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Hillcrest Realty Sdn. Bhd Versus Hotel Queen Road Pvt. Ltd. and Ors.

2006 (1) TMI 650 - COMPANY LAW BOARD NEW DELHI

CP No. 64 of 2005 - Dated:- 31-1-2006 - S. Balasubramanian For the Appellant: U.K. Choudhary, Sr. Adv. for 1st Petition, H.L. Tiku and Shanti Bhushan, Sr. Advs. for 2nd Petition, Ranjana Roy Gawai, Saurabh Kalia, Advs. and Arun Sexena, FCA For the Respondents: Sudipto Sarkar, Sr. Adv. for Respondent 1, C.A. Sundaram Sr. Adv. for Respondent 2, S. Ganesh, Sr. Adv. for Respondent 6, Mahesh Agarwal, Rishi Agrawala, Rchini Musa and Neha Phulan, Advs. ORDER S. Balasubramanian, Chairman 1. As a part of .....

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d as a special purpose vehicle to enable dis-investment At that time, the paid up capital of Hotel Queen was ₹ 90 lakhs comprised in 9 lakh equity shares of ₹ 10/- each of which the Government of India (GOI) held 89.97% shares while Indian Hotels Ltd held about 10% shares and the balance shares were held by the employees of the company. GOI invited bids for sale of the shares of the company. By a Share Purchase Agreement dated 8.10.2002, the 6th respondent, a public company, being th .....

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tioner was funded by ₹ 5.50 crores from the 2nd petitioner and ₹ 6.23 crores from the 2nd respondent 2. Since the 6th respondent had acquired about 99.99% equity shares in the Hotel, it became a subsidiary of the 6th respondent. The 2nd, 3rd respondents and the 2nd petitioner were appointed as additional directors on 8.10.2002 and later on were appointed as regular directors in the AGM held on 28.12.2002. On 21.12.2002, the 6th respondent transferred 13 shares to 7 other persons of w .....

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d capital was altered by increasing the preference shares to ₹ 30 crores. 3. The lst petitioner which is a company registered in Malaysia, applied for and was allotted, in two spells- on 5.5.2003 and on 19.7.2003- a total of 28,29,290 preference shares. (Rs 29.29 crores). To fund the renovation of the Hotel premises, a term loan of ₹ 40 crores was raised from Indian Oversees Bank. This loan was secured with joint personal guarantees of the 2nd/3rd respondents and the 2nd petitioner, .....

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e at par. On 10.5.2005, the company registered the transfer of 32,88,181 equity shares of the company held by the 6th respondent in favour of the 2nd respondent. In a Board Meeting held on 4.7.2005, 4th and 5th respondents were appointed as additional directors, 5. The 1st petitioner, claiming that due to non payment of dividend on the preference shares, it had acquired voting rights on the preference shares in terms of Section 87(2) of the Act, requisitioned an EOGM by a notice dated 1.6.05 for .....

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re held that the resolutions passed in the said EOGM which had already been held as void. The 1st petitioner has filed an appeal before the Division Bench which is pending as of date. 6. On various grounds stated in the petition, the petitioners have challenged all the allotments of equity shares and also the transfer of equity shares from 6th respondent to the 2nd respondents and consequently they have sought for cancellation of all the allotments of equity shares as also the registration of tr .....

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nt in the preference shares only on the understanding that the respondents would use the funds for achieving objects of the Hotel and that the Hotel would pay dividend as per agreed terms and in the event of failure to pay the dividend, the 1st petitioner would be entitled to exercise its voting rights on the preference shares in accordance with law. It was also the understanding that the Hotel would continue to be a subsidiary of the 6th respondent. The 1st petitioner has the largest stake in t .....

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nly used for the above purposes but also enabled the Hotel to raise further ₹ 40 crores from the banks. The Hotel did not pay dividend for two continuous years after the allotment of the preference shares to the 1st petitioner and as such voting rights had accrued on the preference shares held by the 1st petitioner in terms of Section 87(2) of the Act Since the 2nd respondent was mismanaging the affairs of the Hotel and had also failed to make the hotel operational, the 1st petitioner, wit .....

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tice, the power of attorney holder of the 1st petitioner himself issued a notice on 8th July, 2005 convening the proposed EOGM on 4th August, 2005. For the first time on 23.7.2005, the petitioners came to know that the Hotel had filed a civil suit before Delhi High Court seeking for a decree of declaration that notices issued for convening the EOGM were illegal, null and void and also for a. declaration that the 1st petitioner was not entitled for any voting rights in respect of the preference s .....

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preference shares if dividend is not paid for 2 consecutive years. However, in terms of Section 90(2) of the Act, Section 87(2) will apply in case of a private company only if it is a subsidiary of a public company. Admittedly, the 6th respondent is a public company and by virtue of its holding over 99.99% equity shares in the Hotel which is a private company, it was a subsidiary of the 6th respondent. By transfer of shares to the 2nd respondent, the holding of the 6th respondent in the Hotel ha .....

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espondent. The timing of the transfer of shares would clearly indicate that the 2nd respondent was aware that the voting rights had accrued on the preference shares as the Hotel had failed to pay dividend accrued on the preference shares for two years. The contention of the respondents that in terms of Article 4 of AOA of the Hotel, the preference shares have no voting rights and the 1st petitioner, being aware of the same, invested in the preference shares and as such no voting rights could acc .....

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It was in violation of the provisions of the Article 8 and approved in a meeting without notice to the 2nd petitioner and without a valid quorum. Article 8 of the AOA of the company prescribes a procedure for transfer of shares according to which the transferor has to give a notice to the company regarding the proposed transfer and other shareholders are at liberty to purchase the shares at the same price or at a higher price. It is a settle law that any transfer in violation of the preemption p .....

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, the approval of transfer in this Board meeting has to be declared as invalid. Transfer of shares is a contract with the company when the instruments of transfer are lodged for approval by the Board, it is also an arrangement as the company is a party to the registration of transfer. It has been held by this Board that to be a non interested director in terms o Section 300, the said director should not have any interest either as a transferor or a transferee or as a beneficial holder of shares .....

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the 2nd respondent which have also been impugned in the petition, the 2nd respondent who held only 2 shares has now come to hold 37.76% in the Hotel. Further, the 2nd respondent did not pay any consideration to the 6th respondent for the shares and instead the consideration was adjusted against the loans given by him to the 6th respondent at the time of acquisition of the Hotel. In addition, while the 6th respondent made offers to other shareholders of the Hotel at the time of its acquisition, t .....

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s to why such a differential pricing was adopted. This is nothing but a fraud played by the respondents to defeat the voting rights on the preference shares. Further, the 6th respondent has not adduced any justification for transferring the shares to the 2nd respondent other than stating that it owed money to the 2nd respondent ignoring the fact that the 2ndpetitioner has also lent over ₹ 5 crores to the 6th respondent at the time of acquisition of the Hotel. If the Hotel had called for a .....

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both the companies and by effecting the transfer, they have breached their fiduciary obligations. 11. The learned Counsel further submitted: In a Board Meeting held on 27.7.2004, the Board allotted 23,90,000 equity shares to the 6th respondent at par. No notice was given to the 2nd petitioner for this meeting and as such there was no occasion for him to seek leave of absence. However, it was recorded in the minutes that leave of absence was granted to him. The admitted fact is that the 2nd and 3 .....

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of provisions of Section 300 according to which no interested director can participate or vote on transactions in which they are interested. In the present case, both the 2nd and 3rd respondents were interested directors and as such they could not have voted for the allotment of shares. Further, since both were interested directors, there was no valid quorum in any of these meetings and therefore no Valid business could have been transacted. Similar is the position with the allotment of shares .....

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business, yet, the intrinsic value of the shares was very much higher. Therefore with the sole object to enrich his own group, the 2nd respondent has allotted the shares at par without any proper valuation. 12. He further submitted: The sole-object of allotment of shares impugned in the petition was with the view to perpetuate the control by the 2nd and 3rd respondents over the company. The legal position in regard to issue of further shares has been decided in many cases: a. Shares issued for t .....

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l v. RDI Print and Publishing Co. 84 CC838 CLB d. Increase in shares by majority is an oppression against minority- Akbar Ali A Kalbert v. Konkan Chemicals Pvt. Ltd. 88 CC 245 CLB 13. Summing up his arguments, Shri Choudhary submitted that the disputes between the 2nd petitioner and the 2nd respondent started sometimes in Dec. 2004 regarding their family affairs and division of businesses in the family. When attempts were made to resolve the disputes through the mediation of a renowned Solicitor .....

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ove him and the 3rd respondent as directors with a view to protect the interest of the company. The 2nd respondent had kept the alleged allotments of shares and the transfer of shares as a secret till he disclosed the same in the civil suit. Having de-subsidiarised the Hotel, apprehending that he and the 3rd respondent would be removed from the Board, he also appointed two of his dummies as additional directors just to perpetuate his control over the Hotel. The 2nd petitioner demanded inspection .....

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the company. 14. Shri Tikku, Senior Advocate appearing for the 2nd petitioner submitted: The respondents have falsely contended that the 2nd petitioner was appointed as a director only because he is the younger brother of the 2nd respondent. He was inducted into the Board due to his financial credential and the 2nd and 3rd respondents were aware that his association with the company would be of immense help to the company. Further, 2nd petitioner has also given personal guarantee to the extent .....

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bent on the 2nd respondent to issue notices in writing to the petitioner for subsequent Board Meetings which he did not do and without notice to the 2nd petitioner, Board meetings were held and decisions to allot shares and register the transfer of shares were taken. For the first time, after the 2nd petitioner sought, in writing, for issue of notices for Board meetings, he received a notice for the Board meeting on 4.7.2005, that too, without any agenda. While the allotment of shares suffers fr .....

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holder of equity shares and to the detriment to the interest of the petitioners. 15. Supplementing the above arguments, Shri Shanti Bushan, Senior Advocate for the 2nd petitioner submitted: In terms of Section 286, notices for Board meetings should be sent to all directors in writing. The respondents have not adduced any proof that notices were sent to the 2nd petitioner for the impugned meetings and therefore the presumption should be drawn that no notices were sent. The 2nd petitioner specific .....

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Page 393) that he had not received notices for any general meeting in the past. Therefore, all the allotments made in the impugned Board meetings as also the transfer of shares have to be cancelled as the meetings were not validly held on account of non issue of notices to the 2nd petitioner. Further the transfer of shares is a grave act of oppression, as, by this singular act, the 1st petitioner has been deprived of the voting rights statutorily accrued on the preference shares. Further, Articl .....

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ing submitted: His client was the prime mover in acquisition of the Hotel, ft is his company, i.e., the 6th respondent which bid for the Hotel and acquired the same after mobilizing necessary funds. If according to the 2nd petitioner that he was instrumental in getting the investment by the 1st petitioner on certain promises, the respondents are not concerned. As a matter of fact, the 1st petitioner must have been aware that the gestation period for the hotel project would be long and that is wh .....

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holder and the 2nd petitioner - a holder of 1 equity share, is to oust out the 2nd and 3rd respondents and take over the control of the Hotel. It was the 2nd respondent who" appointed the 2nd petitioner as a director and also gave him one share because both are brothers and the 2nd respondent had complete faith and trust in the 2nd petitioner. The very fact that the 2nd petitioner never attended any Board meeting would indicate that he never exhibited any interest in the affairs of the comp .....

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ntor. In spite of the trust and faith that the 2nd respondent had in the 2nd petitioner, with the support of the 1st petitioner, the 2nd petitioner is trying to take control of the company. The main challenge in the petition is regarding transfer of shares by the 6th respondent to the 2nd respondent. It is an admitted fact that the 6th respondent is controlled by the 2nd respondent and the transfers being with the same group, the 2nd petitioner is not in any way affected. As far as the 1st petit .....

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ent is found in the rejoinder. Further, in Article 4 of the Articles of Association, it is specifically stipulated that the preference shares will have no voting rights. The claim of the 1st petitioner for voting rights is not with a view to protect its investment or to gain seats in the Board but to hand over the company to the 2nd petitioner who holds only one share. This fact is evident from the EOGM notice proposing the removal of the 2nd and 3rd respondents as directors and in their place t .....

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any step taken by the company to prevent such an attempt cannot be considered to be an act of oppression against the preference shareholders. The provisions of Sections 397/398 of the Act cannot be used for a collateral and collusive purpose. Even though, there are allegations of no notices for Board meetings, the 1st petitioner is not concerned with the same but the 2nd petitioner who had never complained of non receipt of notices for Board meetings for long, has raised the same in the petitio .....

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re also questioning the raising of funds by allotment of shares. The 1st petitioner is not in any way concerned or connected with allotment of equity shares and the 2nd petitioner holding only one share is also not in any way affected by the allotment as the respondents' group always held more than 99% of equity shares. If at all, the 2nd petitioner could have any grievance, it could be that he had not been allotted proportionate shares which the company is willing to allot even now. Further .....

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opposed to the same. In the appointment of directors, the 1st petitioner is not in any way concerned with. The allegation of the petitioners that the hotel has not become operational due to mismanagement by the 2nd respondent is baseless. At the time when the Hotel was acquired, the hotel was in a bad shape requiring extensive repairs and renovation to make it a star hotel which also required time consuming obtaining of various approvals. Presently, most of the renovation of the hotel has been c .....

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voting rights. Even though, in the affidavit at pages 45 and 47 of the petition, it is stated that averments in the petition are based on records, no document has been produced relating to the alleged understanding that the 1st petitioner would be entitled for voting rights in the event of non payment of dividend. Even otherwise, in terms of Section 87(2) of the Act, voting rights would accrue on preference shares only when dividend is not paid for two years and in terms of Section 205 of the A .....

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titioners had complained about the affairs of the company. There is no averment in the petition that the 2nd petitioner has the right of management nor there is an averment that the company is in the nature of a partnership or a family company wherein the right to management could be claimed. Even the complaint relating to non receipt of notices for Board meetings could be entertained only in a company in the nature of a quasi partnership or a family company. While the company was taken over in .....

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revails. Rights of preference shareholders is always governed by Articles as held Scottish Insurance Corporation Ltd v. Wilson and Clyde Coal Co. 1949 1 All ER 1068 and Re Isle Thanet Electric Supply Co. Ltd 1949 2 All ER 1060. Therefore, Section 9 of the Act has no application, Similarly, a preference shareholder cannot complain of transfer of equity shares. The petitioners have also complained of under valuation of the shares transferred. This complaint can legitimately voiced only by the shar .....

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on to the transferee. LIC v. Escorts Ltd; Vasudev Shelat v. Pranlal. Therefore, as soon the 6th respondent had delivered the share certificates together with transfer instruments, the title to the shares became vested in the 2nd respondent and since transfer of shares from one member to another member is governed by Article 11 according to which no approval of the board is necessary in case of transfer of shares from one member to another member, the 2nd respondent automatically became a member .....

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Maharani Hotel 2005 DLT 333. 19. Therefore, there was no legal infirmity in the transfer of shares. Further, the transfer of shares to the 2nd respondent and allotment of shares to the 7th respondent were approved in the Board meeting held on 104.2005. The minutes of this Board meeting were confirmed in the Board meeting held on 4.7.2005 and the 2nd petitioner who was present in that meeting never objected to the said confirmation. Even subsequently, when he inspected the minutes of this meeting .....

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all the directors present, the same cannot be questioned subsequently as it has been held any irregularity in holding meeting could be subsequently cured by proper process. (1974 (2) All.ER 653-Bently Stevens}. 20. He further submitted: As far as allotment of equity shares is concerned, in terms of Section 81 of the Act, the preference shareholders have no right to seek proportionate shares. Not only in terms of Article 14, the directors have full powers to allot shares to any one of their choic .....

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3 directors who were/are related to each other has to be taken into consideration while applying the provisions of Sections 297/299/300 of the Act failing which the Board will become non functional and even the transfer of one share to the petitioner would have to be declared as invalid. In Sangram Singh P. Gaekwad v. Shanta Devi the Supreme Court has held that when the petitioners have consented to and even benefited in the company being run in a way which would normally be regarded as unfairly .....

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Section 301 of the Act which stipulates maintenance of register of contracts does not stipulate that transfers and allotments should be incorporated in the said register. It has been held that Sections 299/300 are not applicable in cases of transfer of shares or allotment of shares -T & K Govindraju v. Kadri Mills CP No. 8 & 32 of 1995 CLB: Mukkatukara Catholic Co. Ltd. v. H.B. Thomas 96 CC 864. 21. Summing up his arguments, Shri Sarkar submitted that the petition is a collusive petition .....

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leged should be with reference to that particular class. In the present petition, both have joined together with the sole object of taking over the control of the company which should not be permitted and the petition should be dismissed. 22. Shri Ganesh, Senior Advocate appearing for the 6th respondent submitted: The petitioners do not hold any share in the 6th respondent and therefore they have no locus standi to question the transfer effected by it to the 2nd respondent and seek any relief ag .....

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mpany of the Hotel. As a matter of fact as soon the agreement was worked out, the terms of the agreement came to an end. At the time when the shares were transferred, the Hotel being a subsidiary of the 6th respondent, its shares were freely transferable in terms of Section 111A and therefore the 6th respondent was not obligated to follow the provisions of Article 8. In terms of Section 82, the shares are movable property and freely transferable and as such the 6th respondent has the statutory r .....

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hts on the preference shares is incorrect as by May 2005, when the shares were transferred, voting rights had not accrued on the preference shares. 23. In the rejoinder, Shri Choudhary submitted: The contention of the respondents that the petitioners are prosecuting parallel proceedings is wrong. The civil suit in the High court was initiated by the Hotel and not by either of the petitioners. In the appeal, the only relief that the 1st petitioner has sought is for setting aside the order of the .....

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cts committed by the 2nd respondent as the same has affected the common interest of the petitioners and by this petition they seek to protect their legal rights. The funding pattern of acquisition of the Hotel would indicate that the 6th respondent has not invested any of its own money and the entire funding was out of borrowed money. Since the 1st petitioner has the largest investment in the company, and the 2nd petitioner has given personal guarantee for ₹ 45 crores, there is nothing wro .....

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n the purview of these Sections. If the buyer or seller is a director, the provisions of Section 300 will apply and when the Board approves the transfer, the company becomes a party and as such it becomes an arrangement within the meaning of Section 300 of the Act. The very fact that Section 307 of the Act requires maintenance of register for disclosing directors' shareholding, it is obvious that a company is actually involved in share transactions by a director and therefore he will be an i .....

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the Hotel would continue to be a subsidiary of the 6th respondent. The 1st petitioner understood, from the various provisions of the agreement between GOI and the 6th respondent that it would continue to be the holding company of the Hotel. A reading of Clause 9.5 of the Agreement with GOI would indicate that the 6th respondent being the purchaser would continue to have the controlling interest in the Hotel and if so, the Hotel has to be a subsidiary of the 6th respondent. By the transfer, the .....

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tself has sent a communication that the investment was subject to different laws and rules as prevailing in India and it is also applicable to the 1st petitioner as an investor. If so, the 1st petitioner was made to understand that in case dividend was not paid for two years, the company being a subsidiary of the 6th respondent, the preference shares would have voting rights in terms of Section 87(2) of the Act. In so far as applicability of Articles 8 and 11 is concerned, Article 11 only exempt .....

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to file a petition and issued capital includes not only equity shares but also preference shares, this objection was not pressed. Another issue, which I would like to record at the outset is that, during the hearing on 9.11.05, Shri Sundaram contended that the main issue relating to voting rights on the preference shares being before the High Court in appeal, the same should not be considered by this Board unless the appeal was withdrawn by the petitioners. On this, Shri Choudhary contended tha .....

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nts, However in the hearing held on 28.11.05, Shri Choudhary himself submitted that no finding needed to be given on the issue relating to voting rights on the preference shares as the same was before the High Court in appeal. In view of this, even though the counsel from the both the sides extensively argued on accrual of voting rights on the preference shares, and I have also elaborated their arguments on this issue in this order, I am not giving any finding on the same. 27. Before I deal with .....

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e petitioners have not challenged the explanation given in the reply. I also find that in the annual report for 2004-2005, the Auditor has not repeated most of the earlier qualified remarks, signifying the fact that the earlier lapses pointed out by the auditor have been rectified subsequently. In the written submission also, the petitioners have not referred to any instance of financial mismanagement. This is inspite of the fact that the claim of the 1st petitioner that it sought to remove the .....

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r investing in the company as such he is interested in protection of the investment of the 1st petitioner, not even a single document was produced by him to substantiate this contention. In the earlier paragraph I have noted that in view of the mismanagement part of the allegations not having been pressed, this petition is essentially one on oppression. It has been judicially held in many cases that acts complained of as oppression should be with reference to the proprietary rights of a sharehol .....

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e statute and Articles have not been followed. 29. Regarding transfer of shares: Shri Sundaram contented that complaints relating to transfers have to be agitated in a petition under Section 111 and not in a petition under Section 397/398. His contention would be valid if only transfer of shares is alleged in isolation. In the present case, the petition not only contains the allegation relating to transfer but also of allotments, and the complaint of the petitioners is that these acts are oppres .....

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e company, he submitted that there were some legal hurdles without elaborating as to whether the same were with reference to Indian Law or Malaysian Law. If there were legal hurdles to invest in equity shares at that time , whether the same legal hurdles would apply for taking control of the company has not been explained. It was also not explained, if the 1st petitioner had desired to invest in the equity share capital of the company, whether the respondents would have agreed as the control of .....

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an understanding. It was also not explained as to with whom the alleged understanding was arrived at - whether with the 2nd petitioner, 2nd respondent, the company or the 6th respondent. However, at paragraph 7 of page 25 of the rejoinder, is stated "In fact the Petitioner No2 is the only, witness for the understanding arrived by the Respondent No 1 and Petitioner No 1 at the time of allotment of Cumulative Preference shares ". Who represented the Hotel during the understanding is not .....

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wherein you have invited applications for investment 8.5% preference shares of hotel Queen Road Private Ltd., we are interested to acquire 8.5% redeemable preference shares face value of ₹ 100/- each for a total amount of INR 23.65 crores. For this purpose, we have already remitted 2.5 million US$....". A similarly worded letter for additional preference shares together with consideration for the shares was sent by the 1st petitioner on 21st July, 2003. From these letters, not even a .....

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n to shareholdings in the company. The facts of the case, short of detail are: Kalinga Tube was a private Limited Company with two shareholders Patnaik and Loganathan having equal shares except a few shares held by outsiders. The company was in financial difficulties. The appellant-Jain-was approached for providing funds and also for arranging bank finance to which he agreed. On 27th July 1954, a written agreement was entered into between Jain, Loganathan and Patnaik. Company was not a party to .....

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with the view that being a public company it would be in a better position to mobilize more bank finances. Thereafter, some disputes arose between Jain and the other two. In December, 1957, the company obtained an approval from the Controller of Capital for further issue of equity shares to the tune of ₹ 39 lakhs. Since the company had become a public company, the provisions of Section 81(1) of the Act became applicable by which shares had to be issued proportionately to the existing share .....

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siders. After some subsequent events which are not relevant to cite, Jain filed a petition under Sections 397/398 before Orissa High Court. . While the Learned Single Judge decided the matter in favour of Jain, on appeal the Division Bench decided the matter in favour of Patnaik and Loknathan. Shri Jain took up the matter to the Supreme Court. The Supreme Court after examining the entire provisions of Sections 397/398 in its detailed judgment, dismissed the appeal. In doing so, it noted that the .....

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and was jell that the appellants help was not absolutely necessary, these two groups thought it unnecessary to carry out the spirit of the agreement (though not the terms, for the terms had nothing to do with the future increase at capital tend its distribution). But can it be said that the conduct of the affairs of the company was carried on oppressively merely because these two groups which in March and July, 1958, were in majority did not carry out the spirit of the agreement? We have given .....

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based and issue the shares to others and not to the existing shareholders cannot be said to be oppressive of the then minority shareholders, namely, the appellant's group. We have already pointed out that it cannot be said to have been proved in this case that the appellant suffered in his properietary rights as a shareholder and these circumstances it cannot be said that the action taken in March and July, 1958, were in majority did not carry out the spirit of the agreement? We have given a .....

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the shares to others and not to the existing shareholders cannot be said to be oppressive of the them minority shareholders cannot be said to be oppressive of the then minority shareholders, namely, the appellant's group. We have already pointed out that it cannot be said to have been proved in this case that the appellant suffered in his proprietary rights as a shareholder and these circumstances it cannot be said that the action taken in March and July 1958 in the allotment of shares amou .....

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petitioner does not have any representation on the Board and even the 2nd petitioner has not claimed that he is representing the interest of the 1st petitioner on the (sic) Kalinga Tube case, Loganathan and Patnaik, with the sole objective of denying Jain his entitlement to right shares caused a resolution under Section 81(1A) passed by using their majority shareholding and allotted shares to outsiders. In the present case, the 1st petitioner's right to vote on the preference shares is a def .....

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rights and allege that denial of the said right is oppressive to him. This aspect is being dealt with subsequently. 33. However, having based the entire petition on the alleged understanding with the respondents, in the rejoinder argument, Shri Choudhary contended that there was no need for any understanding and relied on the terms of the of the share purchase agreement with GOI to contend that from the terms of the agreement with the GOI, the 1st petitioner came to understand that the 6th resp .....

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which consent shall not be unreasonably withheld. Subject to the foregoing, this agreement shall inure to the benefit of and be binding upon the parties and respective successors (including any successors by reason of amalgamation and merger of any party) and permitted assigns". In the agreement certain clauses have been inserted under the heading of "Post closing date obligations of the purchaser". There is no specific clause under this heading stipulating that the purchaser wou .....

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cellaneous", it is quite clear that the prohibition of assignment would continue only up to the date of Working out the agreement. Therefore, from this clause also the 1st petitioner could not have understood that the 6th respondent would continue to be the holding company. In the agreement, the 6th respondent has been referred to as the "Purchaser" (which expression shall include its successors and permitted assigns). It is an admitted fact that the 2nd and 3rd respondents contro .....

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company, it would also be in breach of the same assignment clause. It is on record that the 2nd and 3rd respondents, in addition to giving personal guarantees have also given as collateral security, a number of . their personal properties for the loans sanctioned by the bank and the 6th respondent has given its corporate guarantee. The petitioners vehemently argued that the 1st petitioner's contribution to the share capital before the allotment of the impugned shares accounted for more than .....

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shares and also the amount needed to clear the liabilities of the Hotel. If the contention of the petitioners that it is the one who has the largest financial stake in the company should control the management of the company, then, in the present case, obviously, it is the banks which have funded more than 70 crores for both acquisition and renovation of the Hotel, In corporate law, it is always the equity shareholders who have the statutory rights deciding the composition of the Board. 34. When .....

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er has been deprived of its voting rights on the preference shares. As regards the other three aspects, the stand of the petitioners is not clear. There is no specific averment as to who committed the act of oppression and how the company is a party to the oppression. If it is the 6th respondent which has committed the act of oppression, the petitioners have no locus standi as this petition is essentially in the affairs of the company. If: their allegation is that since the 2nd respondent contro .....

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t even a single document has been produced to show that at any time, the 1st petitioner enquired about the affairs of the company. As a matter of fact, the alleged acts of mismanagement were not even pressed during the hearing. Secondly, there is nothing on record to show that at any time either after the expiry of the first year or the second year, the 1st petitioner sought for payment of dividend. All of a sudden, on 1.6.2005, it issued a requisition notice seeking for removal of the 2nd and 3 .....

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Hotel right from the time of acquisition. Therefore, I am of the view that no lawful action taken by the promoters having overwhelming majority of equity shares and who have nurtured the company, to prevent an outsider from taking control of the company, could be considered to be an act of oppression. In this connection, I may beneficially refer to the observation of the Division Bench of Delhi High Court regarding the principle of equity in Shrimati Abnash Kaur v. Land Krishna Sugar Milts Ltd 4 .....

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mes into equity must come with clean hands. Another equally well known maxim is that where both parties to the litigation are at fault, the defendant's position is stronger (see Pomeroy 's Equity Jurisdiction, Vol 2, page 90) " . In the present case, it is the 2nd petitioner holding only one equity sahre, is aiming to take control of the Hotel with the support of the 1st petitioner as is evident from the fact that his son and brother in law were proposed to be appointed as directors .....

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ioners have challenged the transfer on three legal grounds: that the transfer is in violation of Article 8, registered in a board meeting held without notice to the 2nd petitioner (Section 286), approved by interested directors (Sections 299/300) and without a valid quorum(Section 287). In Needles Industries case, the Supreme Court has held that an isolated illegal act need not lead to the conclusion that it was committed with the view to oppress, but a series of illegal acts could lead to that .....

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r Article 11, transfer from a member to another member is permissible and there is no need to comply with Article 8. I have to necessarily reject the first contention. The basic characteristics of a private company in terms of Section 3(iii) of the Act do not get altered just because it is a subsidiary of a public company in view of the fiction in terms of Section 3(3)(iv)(c) of the Act that it is a public company. May be it is a public company in relation to other provisions of the Act but not .....

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idiary of a public company. One of the basic characteristics of a private company in terms of that Section is restriction on the right to transfer and the same will apply even if a private company is a subsidiary of a public company. Therefore, none of the cases cited by Shri Sarkar regarding the free transferability of shares of the public company, is relevant in this case. Since transfer of shares of a private company has to be strictly in accordance with Articles, the company should always fo .....

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ction such as the number of shares, the fair value and the name of the proposed transferee. The board shall, within 7 days from the date of such notice, notify the non transferring shareholders about the proposed transaction. In case, any of the non transferring shareholders are willing to purchase the shares at the same price or at a higher price, that shareholder shall notify the board of his willingness within 21 days from the date of the notice. Upon receipt of such notice, the transferring .....

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on of the board except when the transfer is made by any member of the company to another member or to members (spouse, child or children or heirs)or the board may decline to give such sanction without assigning any reasons. 38. If one were to read Article 8 without reference to Article 11, it would appear that all transfers of shares, irrespective of whether the transfer is from one member to another member or to an outsider, would be governed by this Article. Likewise from an independent readin .....

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o follow the provisions of Article 8, some other member could take the shares either at free of cost or at a nominal value defeating the very desire of the transfer by gift. I actually put a similar question to Shri Chaudhary during the hearing and his answer was that if a member wished to bypass Article 8, he could only bequeath his shares by way of a wall. This would mean that no member can transfer any of his share during his life time even by way of gift. Such a situation is completely contr .....

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ntention is accepted, it would mean absolute restriction. When there is conflict between two Articles, the same has to be resolved by adopting or choosing the one which advance the cause of justice. In the present case by way of a harmonious construction, it has to be held that Article would apply only to a transfer to an outsider and not in the case of a transfer from a member to another member. Such construction would also advance the cause of justice if one keep in mind the object of providin .....

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he transferee as soon the share certificates are delivered (sic) with transfer instruments. A scrutiny of Article 11 would show (sic) only exempts "prior approval" of the Board and not approval for registration of transfers , which, by law has to be approved by the Board. 39. According the allegation that the meeting on 10.5.2005 in which the registration of transfer was approved was held without notice to the 2nd petitioner, the company has not adduced any proof that written notices w .....

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to apply the above decision, all the board meetings laid by the company right from the time the 2nd petitioner became a director, have to be declared as invalid. The 2nd petitioner became a shareholder by registration of one share in his favour in a Board meeting held on 21.12.2002 and likewise the 1st petitioner was allotted preference shares in two board meetings held 5.5.2003 and on 19.7.2003. The admitted position is that the petitioner did not attend any of these meetings for want of notice .....

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plied uniformly to all board meetings, then, neither of the petitioners could claim to be a shareholder Of the company as they became shareholders by transfer/allotment of shares approved in Board meetings without notice to the 2nd petitioner. In other words, they would cease to be members of the company disentitling them even from prosecuting the present petition itself. This, I am sure was not the intention of the petitioners while the counsel for the petitioners cited decisions on this point. .....

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ion 300 and as such the 2nd and 3rd respondents "being interested directors could not have participated in approving registration of shares in favour of the 2nd respondent. On this Shri Chaudhary relied on the decision of this Board in Gordon Woodroffe case (supra). In that case, the interpretation of "interested directors" arose with reference to Section 22A(3)(c) of SCRA and this Board observed As long as the Board of directors who participate in a voting not have any pecuniary .....

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a brother of a director is a relative in terms of Section 6 of the Act. Since transfer of one share in favour of the 2st petitioner was approved in the Board Meeting held on 21.12.2002 by the 2nd and 3rd respondents, this transfer has also to be declared as invalid. Shri Chaudhary tried to differentiate between a transfer to a director and to a relative and contended that Section 300 would apply only in case of transfer to and from a director. I am unable to accept this contention. Section 300 r .....

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est in or concern with his own brother. Therefore, if the registration of transfer in favour of the 2nd respondent has to be declared as invalid, in terms of Section 300, then the same will have to be done in respect of transfer in favour of the 2nd petitioner also. The judgment of the Apex Court in Gaekwad case as referred to by Shri Sarkar is relevant. Any way, this discussion is only academic as in Kerala Kaumudi case (supra), the Supreme Court has held that in case of transfer of shares, the .....

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ving any consideration, adjusted the same against the loans given by the 2nd respondent in exclusion of the 2nd petitioner who had also given loans to the 6th respondent etc. This petition has been filed in the matter of Hotel Queen and not in the matter of the 6th respondent and as such these complaints cannot be examined in this petition. Further, this issue would also become irrelevant in view of the final direction that I propose to give. Thus, in so far as the registration of transfer is co .....

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e view to defeat the voting rights on the preference shares and to increase the holdings of the respondents; that the shares were allotted at par without proper valuation; that provisions of Section 300 would apply and that no notice was issued to the 2nd petitioners for any of the Board meetings in which shares were allotted. 43. It is a settled law, as decided in the cases cited by the learned Counsel for the petitioners and also decided in many other cases, that directors cannot use their pow .....

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the issue/allotment of shares, it is a settled law as propounded by the Supreme Court in Needle Industries case that if the issue of further shares is in the interest of the company and in the process if directors are also benefited, it cannot be considered to be an act of oppression. In the present case, one noteworthy aspect in so far the allegation relating to allotment of shares is concerned is that, the petitioners have not challenged the same on the ground that the company was not in need .....

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statements of the company to the petitioners to evidence the receipt of money from the respondents as consideration for the shares allotted to them. However, in the written submission, the petitioners have alleged that the 2nd respondent did not bring in cash for the allotment made to him but the same was adjusted against his loan account to the company. Since this allegation is only in the written submission to which the respondents did not have any opportunity of rebuttal, I am unable to give .....

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given my finding on the impact of meetings held without notice to the 2nd petitioner and a such I am not repeating the same. In so far applicability of Section 300 is concerned, the learned Counsel for the petitioners contended that in allotment of shares, the company being a party, it is an arrangement and also a contract with the company. Shri Choudhary relied on the decision of Supreme Court in Kerala Kauladi Ltd. case wherein the Supreme Court has held that it is imperative that the company .....

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otment of shares to directors has been examined by this Board in Kadri Mills case. This Board has observed "In regard to legal infirmities, his submission has been that before a quorum of non interested directors, the board decided to issue convertible warrants and also issued shares against the warrant. As far as the presence of dis-interested directors is concerned, we are in full agreement with the submissions made by the counsel of the respondents. As rightly pointed out by him, as long .....

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it is so, then, no issue of right shares/warrant could be made in case all the directors are shareholders of a company. Regarding the allegation that when the warrants were converted in that meeting, quorum was absent. One has to keep in mind that the general body has already approved conversion of warrants and what the board did was only with the authority of the general body which was aware of the interest of the directors. Therefore, we do not find any infirmity in the interested directors pa .....

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or the first annual general meeting of the company convened on 28.12.2002, that the following resolution was proposed as a special resolution: "Resolved that pursuant to Section 81 (1A) and other applicable provisions of the Companies Act, 1956 as amended and subject to the following terms and conditions, the Board of Directors of the company be and is hereby authorized to offer issue and allot 71 lakhs equity shares of ₹ 100/- and 25 lakhs redeemable preference shares of ₹ 100/ .....

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₹ 25 crores. Similarly, holding company and present directors and their relatives have interest to buy equity shares now proposed to be offered by the company. As Section 81A stipulates approval of existing shareholders before allotting shares to persons other than existing members, the above resolution is thus recommended for your kind approval". (emphasis supplied). On the basis of this explanatory statement disclosing the directors' interest to acquire shares, the general body .....

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ody had approved issue/allotment of shares to the directors, he also should have been allotted shares, but he only seeks to cancel the allotments. Admittedly, the respondents have not justified exclusion of the 2nd petitioner, who was/is a director, from allotment of shares. However, during the hearing the respondents have agreed to allot proportionate shares to the 2nd petitioner also. 47. The petitioners have also alleged that the 2nd respondent has played a fraud in the matter of transfer and .....

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misrepresentation is a fraud. In the present case, no such suppression of material facts or misrepresentation in the allotments/transfer of shares has been alleged. Further, in regard to the transfer of shares, I have already given my findings. As far as the allotment of shares is concerned, the first allotment to the 6th respondent was made on.27.7.2004, when there was admittedly no dispute among the parties and even otherwise, the allotment was made to the largest shareholder. Likewise, in th .....

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3rd respondents is concerned, the 2nd petitioner can only have the grievance that he was not allotted proportionate shares. In regard to the allotment and transfer of shares approved in the Board meeting on 10.5.2005, there is nothing on record to show or established by the petitioners, that the minutes and connected records were fabricated after the EQGM notice was issued on 1.6.2005 by the 1st petitioner. In that were the case, the petitioners could definitely allege fraud. Further, the learne .....

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transfer were done lawfully and with the view to protect the interests of the promoters of the company. Therefore, I do not find that the respondents are guilty of any fraud. The counsel for the petitioners also contended that by the allotments and transfer of shares, only the 2nd respondent was benefited and not the company. As far as the allotments are concerned, it is an admitted fact that the company needed funds and to that extent the company was benefited by induction of funds. In so far a .....

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n the appointment of the additional directors, then, I do not find any justification, It is on record that there are only three directors on the Board with the 2nd petitioner also being a director. If the 2nd and 3rd respondents had been removed in the EOGM, wherein two more directors of the petitioners' choice were proposed to be appointed, then the petitioner would have majority on the Board. Thus, I find that in the appointment of additional directors, neither the petitioners have shown h .....

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who, being a director did not seem to have evinced any interest in the affairs of the company. While seeking for declaring the transfer of shares as invalid on the ground that the same was in violation of the preemptive rights in terms of Article 8, the 2nd petitioner has not sought for granting him that pre-emptive rights to enable him to acquire the shares. Instead he has only sought for cancellation of the transfer so that the 6th respondent would be restored to the position of the holding co .....

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are to be invoked to get the grievances of oppression redressed and not for the purpose of achieving an oblique or ulterior object. In this connection I may refer to the case of Mathur v. Har Swamp Mathur 40 Comp Cas 282 (AH), where in Allahabad High Court has observed "the court has to be careful and astute enough to prevent a misuse of the provisions of sections 397/398 by a party, lest a remedy proposed and granted to overcome an alleged mischief becomes a source of greater oppression t .....

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to grant some appropriate reliefs taking into consideration the observation of the Supreme Court in Needles Industries case (para 172) and reiterated in Gaekwad's case (para 207) that even when oppression has not been established, the court may grant such relief so as to do substantial justice between the parties. Even though the respondents repeatedly contended that the 2nd petitioner holds only one share, it is to be noted that even the 2nd respondent held only two shares shares and the 3r .....

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, the stand of the petitioners that the 2nd petitioner had given a loan of ₹ 5.5. crores was not specifically denied nor any documents produced to rebut the same. In the balance sheet of the 6th respondent for the years 2003 and 2004, I find that there is a credit balance of ₹ 4.91 crores in the name of the 2nd petitioner under "unsecured loans". The 2nd petitioner has also given a joint guarantee for the loans of ₹ 45 crores. Both are still continuing. No one would g .....

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far as allotment of shares in concerned, the respondents themselves undertook before me that they would allot proportionate shares to the 2nd petitioner if he so desired, however without indicating the basis on which the proportion would be arrived at. I have already held that allotment of shares to the 6th respondent cannot be questioned as it was/is the largest shareholder in the Hotel. However, the 2nd respondent holding 2 shares and the 3rd respondent holding 3 shares and a non shareholder- .....

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respondents- that is 2,60,000 shares should be offered to the 2nd petitioner at par. In case he accepts the same along with consideration, each of these respondents should transfer 1/6th of the shares allotted to each of them. Since it is the stand of the 2nd petitioner that at the time of acquiring the Hotel, he had given a loan of ₹ 5.5 crores to the 6th respondent, which stand has not been rebutted, I am of the view that he should get benefit for the same. Therefore, when the 2nd respo .....

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f shares required to be so transferred works out to 15,42,156 shares. The consideration for the transfers will be ₹ 20 per share at which the 6th respondent transferred shares to the 2nd respondent. Since the consideration for the transfer of the shares from the 6th respondent was adjusted against the loan account of the 2nd respondent in the 6th respondent, similarly, consideration for 15,42,156 shares now directed to be transferred by the 2nd respondent to the 2nd petitioner be adjusted .....

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without any further act by any one. Since the 2n petitioner would also get the shares at the same price at which these shares were transferred/allotted, even the allegation of the 2nd petitioner that the shares were under-valued no longer survives. I have consciously not taken into consideration the allotments made to the 6l respondent as the object of my direction is to maintain the ratio of shareholding between the 2nd petitioner and the 2nd/3rd respondents as it is the 6th respondent which ac .....

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