A Related-Party Warehouse Sale and a Down-Round Rights Issue

Three layers must be checked separately.

Statutory. The buyer is a private company owned by the CEO's brother, a relative of a director. A private company in which a director or his relative is a member is a related party. A one-off sale of a cold-storage warehouse is not in the ordinary course of a food business and is not at arm's length (Rs 4.2 crore against a Rs 5.6 crore draft valuation). The ordinary-course, arm's-length exemption therefore does not apply, and the related-party approval provisions are engaged. Board approval must be by resolution passed at a meeting, not by circulation. The CEO is interested: he must disclose under Section 184 and, because the arm's-length proviso does not rescue the item, cannot vote on it.

Contractual. The articles require seven days' papers for related-party items; three days is a breach. The shareholders' agreement's reserved matter is also breached because the Kestrel nominee's approval was never validly sought.

Consequence. A related-party transaction that breaches the approval route is voidable at the company's option, not automatically void, and the interested director exposes himself to indemnity. Kestrel should seek an injunction before completion rather than await a compensation claim.

Notice. A rights issue requires 15 days' notice; a 10-day window is short unless members holding 90% of the shares consent to the shorter period. That defect is curable but it is a live challenge if Kestrel was not consulted.

Price. A 40% discount is not per se unlawful - a company genuinely short of cash may have to price at what the market will bear. The court will ask whether the issue is bona fide or a device to dilute. Indicators here: the company needs Rs 8 crore, Kestrel has not been told the use of proceeds, and the price is far below the last round. If the founders cannot subscribe and Kestrel can, the price mainly harms those who cannot pay - which cuts both ways.

Anti-dilution. The adjustment formula decides the economics. A broad-based weighted-average adjustment softens the effect; a full-ratchet resets Kestrel's price to Rs 120 and sharply increases its share count. Either way, a down round triggers a true-up, and the founders should expect it.

Blocking. Kestrel cannot veto a genuine rights issue unless the shareholders' agreement makes capital raising a reserved matter. Its realistic levers are to subscribe to protect its stake, challenge the notice period, and plead oppression if the issue is designed to push it below a threshold.

Director duties. The two transactions must be read together, because a cheap rights issue can be used to compensate founders for a related-party sale that benefits the CEO's family. The board's duty of care requires an informed decision: the valuation report was withheld from the only director who asked for it, and that alone is a process failure. Independence of the two independent directors is also in question if they approved on three days' notice without the valuation.

Remedies.

1. Injunction restraining completion of the warehouse sale until a valid board and reserved-matter approval is obtained.
2. Oppression and mismanagement petition: the remedy can include regulating the company's affairs, restraining the rights issue, or ordering the purchase of Kestrel's shares at a fair value.
3. A derivative action if the company itself refuses to avoid the transaction; the company is the proper plaintiff.
4. Contractual claims under the shareholders' agreement and the articles for breach of the reserved matter and notice covenants.
5. Regulatory exposure for the directors under Section 184 and the related-party provisions.

What Kestrel should not do. It should not simply reject both transactions and walk away: the company needs the Rs 8 crore, and a court will not run the business. The stronger position is conditional consent - approve the rights issue with a corrected notice and a disclosed use of proceeds, and block the warehouse sale until it is re-valued.