Section 179 Companies Act | Directors Cannot Bind Company Without Board Resolution in Property Sale: Bombay HC Sets Aside Injunction for Lack of Prima Facie Authority

The Bombay High Court recently delivered a critical judgment on the requirements for granting temporary injunctions in suits for specific performance of agreements involving company-owned properties. The court emphasized that directors cannot bind a company without proper board authorization, setting aside an injunction that had restrained the company from creating third-party rights in a disputed property valued at Rs. 78 crores.

Background & Facts

The Dispute

The case revolves around a suit for specific performance filed by Respondent Nos. 1 and 2 (Hemant Padmakar Chauhan and Kiran Dattatreya Walke) against the appellant company, Sierra Hotels and Tourism Private Limited, and its directors. The plaintiffs sought enforcement of a receipt dated 6th July, 2022, allegedly executed by Gul (Raju) Lakho Lulla, a director of the appellant company, acknowledging receipt of Rs. 11,00,000 in cash towards the sale of a property admeasuring 21,217 sq. mtrs. in Nashik for a total consideration of Rs. 78,00,00,000.

Key Facts

• 06.07.2022: Receipt executed by Gul (Raju) Lakho Lulla, a director of the appellant company, acknowledging Rs. 11,00,000 in cash from the plaintiffs.
• The receipt did not bear the company’s seal or stamp, nor was it supported by a board resolution.
• 28.11.2022: Plaintiffs issued a legal notice to the defendants, to which a reply was allegedly sent by an advocate on behalf of the defendants.
• The defendants denied receiving the notice or authorizing the advocate to respond on their behalf.
• 19.08.2022: A subsequent agreement for sale (Isar Pavati) was executed by the same director in favor of Shakil Ahmad Nazir Ahmad, who also filed a separate suit for specific performance.
• 04.01.2023: Plaintiffs filed Special Civil Suit No. 04 of 2023 for specific performance.

Procedural History

• 04.01.2023: Special Civil Suit No. 04 of 2023 filed before the Trial Court.
• 26.10.2023: Trial Court granted a temporary injunction restraining the defendants from creating third-party rights in the suit property.
• 2024: The appellant company filed Appeal from Order No. 263 of 2024 before the Bombay High Court.
• 08.06.2026: Bombay High Court delivered the judgment, setting aside the Trial Court’s order.

The Parties' Positions

For the Appellant (Sierra Hotels and Tourism Private Limited):

• The receipt dated 6th July, 2022 was executed by a director with only 10% shareholding and without board authorization.
• The receipt did not bear the company’s seal or stamp, rendering it invalid as a concluded contract.
• The defendants denied receiving the legal notice dated 28th November, 2022 and authorizing the advocate to respond.
• The subsequent Isar Pavati dated 19th August, 2022 was also executed by the same director without board authorization.
• The plaintiffs failed to demonstrate readiness and willingness to deposit the balance consideration, a prerequisite for specific performance.

For the Respondents (Plaintiffs):

• The Trial Court rightly considered the subsequent agreement for sale with Shakil Ahmad Nazir Ahmad, which created apprehension of third-party rights.
• The defendants’ denial of authorizing the advocate to respond to the notice was not supported by any action against the advocate.
• The Trial Court’s prima facie finding was based on material on record, and no perversity was demonstrated.

Relief Sought

The plaintiffs sought specific performance of the receipt dated 6th July, 2022, and an injunction restraining the defendants from creating third-party rights in the suit property. The appellant sought to set aside the Trial Court’s order granting the injunction.

The Legal Issue

The central question before the Bombay High Court was whether the plaintiffs had made out a prima facie case for grant of temporary injunction in a suit for specific performance, particularly:

1. Whether the receipt dated 6th July, 2022 could be construed as a concluded contract binding the appellant company, given the absence of board authorization.
2. Whether the Trial Court erred in granting the injunction without addressing the authority of the director to bind the company or the readiness and willingness of the plaintiffs to perform their obligations.

Arguments Presented

For the Appellant

• The receipt dated 6th July, 2022 was executed by a director without board authorization, rendering it invalid as a concluded contract.
• The plaintiffs failed to demonstrate readiness and willingness to deposit the balance consideration, a sine qua non for specific performance.
• The defendants denied receiving the legal notice dated 28th November, 2022, and no proof of dispatch or acknowledgment was produced.
• The subsequent Isar Pavati dated 19th August, 2022 was also executed by the same director without board authorization, and thus, no fetters could be imposed on the company’s rights.

For the Respondents

• The Trial Court rightly considered the subsequent agreement for sale, which created apprehension of third-party rights and multiplicity of proceedings.
• The defendants’ denial of authorizing the advocate to respond to the notice was not supported by any action against the advocate.
• The Trial Court’s prima facie finding was based on material on record, and no perversity was demonstrated.

The Court's Analysis

The Bombay High Court undertook a detailed analysis of the prima facie requirements for granting a temporary injunction in a suit for specific performance. The court emphasized the following key principles:

1. Authority of Directors to Bind the Company: The court observed that the receipt dated 6th July, 2022 was executed by a director of the appellant company without the company’s seal, stamp, or board resolution. The court held that in the absence of such authorization, the director could not bind the company to the transaction. The court relied on the settled principle that a company’s property cannot be alienated without proper board authorization.

   "Prima facie the receipt makes it clear that it is one of the Directors of the Company who has accepted the amount in cash from the Plaintiffs, without any authorisation by the Defendant No 1 Company. By grant of injunction, the Trial Court has in fact bound the Company with an unauthorised act of its Director. Unless it is prima facie shown that the said director was authorized to enter into sale transaction, execute the receipt or accept the cash, the document could not have been considered as a concluded contract for sale of the property belonging to the Defendant No. 1-company."

2. Readiness and Willingness: The court noted that the plaintiffs failed to demonstrate readiness and willingness to deposit the balance consideration, even when given an opportunity during the hearing. The court reiterated that readiness and willingness are essential prerequisites for claiming specific performance, and their absence at the interim stage is fatal to the plaintiffs’ case.

   "It is well-settled position in law that in order to seek a relief of specific performance, the Plaintiff is required to demonstrate the readiness and willingness from the date of execution of agreement till the final decree is passed. Even before this Court, there is no readiness demonstrated to comply with the obligations which is sine qua non for claiming the relief of specific performance."

3. Prima Facie Case for Injunction: The court held that the Trial Court erred in granting the injunction without addressing whether the plaintiffs had made out a prima facie case for specific performance. The Trial Court had focused on the apprehension of third-party rights without examining whether the receipt constituted a concluded contract or whether the director had the authority to bind the company.

   "The Trial Court erred in formulating the proposition for the purpose of considering the prima facie case of grant of injunction. The Trial Court has addressed itself to the issue of creation of third party rights without adverting to the relevant issue of prima facie case being has been made out for grant of specific performance of the receipt dated 6th July, 2022."

4. Denial of Notice and Burden of Proof: The court observed that the defendants had denied receiving the legal notice dated 28th November, 2022 and authorizing the advocate to respond. The court held that it was incumbent upon the plaintiffs to produce proof of dispatch and acknowledgment of the notice, which they failed to do.

   "At the prima facie stage, in view of denial of receipt of the purported notice, it was incumbent upon the Plaintiffs to demonstrate by producing on record, the postal receipts/acknowledgment that the notice was in fact sent and received by Defendant No. 1 or by Defendant Nos. 3 and 4."

5. Subsequent Transaction and Multiplicity of Proceedings: The court noted that the Trial Court had considered the subsequent Isar Pavati dated 19th August, 2022 executed by the same director in favor of Shakil Ahmad Nazir Ahmad. However, the court held that since the subsequent transaction was also executed without board authorization, it could not be used to restrain the company from dealing with its property.

The Verdict

The Bombay High Court allowed the appeal, setting aside the Trial Court’s order dated 26th October, 2023 granting the temporary injunction. The court held that the plaintiffs failed to make out a prima facie case for specific performance, as the receipt dated 6th July, 2022 did not constitute a concluded contract binding the appellant company. The court rejected the request for stay of the order, emphasizing that the balance of convenience tilted in favor of the appellant company.

What This Means For Similar Cases

Directors Cannot Bind a Company Without Board Authorization

• Corporate Governance: Practitioners must ensure that any agreement involving company-owned property is supported by a board resolution and bears the company’s seal and stamp. The absence of these formalities renders the agreement invalid and unenforceable against the company.
• Authority of Directors: Directors acting without board authorization cannot bind the company, and their acts in personal capacity do not impose obligations on the company.

Prima Facie Proof is Essential for Interim Relief

• Specific Performance Suits: Plaintiffs seeking specific performance must demonstrate readiness and willingness to perform their obligations from the date of the agreement till the final decree. Failure to do so at the interim stage is fatal to their case.
• Burden of Proof: Where defendants deny receipt of notices or authorization of advocates, plaintiffs must produce postal receipts or acknowledgments to substantiate their claims. Mere allegations without proof are insufficient.

Multiplicity of Proceedings Does Not Justify Injunction

• Third-Party Rights: The apprehension of third-party rights or multiplicity of proceedings cannot justify an injunction unless the plaintiffs establish a prima facie case of a concluded contract binding the company.
• Unauthorized Transactions: Subsequent transactions executed by unauthorized directors cannot be used to restrain the company from dealing with its property.