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2009 DIGILAW 160 (DEL)

Wrap Knits Pvt. Ltd. v. Anju Sharma @ Anu Sharma

2009-02-06

MANMOHAN SINGH

body2009
JUDGMENT Manmohan Singh, J. 1. This order shall dispose of the plaintiffs application being IA No. 6867/2008 under Order XXXIX Rule 1 and 2 for restraining the defendants, their executors, their assignees, their legal representatives, their servants, employees and all the persons acting and entitled to act on their behalf from competing with the business of the plaintiffs or from approaching the clients/ agents/business associates of the Plaintiffs. 2. The plaintiff filed the suit for permanent injunction and for specific performance of agreement dated 6th May, 2000 and for rendition of accounts for the damages committed by the defendants in breach of the above said agreement. 3. Plaintiff No. 1 company is a private limited company working under the name and style of M/s. Wrap Knits Pvt. Ltd. having its office at M-187, 2nd Floor, Greater Kailash-2, New Delhi-1100 48. Plaintiff No. 2 Mr. Pankaj Gupta is one of the directors of the company. The defendant No. 1 Ms. Anju Sharma was one of the promoter director of the plaintiff company who was working with the plaintiff company since its incorporation. She voluntarily resigned on 3.5.2000 and in a meeting held on 3.5.2000 the resignation of the defendant No. 1 was duly accepted by the board of directors and as per the minutes of the above said meeting, defendant No. 1 transferred her shares to Ms. Ruchi Gupta and plaintiff No. 2 who are the directors of the plaintiff company. In consideration of the abovesaid transfer, the plaintiff No. 2 paid defendant No. 1 a sum of Rs. 45,000/-on transfer of 900 shares of the plaintiff company, and Ms. Ruchi Gupta paid Rs. 5000/- on transfer of 100 shares of the plaintiff company in her favour, which amounts were duly received by the defendant No. 1. 4. It is averred in the plaint that vide agreement dated 6.5.2000 titled as "Non-Compete Agreement", the defendant No. 1 specifically agreed that after resigning from the post of the director of the plaintiff No. 1 company, she shall not compete in the present business against the plaintiff No. 1 company nor she will do the same against the plaintiff No. 2 in any way and by any means, for a period of ten years from the date of signing of this agreement. It was further agreed between the parties that defendant No. 1shall not try to influence and do business with any of the past/present/future clients/agents/employees etc. with which the plaintiff No. 1 company or the plaintiff No. 2 has any working/business relation in the past/present/future. A consideration of Rs. 1 lac was paid by the plaintiffs to the defendant No. 1 against the abovesaid covenant and in the event of breach of the above said agreement the defendant No. 1 would be liable to pay the damages amounting to Rs. 10 lac to plaintiff No. 2. 5. It is further argued that the defendant No. 1 after spending almost eight years in USA came back to India and has started setting her own business with defendant No. 2 (her husband) in the same line. It is submitted that the period of 10 years mentioned in the "Non-compete Agreement" has not yet expired and the defendants have breached the said agreement which is causing grave hardship and loss to the plaintiffs and is thus liable to damages. The plaintiff relied upon an email dated 6.3.2008 wherein the overseas client of the plaintiff gave the charge of quality control to the defendants in place of the plaintiff company. It is alleged that there is loss of goodwill and reputation of the plaintiff company since the defendant No. 1 is dealing directly with the clients of the plaintiff company. .6. It is contended by the defendant that the alleged Non-Compete Agreement is prima facie void in view of prohibition contained in Section 27 of the Indian Contract Act, 1872 and does not fall within the exception to Section 27 of the Indian Contract Act, 1872. 7. It is argued by the defendant that the defendant No. 1, was only a shareholder in the said company. It is well settled position in law that a company is a juristic person and is distinct from its shareholders. 8. It is submitted that the alleged consideration was paid by plaintiff No. 2 from his personal account and not by the plaintiff No. 1 company, in which defendant No. 1 was shareholder. The plaintiff No. 2 had in fact returned the Rs. 1 lac he owed to defendant No. 1 and the same was not a consideration for executing the alleged agreement dated 6th May, 2000. 9. The plaintiff No. 2 had in fact returned the Rs. 1 lac he owed to defendant No. 1 and the same was not a consideration for executing the alleged agreement dated 6th May, 2000. 9. The defendant has denied the execution of "Non-compete Agreement" and submitted that in view of the above said agreement, the defendants shall be deprived of their fundamental right to carry on any lawful trade and occupation of their choice if an injunction is granted in favour of the plaintiffs and against the defendants. The alleged agreement is void, inoperative, oppressive, unconscionable, unenforceable non-est and against public policy as the same impinges the defendants right to carry on lawful trade and business as permitted by law. 10. It is submitted that the minutes of the Board of Directors meeting 3rd May, 2000 never recorded the execution of any Non Compete Agreement nor did it authorize Shri Pankaj Gupta, plaintiff No. 2 herein to enter to any such agreement with the Defendant No. 1 on behalf of plaintiff No. 1. There is no board resolution placed on record. In fact there could not have been such a resolution as a shareholder does not own the goodwill in a company. The defendants also challenged the genuineness of the alleged agreement dated 6th May, 2006. 11. It is denied that the Defendants have started setting up a competing business against the Plaintiff which is causing grave hardships and loss to the Plaintiff, as alleged or that the Defendants have started contacting the clients of the Plaintiff in breach of the alleged Non Compete Agreement in as much as the Defendant No. 1 never signed any such agreement at the first place and there is absolutely no nexus between the plaintiffs and defendant No. 2. The Plaintiffs have also failed to disclose the nature and details of the business or the company alleged to have been set up or in the process of being set up by the Defendants. 12. Further, it is stated that the alleged e-mail dated 6th March, 2008 is a mereseparation agreement between the Plaintiff Company and the said client and in no way affects the business of the Plaintiffs and the same has to be prayed by the plaintiff at the time of trial in accordance with law. The plaintiff has not produced any other cogent evidence to prove his averment made in the plaint. The plaintiff has not produced any other cogent evidence to prove his averment made in the plaint. .13. It is also argued by the defendant that the balance of convenience is also not in favour of the plaintiff and no irreparable loss/damage will be caused to the plaintiff if the injunction is refused. 14. I have heard learned Counsel for the parties and have also gone through the pleadings and documents. 15. In my opinion, prima facie the plaintiff is not able to make out a case in his favour and is not entitled for injunction prayed for. The clause in the Agreement containing ten years condition on the defendant to carry on any similar business as of the plaintiff company is in restraint of trade. Even arguing for the sake of argument that the Non-Compete Agreement is validly executed between the parties, it is violative of Section 27 of the Contract Act. Section 27 provides for the agreement in restraint of trade void in the following words: 27. Agreement in restraint of trade void.--Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. 16. In the case of Central Inland Water Transport Corporation Limited and Anr. v. Brojo Nath Ganguly and Anr.: 1986 (3) SCC 156 it was observed that in agreement/contract, which has for its object a restraint of trade, is prima facie void. If the terms of contract are unconscionable, unfair, unreasonable, arbitrary and opposed to public policy, they are void under Section 23 of the Contract Act as also violative of Article 14 of the Constitution even if accepted between the parties. In the present case the restraint of 10 years on defendant No. 1 not to carry on any similar type of business is highly unreasonable and opposed to public policy. 17. The other reason for refusing interim order is that there is no resolution passed by the Board of Directors to enter into Non Compete Agreement. Neither the minutes of meeting held on 3rd May, 2000 recorded for such a restraint on the defendant not to carry on any similar business. Moreover, when the alleged Non Compete Agreement dated 6th May, 2000 was entered between the parties, defendant No. 1 is admittedly not a Director of the plaintiff company, she resigned from the plaintiff company on 3rd May, 2000. Moreover, when the alleged Non Compete Agreement dated 6th May, 2000 was entered between the parties, defendant No. 1 is admittedly not a Director of the plaintiff company, she resigned from the plaintiff company on 3rd May, 2000. It is also not disputed that the defendant No. 1 has not operated any kind of business for around eight years after resigning from the post of Director of the plaintiff company. 18. In Percept DMark (P) Ltd. v. Zaheer Khan : (2006) 4 Supreme Court Cases 227 in para 63 it was observed as under: Under Section 27 of the Contract Act: (a) a restrictive covenant extending beyond the term of the contract is void and not enforceable, (b) the doctrine of restraint of trade does not apply during the continuance of the contract for employment and it applies only when the contract comes to an end, (c) as held by this Court in Gujarat Bottling v. Coca-Cola this doctrine is not confined only to contracts of employment, but is also applicable to all other contracts. 19. In the case of Niranjan Shankar Golikari v. The Century Spinning and Mfg. Co. Ltd. : AIR 1967 SC 1098 , it was observed that it is a general principle of the Common Law that a person is entitled to exercise his lawful trade or calling as and when he wills and the law has always regarded jealously any interference with trade, even at the risk of interference with freedom of contract as it is public policy to oppose all restraints upon liberty of individual action which are injurious to the interests of the State. An employer, for instance, is not entitled to protect himself against competition on the part of an employee after the employment has ceased but a purchaser of a business is entitled to protect himself against competition per se on the part of the vendor. This principle is based on the footing that an employer has no legitimate interest in preventing an employee after he leaves his service from entering the service of a competitor merely on the ground that he is a competitor. This principle is based on the footing that an employer has no legitimate interest in preventing an employee after he leaves his service from entering the service of a competitor merely on the ground that he is a competitor. A similar distinction has also been drawn by Courts in India and a restraint by which a person binds himself during the term of his agreement directly or indirectly not to take service with any other employer or be engaged by a third party has been held not to be void and not against Section 27 of the Contract Act. In Brahmaputra Tea Co., Ltd. v. Scarth I.L.R. (9) Cal. 545, the condition under which the covenantee was partially restrained from competing after the term of his engagement was over with his former employer was held to be bad but the condition by which he bound himself during the term of his agreement, not, directly or indirectly, to compete with his employer was held good. 20. In view of well settled law and of my above discussion, I find no merit in the plaintiffs application under Order XXXIX Rule 1 and 2 CPC and the same is dismissed with cost of Rs. 5,000/- (Rupees Five Thousand only). 21. It is made clear that any observation made herein shall be treated as tentative in nature and shall not constitute any expression of final opinion on the issues involved and shall have no bearing on the final merit of case and submissions of the parties in the suit. Application dismissed.