below instead of passing the injunction order, based on the assertions made by the appellants-company, ought to have considered whether respondent No.1-company, which sought injunction has made out prima facie case, balance of convenience and irreparable loss. Unfortunately, the Court below did not consider the petition in the light of the principles governing the grant of injunction. Though respondent No.1-company sought the relief of injunction, it is their case that they have no objection for removal of the plant, machinery and equipment, if the appellants-company gives an undertaking that they will pay the balance 20% sale consideration to respondent No.1-company and not to respondent Nos. 2 and 3. From this stand taken by respondent No.1-company, it is evident that there is dispute as to who, as per clause 5.2 of the agreement, is entitled to receive the balance 20% sale consideration of Rs.4,30,00,000/-, which relates to goodwill - whether respondent No.1-company or respondent Nos. 2 and 3. Respondent Nos. 2 and 3, even though were suspended from employment by the appellants-company, they have not challenged their suspension till date. At any rate, as per the terms of the agreement, the appellants-company have time to pay the balance 20% sale consideration till 03.09.2011. As to whether respondent No.1-company is entitled to receive the balance sale consideration or respondent Nos. 2 and 3 are entitled to receive the same, are inter se disputes between respondent No.1 and respondent Nos. 2 and 3, and they can sort out their disputes by initiating arbitration proceedings as per the agreement. Since respondent No.1- company has received 80% of the total sale consideration, which includes the cost of plant, machinery and equipment, and the dispute arising out of the agreement, being as to who is entitled to receive the balance 20% sale consideration, whether respondent No.1 or respondent Nos. 2 and 3, and having regard to the discussion made above, we are of the considered opinion that the Court below was not justified in granting injunction as prayed for by respondent No.1- company against the appellants-company, and more so when respondent No.1-company failed to prove prima facie case, balance of convenience and irreparable loss. It is brought to the notice of the Court that already the appellants-company have initiated arbitration proceedings by invoking clause 15.13 of the agreement. That being so, respondent No.1 and respondent Nos. 2 and 3 are at liberty to work out their remedies in the arbitration proceedings For the foregoing reasons, the order under appeal cannot be sustained, and is accordingly set aside. Accordingly, the C.M.A. is allowed. No costs. _________________________ JUSTICE N.V. RAMANA ______________________ JUSTICE K.S. APPA RAO Dated: 13th July, 2011 KSR