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EIH Limited And 5 Ors. Versus Mashobra Resort Limited, The State Govt. of Himachal Pradesh, Shri Harsh Gupta, Shri S.K. Sood, Shri Ashok Thakur, Shri P.R.S. Oberoi, Shri S.S. Mukherjee, Shri Arjun Singh Oberoi and Shri T.K. Sibal

2002 (11) TMI 798 - COMPANY LAW BOARD, DELHI

CP No. 12 of 2002 - Dated:- 14-11-2002 - S. Balasubramanian, J. For Appellant: Sudipto Sarkar, Sr. Adv., Prateek Jalan, Nipun Malhotra and Rajat Bhalla, Advs. For Respondents: V.R. Reddy, Sr. Adv., Pramod Saigal, Amrita Sanghi and Sunil Morarka, Advs. and Ashok Vij, FCA ORDER S. Balasubramanian 1. In this petition filed under Section 397/98 of the Companies Act, in the matter of M/s Mashobra Resort Limited the acts are that the 2nd respondent - the Govt of Himachal Pradesh (the State) owned a pr .....

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the joint venture agreement, the 2nd respondent was to hold not less than 35% shares while the 1st petitioner and its group were to hold not less than 36% and not more than 55% shares in the 1st respondent company. The contribution by the 2nd respondent was to be in kind, that is the transfer of the Wildflower Hall to the company for a value of ₹ 7.5 crores against which shares were to be issued. The 1st petitioner and its group were to invest ₹ 20 crores towards share capital and t .....

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#8377; 2 crores for each of the extended years - the shares issued in favour of the petitioners' group would be surrendered/transferred to the 2nd respondent on payment of 50% of the face value of the shares plus ₹ 10 for the technical services rendered by the Oberoi group. It further provided that the premises with all the improvements thereon on a "as is where is" basis would vest in the second respondent. It also provided for arbitration in case of disputes arising out of .....

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nd respondent about 21%. As per the terms of the JV, the 2nd respondent has 3 directors including the Chairman while the petitioners' group has 4 directors including the MD. Even though all the 85 rooms envisaged under the JV have been fully constructed, yet, only 28 rooms are operational w.e.f. 30.3.2001 and the operation of the balance rooms are reportedly struck up for want of certain approvals. A writ petition has been filed by the company in HP High Court for directions to the concerned .....

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make the hotel fully commercially operational within 4 years from the effective date within the meaning of Clause 10.1(b) of the Joint Venture Agreement and Article 3(2) of the Allotment Agreement. 2. You have failed to perform your obligation as regarding the technical services in the manner and time frame prescribed within the meaning of proviso appended with Clause 11 of the Joint Venture Agreement and Article 1(3) of the Allotment Agreement. 3. You have illegally and unauthorizedly changed .....

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ve burdened the joint venture with escalation of more than 100%. In view of the above, the joint Venture Agreement dated 30.10.95 stands automatically terminated w.e.f. 30.10.2001 in terms of Clause 10.1.(b) of the JVA. Consequently EIH stands disqualified from continuing as a member and/or shareholder of the JV company and the shares held by EIH stand surrendered in favour of the State in terms of Article 3(3) of Allotment Agreement read with Article 10 of the Article of Association of the JV c .....

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; group stood transferred to the 2nd respondent for a consideration of 50% of the face value of the shares held by the petitioners plus ₹ 10/- as consideration towards the technical services. A cheque for ₹ 9 crores and ₹ 10 was enclosed with the notice. Thereafter, the 2nd respondent conveyed to the company by a letter dated 7th March, 2002 that in view of the termination of the JV Agreement, the nominee directors of the 1st petitioner including the managing director ceased to .....

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appointing of Shri Baldi as the Executive Director cum OSD and that in view of the termination of the JV Agreement, and resultant disqualification of EIH to continue as members, its nominee directors the managing director had ceased to hold office w.e.f. 30.10.2001. This has caused the petitioners to file this petition. 3. Shri Sarkar, Sr. Advocate for the petitioners submitted: The company was incorporated in terms of the JV Agreement dated 30.10.1995. The contribution by the State was by way o .....

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ent has been framed on the understanding that the State continues to hold 35% shares and once this condition is no longer fulfilled, even the JVA cannot stand. It is more so when the State itself agreed for alteration in the Articles to provide for the Board to decide the proportion of shareholding of the State and the petitioners' group. According to Article 6.2, the State has the right to appoint the Chairman of the Board only if it continues to hold 35% shares and not otherwise. Therefore .....

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n the notice. Further, in terms of Article 6.8, there should be at least one director from both the sides to constitute the quorum for the meeting. In the absence of a notice, 'none from the petitioners' side attended the meeting on 7.3.2002 and the decision taken in that meeting is null and void. 4. He further submitted: The action of the State is illegal and is oppressive. The entire letter of 6th March, 2002 refers only to the breach of the certain terms of the JVA. No pre incorporati .....

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ion of the State is that the petitioners have not put in operational all the 85 room of the Hotel and as such the petitioners have not made the Hotel fully commercially operational within the specified period. This stand of the State is wholly erroneous. Article 8.1 of the Articles and Clause 10.1 of the JVA provide for of making the Hotel fully commercially operational within 4 years from the date of handing over of the possession of the premises or a further period of two years. However, while .....

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ly on 3.5.2002 and therefore the act of the State of terminate the JVA effective from 30.10.2001 is illegal. Further, the very provision in the Article 10.1 that if the petitioners fail to comply with the terms and conditions shall disqualify themselves to continue as members and shall be expelled from the membership is illegal and against the provisions of law and as such cannot be sustained. Expelling a member would amount to forfeiture of his shares. Such forfeiture is permissible only when a .....

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p of company, if there is any surplus. (Bacha F. Gudzar v. CIT-1955 SCR 876). 5. The learned counsel further submitted: The Hotel became fully commercially operational with 28 room with all the facilities on 30.3.2001. Even though other 57 rooms are fully ready, yet the Government has not given permission to operate these rooms. Therefore, the petitioners can never be held responsible for not bringing these 57 rooms operational. Even otherwise, in terms of Clause 4 of Article 3 of the Allotment .....

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at the State has demanded ₹ 2 crores per year as penalty. In terms of Section 55 of the Contract Act, penalty in terrarium is not valid in law. As per Section 74 of the Contract Act, only reasonable amount for loss can be claimed and the State has not indicated in what way it has lost even assuming that there is default on the part of the petitioners. For damages one has to establish and prove his claim as held in Bhai Panveer v. Bhai Arjun (AIR 1929 PC 179) and UOI v. Rampur Distilliary L .....

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directors have to act in the interest of the company as held in Rolta India Ltd v. Venire Industries Ltd (100 CC 19-Bom). Immediately after issue of the notice dated 6.3.2002, the Government nominees held a Board Meeting without notice to the petitioners. In that meeting far reaching decision were taken without taking into consideration the interests of the company. The Board decided that all the nominees of the petitioners had ceased to be directors of the company and that one Shri Kant Baldi w .....

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otel and as held by this Board in VLS Finance Limited v. Sunair Hotel Ltd. (110 CC 772), the persons who have nurtured a project have to have the control of the company. It is a peculiar case where the State takes over the only assets of the company and also the shares held by the petitioners. It is to the knowledge of the State that a Hotel project is a capital intensive one and there is no likelihood of any income for quite some time. That is the reason why the State gave only the premises for .....

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State cannot wear two caps. While its nominees of the State on the Board approve the plans for construction of the hotel premises, another arm of the State, namely, the Tourism Department declines to give permission to operate the hotel fully. The Supreme Court has approved in Express Newspapers Ltd v. UOI (1986 1 SCC at page 248) the observation in Robertson v. Minister of Pension (1949 1 KB 27) that one arm of the government is bound by the decision of another arm of the same government. As a .....

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hould be given complete control of running and managing the hotel. To this end, the status quo ante as prevailed before 7.3.2002 in regard to the control and management of the hotel should be restored or in the alternative the State should be directed to sell its shares to the petitioners on a valuation to be made by an independent valuer. Further, the State should also be directed to grant licence for the balance 57 rooms as the nominees of the State on the Board had approved the construction a .....

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ration proceedings. Even though, there is no provision in the present Arbitration Act for stay of proceedings before a court unlike that of 1940 Arbitration Act, this Board should exercise its inherent powers to stay the proceedings to avoid conflict of decisions - one by this Board and another by the Arbitral Tribunal. This could be done either under Section 10 of the Code of Civil Procedure or in terms of Regulation 44 of CLB Regulations. Since the Scheme of Arbitration Act is to give primacy .....

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under Section 8 of the Arbitration Act. In addition, in terms of Section 17 of the Arbitration Act, the Arbitral Tribunal is competent to grant interim relief and as such the petitioners can move that Tribunal for any interim order that they seek to have. The very fact of invoking the Arbitration clause and immediately thereafter filing this petition is nothing but abuse of process of this Board and as such should not be encouraged. This is more so because the entire cause of action in this peti .....

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e Bhadresh Kansilal Shah v. AIA Magotteaux International (2000 36 CLA 76-CLB) this Bench should use its discretion to stay the present proceedings. Even though the prayer for referring the parties to arbitration had been rejected by this Bench vide its order dated 19.4.2002, much water has flown thereafter. Both the side have submitted their claims and counter claims to the Arbitral Tribunal. Only after the claims were filed with the Arbitral Tribunal by the petitioners, the State came to know o .....

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f directors does not arise. The parties having agreed to certain terms cannot impugn them as either illegal or unlawful. 8. The learned counsel further submitted. The petitioners have suppressed vital information in regard to certain disputes going on between the parties even prior to 6.3.2002 as is evident from the copies of the correspondence enclosed with the additional affidavit. These correspondence would reveal that while the State has been seeking to give the premises on long term basis i .....

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his statement of the petitioners had been taken into account in passing the interim order. Thus, the petitioners, by suppressing this vital material, have not come with clean hands and as such as held in Rajabhai Abdul Rehman Munshi v. Vasudev Dhanjibhai Mody (1964 3 SCR 481), Shri Krishna Khanna v. ADM (1975 2 ACC 361) and Needle Industries Case (1981 3ACC 333), Sri Kanta Datta v. Sri Venkateshwara Real Estate Enterprises Pvt. Ltd. (72 CC 211), they are not entitled for any equitable relief fro .....

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#8377; 100 crores as against projected cost of ₹ 40 crores. They have been charging the company for provision of technical services which should have been given free of charge in terms of the JVA. For over 3 years, in spite of repeated requests by the State for having the accounts of the company audited by an independent auditor, the petitioners have refused to do so. The suggestion of the State to agree to the lease terms and match the offer made by Holiday Inn has not been agreed to by t .....

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tioners. The JVA and all connected annexure have been adopted in the Memorandum itself at Clause 15 of Incidental Objects and most of the terms of the JVA have also been incorporated in the Articles of Association of the company. This being so, JVA, Articles and all other agreements have to be read together. In terms of Article 8.1, the allotment of shares to the petitioners was conditional on commencement of business by the company fully commercially operational within 4 years from the handing .....

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oom operational by 30.10.2001, the State terminated the JVA with effect from that date by its notice dated 6.3.2002. Therefore, in terms of Article 10.1, the petitioners have been disqualified as members and have been expelled from the membership. This is in line with Clause 10(ii) of the JVA. In Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd (1971 (1) SCC 50), the Supreme Court has upheld the powers of the Board of a company in terms of the Articles, to forfeit his shares and .....

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cts of termination. As per this clause, the State is entitled to require the petitioners to sell their shares to the State and it also provides the consideration to be paid in case of such sale of shares. The same clause also provides that on termination and payment of consideration for the shares, the property of the company shall revert to the State. The JVA, the allotment agreement and the Articles, all provide for timely completion of the project and the therefore time is the essence of the .....

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. In terms of JVA, shareholders' agreement, allotment agreement and Memorandum and Articles of the company, it was the duty of the petitioners to make the Hotel fully commercially operational within 6 years from the date of signing of the JVA or within a period of 4 years from the date of possession of the property. The term "fully commercially operational" can only be that not only all the 85 rooms should become operational but also all facilities expected in a 5 Star Hotel. Since .....

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ressive or unlawful. Therefore, this petition should be dismissed. 12. Shri Sarkar, in rejoinder submitted: As far as the argument of the State that the proceedings should be stayed or the petition be dismissed no longer survives in view of the finding given by this Bench earlier in its order dated 20.4.2002, wherein after considering similar arguments, this Bench had declined to either stay its proceedings or dismiss the petition. Further, the petitioners have also not filed any application in .....

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Court in P. Anand Gajapati Raju v. PVB Raju (2000 4 SCC 539) that Sub-section (4) of Section 8 of the Arbitration Act creates a right if the person bringing the action to have the dispute adjudicated by the court by the other party has submitted his first statement. In the present case, not only no application under Section 8 of the Arbitration Act has been filed but the State has filed more than one affidavit on the merits of the case. In Gaekwad Investment Company case cited by the State, ther .....

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that Act. It only provides that a judicial authority cannot intervene in the conduct of the arbitration and does not restrict it from matters brought before it when the party do not make any application under Section 8 of the Arbitration Act. 13. The learned counsel further submitted: As alleged by the State, the prayers before the arbitration and in the present petition are not common. While in the arbitration, the petitioners have challenged the termination notice dated 6th March, 2002, in the .....

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ase (AIR 1977 SC 536) and without the procedure envisaged in that section, no company/Board of Directors could take cognizance of change of ownership. As held in International Credit Co. v. Adham (1994 1 BCLC 66) and in AIR 1941 Mad 354 it has been held that even if the Articles empower the directors to register a transfer without valid instruments of transfer, the same is invalid. Similar is the decision in K.K. Somani v. D.K. Somani-86 CC 911 All). It is a settled law that any provision in the .....

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for non fulfillment of a private agreement. Therefore, this Article is invalid. The State has relied on the shareholders' agreement which is not a part of the JVA. In terms of Allotment Agreement which has also not been executed between the company and the petitioners as is evident from the agenda for the Board Meeting on 24.4.2002, only the company can acquire the shares of the petitioners for the alleged default. The company has not so far done so. Just because the State has written a let .....

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rt of the JVA as is evident from Article 19 of JVA in which among the various schedules given, the shareholders' agreement does not find place. In terms of Article 8.1 of the Articles of Association of the company, the company has the right to acquire the shares in case of non fulfillment of any of the terms of the allotment agreement notwithstanding the fact that this allotment agreement has not been executed between the company and EIH as is evident from the agenda for the Board meeting on .....

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ground on which the nominees of EIH had reportedly ceased to be directors was on the basis that EIH and its group had ceased to be members of the company. Such a stand by the Board cannot be sustained in law. The only way by which a person can be declared to have ceased to a director is his removal in terms of Section 28A Act after following the procedure prescribed under that Section. (Bhankerpur Simbholi Breweries P Ltd. v. Sarabjit Singh-86 CC 842). 14. The learned counsel further submitted .....

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does not amount to suppression of material fats and as such none of the cases cited by the learned counsel for the State on the proposition that one has to come with clean hands has any application to the present case. 15. I have considered the pleadings, arguments of the counsel and also the written submission submitted by the parties. Shri Reddy has prayed for either dismissal of the petition or staying of the proceedings on the ground that the Arbitral Tribunal is seized of the matter. The re .....

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Hotels Ltd case, for the proposition as made by Shri Reddy, this Board rejected the said argument relying on its observation in Suresh Kumar Jain v. Hindustan Ferro Industry Ltd (1998 3 CLA 313) wherein this Board had observed "A careful reading of Section 5 would show that it is not that judicial intervention in a matter covered by arbitration agreement is barred. It only provides that no judicial authority shall intervene in matter covered by Part I, except where so provided in that Part. .....

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taken on appeal and the High Court upheld the decision. SLP filed thereafter was also dismissed. As a matter of fact even when an application under Section 8 of the Arbitration Act is pending before a judicial authority, Section 8(3) of the said Act permits continuation and completion of arbitration proceedings. Therefore, the provisions of Section 5 of the Arbitration Act do not envisage either staying or dismissal of a petition pending before a judicial authority once arbitration proceedings h .....

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that once Arbitration proceedings have commenced, there is no need to file a petition under Section 8 of the Act is concerned, it is to be noted that in terms of Section 21 of the Arbitration Act, arbitration proceedings commence on the day when notice invoking the arbitration is received by the respondent. On the day when the interim orders were passed by this Board rejecting the prayers of the State to stay these proceedings, the State had received the request of the petitioners to refer the d .....

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iled any application under Section 8 of the Arbitration Act seeking for referring the parties to arbitration and they have voluntarily completed the pleadings. Further, I find that in the Arbitration proceedings, the petitioners have challenged the notice of termination dated 6th March, 2002, while in the present proceedings, they have challenged the decisions of the Board in the meeting held on 7th March 2002 both on the grounds that they are illegal and oppressive. Therefore, there is no simil .....

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ial authority to refer the parties to arbitration, a right is created in the person bringing the action to have the dispute adjudicated by the judicial authority. Similar decision is found in State of UP v. Janki Saran (AIR 1973 SC 2071) as pointed out by Shri Sarkar. A right created by the statute cannot be curbed by use in inherent powers by a judicial authority. Therefore, there is no scope either to dismiss this petition or to stay the present proceedings on the ground that arbitration proce .....

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been carried on successfully and peacefully. Throughout this period, the Board of Directors of this company including the representative of the petitioner No. 1 and respondent No. 2 have conducted the affairs of the company in accordance with provisions of the Act and the Articles and in furtherance of the aforesaid objects. During this period, the Board of Directors of the company met on number of occasions and except in the meeting held on December, 28, 2001, there was unanimity among the mem .....

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eeting of the Board of Directors held on December, 28, 2001". From these averments, it is apparent that what the petitioners have stated is that there had been no disputes or differences as far as the Board Meetings are concerned. Further, the statement of the petitioners that the business of the company had been carried on without any disputes has been noted by this Bench in its order dated 24.4.2002 as is evident from the extract of the relevant portion of that order: "It is not in d .....

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of the Bench the contents of the correspondence relied on by the learned counsel for the State, yet, I do not find that the contents of the said correspondence are so material that non disclosure of the same would be fatal to the petition. Disputes and discussions are altogether different. I have seen the correspondence exchanged between the parties as enclosed with the supplementary affidavit dated 15.4.2002 filed by the State. It appears from Annexure R/7 to the affidavit that certain discussi .....

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he highest bid for the property on lease hold basis. This suggestion was not acceptable to EIH as is evident from its letter dated 21.9.2001 to the State wherein EIH has given an alternative proposal that the State could sell its shares to EIH on a value to be determined by an internationally recognized independent valuer. No further documents have been filed to ascertain as to what ultimately happened. It is on record that even after 1998, both the parties have been working together and the 28 .....

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rest by the agenda for the Board meeting convened on 6th May. Item No. 4 reads "Execution of the allotment agreement between Mashobra Resort Limited and EIH Limited as per the Board of Directors resolution dated 6th January 1996". Shri Sarkar fairly admitted that the petitioners had committed an error in the petition by stating that the agreement had been executed. The conduct of the petitioners would have become questionable if after their denial in the rejoinder, it is established t .....

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the same even though arguments were advanced by both the sides in connection with the contents of that notice-what is the effective date, what is the meaning of "commercially fully operational", whether EIH had failed to provide technical services and whether the State can claim ₹ 2 crores as penalty for each year of delay etc. I shall be confining myself only to those issues which directly arise out of the prayers made in the petition mainly connected with the decisions taken in .....

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n are illegal, invalid, null and void. (b) That this Hon'ble Board may be pleased to declare that all consequential acts of commission and omission pursuant to the aforesaid Board Resolution dated March 7, 2002 taken by Respondent No. 2, its nominees including Shri Srikant Baldi, the purported Executive Director cum OSD of the company are illegal, invalid and void. (c) This Hon'ble Board may be pleased to hold and declare that petitioner continue as shareholder and member of Respondent N .....

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pass any or all of the directions provided in Section 402 of the Act including the purchase of shares or interest of Respondent No. 2 by Petitioner No. 1 and/or its nominee. (f) This Hon'ble Board may be pleased to reserve petitioners right to amend or add to the reliefs as prayed for. 21. The impugned Board meeting was held obviously in response to the letter of the State dated 7.3.2002 addressed to the company, which reads as follows: "This is to inform you that the Government of Hima .....

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f the Joint Venture Company and Article 5 of the shareholders' Agreement. Also the nominee directors of EIH including the Managing Director cease to hold office as directors of Mashobra Resorts Limited. A copy of letter No. TSM-F(6)-1/95-Vol.-7(2) dated 6.3.2002 issued by the Government in this behalf is enclosed herewith. Requisite payment of Share Transfer consideration in terms of the Joint Venture Agreement will also be made along with this letter. As such, Mashobra Resorts Ltd. is requi .....

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ard Meeting at 5.00 Pm on 7.3.2002, that is on the same day of the notice, with the following agenda: (1) To grant leave of absence to Directors not present. (2) To confirm the minutes of the meeting of the Board of Directors held on 20th December, 2001. (3) To consent to shorter notice of the Board of Directors meeting. (4) To consider and approve the transfer of shares and vacation of office of EIH nominee directors. (5) To consider and appoint officer on special duty. (6) Change in authorizat .....

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nkers. However, after the hearing was concluded, both the parties were advised to furnish a copy of the minutes. While the petitioners have informed that they had no knowledge of existence of any minutes, the State has furnished a copy of the minutes from which it is seen that all the businesses as per the agenda had been transacted in that meeting which was attended only by 3 of the nominees of the State. In regard to item No. 4 of the agenda, the minutes read: 4. Transfer of shares and vacatio .....

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t in terms of the aforesaid letter, as a consequence of this automatic termination EIH stands disqualified from continuing as a member and/or shareholder of the Joint Venture Company and the shares held by EIH stand surrendered in favour of the State of Himachal Pradesh in terms of Article 3(3) of Allotment Agreement read with Article 10 of the Articles of Association of the Joint Venture Company and Article 5 of the Shareholders Agreement. Also the nominee directors of EIH including the Managin .....

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to pass a resolution approving the transfer of 2,60,00,000 shares held by EIH in favour of the Government of Himachal Pradesh. Against the above background, the Board passed the following resolutions: RESOLVED THAT consequent to the termination of Joint Venture Agreement dated 30.10.1995 and resultant disqualification of EIH to continue as a member and/or shareholder of the Joint Venture Company, the EIH nominee directors, Shri P.R.S. Oberoi, Shri SS Mukherji, Shri Arjun Singh Oberoi (Managing D .....

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nsferee be and is hereby approved and that the share records of the company be amended accordingly". 'FURTHER RESOLVED that Mr. Lalji Kumar, Company Secretary be and is hereby authorised to take all the necessary steps to give effect to the same in compliance with the Articles of Association of the company and the Companies Act, 1956". 24. Through these resolutions the Board had approved the transfer of the shares of EIH in favour of the State and the nominee directors of EIH have .....

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on. Therefore, the issue to be examined is whether, the same have been done on valid grounds and in accordance with law. 25. The rights and liabilities of EIH and the State have been elaborated in various documents like JVA, Allotment Agreement, Shareholders Agreement and Articles. According to the learned counsel for the State, all these documents have to be read together to determine the rights and liabilities of the parties since in terms of Clause B-15 of the Memorandum, the company has adop .....

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icle 1.1 reads "The present Articles of Association have been formulated in pursuance of JV Agreement dated 30.10.1995 entered into by and between the State of Himachal Pradesh and EIH whereby thy have come together to form and incorporate this company". The word "pursuance" has been defined in Oxford dictionary as 'the carrying out or observance of a plain'. Once the Articles have been framed in carrying out the terms of the JVA, the Articles would only govern the re .....

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Articles. This view appears to have based on the principle that the directors of a company being under fiduciary obligation to a company, have to act in the best interest of the company. Therefore, if the terms of either the Articles or the agreements among the shareholders containing terms which are prejudicial to the interest of the company, then the Board of Directors is not bound to comply with those terms. In the present case, some of the Articles specifically refer the terms of JVA or oth .....

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ng with the shares are as follows: Article 8.1: Provided further that the issue and allotment of the shares to EIH shall be subject to the terms and conditions of the draft allotment agreement to be executed between the company and EIH. Such allotment to EIH is therefore at all times subject to right of the company to acquire shares for non fulfilment of any of the terms of allotment of the allotment agreement. Surrender of Shares: Article 10: Provided that the allotment of shares to EIH shall b .....

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by EIH shall be surrendered by the company in accordance with the shareholders' agreement. Article 10.2: The Board shall then issue the shares held by EIH to the other members and/or shareholders in proportion to their shareholder in the company in accordance with the shareholders' agreement. Article 10.3: In the event that EIH continues to hold the shares for any reason whatsoever, it shall exercise its voting rights in such a manner so as to cause the transfer of the premises on a &quo .....

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ture Agreement: Clause 11: Effects of Termination: Article 11.1: If this agreement is terminated pursuant to Article 10, the party terminating this agreement shall be entitled to require the other party in breach to sell its own and its associate companies shareholdings in the joint company at the option of the terminating party: (a) to the terminating party or its associate companies on the terms and conditions set forth in Article 9 hereof. (b) to the public at large by a public offer. Provide .....

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the first part shall be entitled to acquire the shares. Terms of Allotment Agreement: Article 3.3: Yet, in the event hat the aforementioned provisions in Clause 2 of this Article is breached for any reason whatsoever, the shares allotted to the EIH shall stand surrendered in accordance with Articles of Association of the company and the Shareholders' Agreement. Terms of Shareholder's Agreement: Article 5.2: In the event that EIH fails to provide technical services as aforesaid, it shall .....

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consistencies, the provisions of the Articles would have to prevail. Significantly, in the Board resolution in regard to transfer of shares, there is no reference to the Articles at all. In terms of the Articles of Association, only the company has the right to either acquire the shares held by EIH or expel them as members, that too only in case of breach of the terms of the allotment agreement. Even though, there is a dispute as to whether the allotment agreement has been executed, now it is on .....

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he position in the present case. At the same time, Article 32 of the Articles of Association of the company stipulates compulsory transfer of shares in the event of termination of the joint venture agreement. In addition while Article 8.1 gives the right to the company to acquire shares of EIH, Article 10(1) stipulates expulsion of EIH as a member. Thus within the Articles themselves,t here are inconsistencies. When there are inconsistencies and infirmities in the Articles, when the company rece .....

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lsion of a member in a company with share capital. I do not propose to deliberate on this as the Board of Directors has not passed any resolution either seeking for surrender of the shares or for expelling EIH as a member. Even otherwise, in both the cases, the shares would have been with the company and in terms of Article 10.2, the company is to issue the shares either to the State or to public. However, before exercising this right, the Board is bound to first satisfy itself, assuming that th .....

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mining the consequencies of the decisions. The company has not become financially self supporting and it is EIH which is meeting all the expenses of the company. Throwing them out of the company would result in closure of the Hotel as the State cannot fund the operations of the hotel. No director can take a decision which is detrimental to the interest of the company and if he does so, it would amount to breach of his fiduciary obligation to the company. The nominee directors of the State had no .....

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sferred on its remitting the consideration and that on that basis the Board would approve the transfer. Even though Article 32 provides for compulsory transfer, it does not mean that the State can unilaterally decide that the shares stood transferred in its favour. This Article only provides that the State can compel EIH to transfer its shares in favour of the State. In the process of approving the transfer of shares in a hurried manner, the Board had also overlooked compliance with statutory re .....

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s. Likewise, the Allotment Agreement also stipulates surrender of shares. All these provisions indicate voluntary action on the part of EIH either to surrender or transfer the shares and do not provide for compulsory acquisition by the State, the moment it had issued the termination notice. It appears that the parties themselves did not seem to have visualized the situation of registration of transfer of shares without proper procedure as is evident from Article 10.3, which envisages EIH continu .....

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cles of Association provides that the Board shall be comprised of 3 directors nominated by the State and 4 directors nominated by EIH and that any change in the proportion would require a special resolution at a general meeting. Article 14 stipulates that as long as the State holds at least 35% shares, the Chairman of the company shall be appointed by the State. Article 15 provides that as long as EIH holds at least 36% shares, it shall have the right to appoint the Managing Director. Article 18 .....

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the quorum above mentioned shall be subject to disqualification of the directors by reason of forfeiture". Article 3.4 of the Allotment Agreement provides "That neither East India Hotels, its nominees or directors in the Board consequent to any shareholding in the company shall participate in the decision making process with reference to aforesaid surrender of the shares allotted to East India Hotels.....as there shall be deemed to be interested parties for the same". Article 5.3 .....

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basis to the State". None of the above provisions empowers the Board to resolve that the nominees of EIH cease to be directors once the State declares that the shares stood transferred in its favour. These provisions indicate that the directorship of the nominees of EIH is linked to its holding shares. The Board had passed the resolution of cessation of the nominees of EIH as directors on the ground that EIH had ceased to be members of the company on approval of the transfer its shares in .....

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ctor cum Officer on Special Duty in terms of Notification of the Government and he was to exercise all the powers of erstwhile Managing Director. Now that I have held that the nominees of EIH on the Board including the managing director had not ceased to be as such, the question of anyone else exercising the powers of managing director does not arise and as such the appointment of Shri Baldi as Executive Director was invalid. 30. One other aspect that deserves to be examined is the stand of the .....

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ild Flower Hall Estate together with buildings, structures or any other moveable assets, which might have been raised by the joint company shall revert to the party of the first part on payment stipulated in proviso to Clause of 11.1 of this agreement". This assertion of the State was conveyed to EIH in the notice of termination dated 6.3.2002. A copy of this notice was sent to the company along with a letter dated 7.3.2002. The minutes of the Board Meeting held on 7.3.2002 do not reflect a .....

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f the same on disposal of any property of the company in the event of winding up, but no distribution amounting to a reduction of capital be made except with the sanction for the time being (if any) required by law". As per Article 23(i) of the Articles of Association of the company, the approval of the Board is required for transfer of interest including sale, exchange, lease, mortgage, surrender or disposal of any asset of the company. In the present case there is no Board resolution nor .....

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; agreement, a shareholder cannot appropriate the assets of a company. The cases cited by Shri Sarkar viz., Bharat Aluminium Company Ltd. v. Special Are Development Authority (51 CC 184 MP) and Tata Engineering and Locomotive Co. Ltd. v. State of Bihar (1964 6 SCR 885) lay down the same principle. The only manner in which a shareholder can share the assets of a company is in the event of winding up of the company and of the surplus if any remaining after discharging the liabilities of the compan .....

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any. Further, in the present case, without premises, the company cannot carry on any business and to this extent it would amount to transfer of the entire undertaking of the company which can be done only with the general body approval in terms of Section 293 of the Act. (P.S. Offshore Interland Services Pvt. Ltd. v. Bombay Offshore Suppliers and Services. -75 CC 583) A reading of Article 10.3 of the Articles of Association indicates that this position is recognized by the company itself as in t .....

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.3.2002, it is clear that there have been acts of oppression against EIH and as such I declare all the resolutions passed in that meeting as null and void. Since the name of EIH/its group would have been removed from the register of members on approval of the transfer of shares in favour of the State, I direct that the name of EIH should be put back on the register of members immediately on receipt of this order in respect of (SIC) shares. The Board will continue to consist of 7 director-3 (SIC) .....

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n relating to the affairs of the company when sought for. Even though Shri Sarkar pointed out that since the right of the State to appoint the Chairman of the Board had ceased after its shareholding came down below 35%, I do not propose to examine the same as thee is no prayer to that effect in the petition. As far as the prayer of the petitioners that this Bench should give directions to the State to accord permission to operate the remaining 57 rooms in the Hotel is concerned, I am of the view .....

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s case such a direction is amply justified. EIH is holding 79% shares and not withstanding the shares holding ratio prescribed in the JVA and the Articles, the State participated in amending the Articles and did not subscribe the right shares offered to it as a result of which its shareholding has come down to 21%. EIH has given corporate guarantee for the loans taken for the company and it is which is funding the day to day operations of the Hotel/company. Further it is an expert in hotel opera .....

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tion as it has to protect the interest of the State. EIH is willing to purchase the shares at par even though as per the valuation done by it through a financial institution, the value of the premises was less than the par value of the shares. The state desires that EIH should match the offer of Holiday Inn which comes to about ₹ 148 crores over a period of 45 years. I am of the view that both the sides should take a pragmatic and reasonable stand. EIH should take into consideration its hi .....

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talling to about ₹ 148 crores in 45 years. Therefore, this amount has to be discounted at appropriate rate of interest to arrive at the present value, which cannot be more than ₹ 15 crores. Taking this aspect and also the interests of the company, EIH and the State into consideration, I would suggest two alternatives for the consideration of both the sides. In facts of certain cases filed under Sections 397/98 of the Act, while directing one of the parties to sell the shares, this Bo .....

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