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Dehra Dun Mussorie Electric Tramway Co. Ltd. and anr. Vs. Jagmandar Das and ors. - Court Judgment

LegalCrystal Citation
SubjectProperty
CourtAllahabad
Decided On
Reported inAIR1932All141
AppellantDehra Dun Mussorie Electric Tramway Co. Ltd. and anr.
RespondentJagmandar Das and ors.
Excerpt:
- - under article 120 of the articles of association also the managing agent was given extensive powers to do anything necessary in the management of the affairs of the company, in the circumstances of this case the managing agent might well be regarded as being faced with an emergency and thus authorized under the ordinary rules of agency to obtain temporary accommodation 'from the bank for the purpose of protecting the interests of the company. beltie shah acted ultra vires in obtaining this loan it appears that his action was clearly ratified by the board of directors. we take it therefore, that the board of directors clearly ratified the loan to the plaintiffs in their report dated 17th september 1923. 7. similarly the directors' report for the' period ending 31st march 1924 was.....king, j.1. this is a defendant's appeal arising out of a suit for sale upon the basis of a mortgage. the defendant is the dehra dun mussoorie electric tramway co., ltd. (in liquidation). this company was incorporated about the end of august 1921 having a registered office at dehra dun. the plaintiff's are the proprietors of a bank at dehra dun and the company had an account with that bank. on 19th january 1923 the plaintiff's allowed the company, at the request of their managing agent mr. beltie shah gilani, an overdraft of rs. 25,000. the mortgage deed in suit was executed on 19th june 1923 by mr. beltie shah on behalf of the company in favour of the plaintiffs to secure the overdraft. the defendants admit receipt of the consideration by the company. the overdraft of rs. 25,000 was.....
Judgment:

King, J.

1. This is a defendant's appeal arising out of a suit for sale upon the basis of a mortgage. The defendant is the Dehra Dun Mussoorie Electric Tramway Co., Ltd. (in liquidation). This company was incorporated about the end of August 1921 having a registered office at Dehra Dun. The plaintiff's are the proprietors of a bank at Dehra Dun and the company had an account with that bank. On 19th January 1923 the plaintiff's allowed the company, at the request of their managing agent Mr. Beltie Shah Gilani, an overdraft of Rs. 25,000. The mortgage deed in suit was executed on 19th June 1923 by Mr. Beltie Shah on behalf of the company in favour of the plaintiffs to secure the overdraft. The defendants admit receipt of the consideration by the company. The overdraft of Rs. 25,000 was undoubtedly utilized for the necessary purposes of the company. The defendants have no objection to treating the plaintiffs as unsecured creditors but plead that the company is not bound by the mortgage deed for various reasons which we shall have to consider in detail. The trial Court held that the mortgage was valid and binding upon the company and decreed the plaintiffs suit. The defendants in appeal have pressed the same points that were taken in the Court below in support of their contention that the mortgage deed is not valid and binding upon the company.

2. The first question is whether Mr. Beltie Shah had authority to borrow Rs. 25,000 from the plaintiffs on behalf of the company. This question formed the subject of issue 1 in the trial Court.

3. The Board of Directors undoubtedly had power under the Articles of Association to borrow money for the purposes of the company and to secure the loan by a mortgage. The appellants rely upon Article 104 of the Articles of Association which lays down that

the Board may delegate any of their powers, other than powers to borrow and make calls, to committees consisting of such member or members of their body as they think fit.

4. Under this article the Board are expressly prohibited from delegating their power to borrow money. Under Article 120 the managing agent was given very extensive powers to conduct and manage the business and affairs of the company and he was given power to enter into all contracts and to do all other things usual, necessary or desirable in the management of the affairs of the company.

5. The respondents contend that the power of entering into contracts would include the power of contracting loans. In our opinion however this contention cannot be accepted. The articles must be read as a whole and as Article 104 restricts the Board from delegating its powers of borrowing we think that Article 120 could not be interpreted so as to give the managing agent unrestricted powers of borrowing money on behalf of the company. It is open to question however whether under the ordinary rules of law relating to agency the managing agent should not be held to have been authorized to obtain the overdraft in the circumstances of this case. The loan was urgently required for the purposes of the company. Machinery and stores had been ordered and had arrived from England and had to be paid for without delay. Under Sections 188 and 189, Contract Act, an agent has very extensive powers in an emergency to do such acts as are necessary for the purpose of protecting his principal from loss and for carrying on the business. Under Article 120 of the Articles of Association also the managing agent was given extensive powers to do anything necessary in the management of the affairs of the company, in the circumstances of this case the managing agent might well be regarded as being faced with an emergency and thus authorized under the ordinary rules of agency to obtain temporary accommodation 'from the bank for the purpose of protecting the interests of the company. It is not denied that the loan was necessary and that the money was at once utilized for the purposes of the company. We think that although the managing agent had no general power to borrow money on behalf of the company he was nevertheless authorized to incur a temporary loan in the interests of the company in an emergency such as arose in the present case. Article 104 prohibits the delegation of a general power of borrowing but we think it does not prohibit the managing agent from incurring a temporary loan in an emergency, for protecting the interests of the company.

6. Even if Mr. Beltie Shah acted ultra vires in obtaining this loan it appears that his action was clearly ratified by the Board of Directors. We cannot lay stress upon the resolution which purports to have been passed at a meeting of the Board on 2nd June 1923 as it appears to us (for reasons which we shall presently give) that this resolution was not. passed by a properly convened meeting of the Board. The directors report to the share holders for the period ending 31st March 1923, submitting the audited accounts for that period, shows the item of Rs. 24,454-3-8 as due to Bhagwan Das & Co., (the plaintiffs) as an unsecured loan. This report purports to be signed by four of the directors of the company at a meeting dated 17th September 1923 and it has not been argued that this meeting was not properly convened. We take it therefore, that the Board of Directors clearly ratified the loan to the plaintiffs in their report dated 17th September 1923.

7. Similarly the directors' report for the' period ending 31st March 1924 was signed by the directors on 7th January 1925, This report submitted the audited accounts of the company and the accounts-clearly show a sum of Rs. 26,802-7-3 as-due to Bhagwan Das & Co., secured by charge over the company's lands. Even if Mr. Beltie Shah exceeded his powers in obtaining the loan to meet an emergency his action was never repudiated, but on the contrary was clearly ratified by 'the Board of Directors; so we hold that the company cannot escape liability on the ground that their managing agent had no-authority to raise the loan.

8. The second question is whether the mortgage deed was executed in such a manner as to bind the company under the provisions of Company Law.

9. The mortgage deed was signed by Mr. Beltie Shah in his capacity as managing agent of the company and it bears the common seal of the company. The appellants refer to Article 98(t) of the Articles of Association and argue that the execution-of the mortgage deed is invalid because-under Article 98(t) a document to which the common seal is affixed must also be signed by at least one director and countersigned by the agent or other officer appointed by the Board for that purpose. Mr. Beltie Shah is an ex-officio director as well as-managing agent, but it is clear that, even if he be considered to have signed the document in his capacity as director, Article 98(t) requires countersignature by the, agent or some other officer duly appointed and the document in question bears no countersignature.

10. The respondent contends that there was no necessity for affixing the common seal to the mortgage deed and the presence of the seal may be ignored. In our opinion the affixation of the seal was not required by Company Law. Under Section 88, Companies Act, the mortgage could be validly executed by any person acting under the authority of the company. No rule of law applicable to companies in general, or to this company in particular, has been shown to us requiring a deed of mortgage to be executed on behalf of a company by affixation of the common seal. If a document under seal is not necessary then a mere defect in the manner of affixing the seal will not render the document invalid. This was the view taken by the Calcutta High Court in Prabodh Chandra Mitra v. Road Oils {India) Ltd. : AIR1930Cal782 . Their Lordships held that a mere defect in respect of the seal does not make the document for all purposes bad even if it was intended to be under seal.

11. The next question is whether Mr. Beltie Shah was authorized to execute the mortgage on behalf of the company.

12. The minute book of the company (p. 121 of the printed record) sets forth a resolution which purports to have been passed by the directors of the company held on 2nd June 1923 in these terms:

Resolved that the Board of Directors of the Dehra Dim Mussoorie Klcctrie Tramway Co., Ltd., approve of the proposal of the managing agents to the effect that in order to secure the overdraft of Rs. 25,000 obtained by the company from Messrs. Bhagwan Das & Co., bankers at Dehra Dun, the company's land known as the Khazanchi Bagh near the Dehra Dun railway station, be legally assigned to the said Messrs. Bhagwan Das & Co., on such terms and conditions as may be settled between the managing agents and Messrs. Bhagwan Das & Co. The Board of Directors authorize Mr. Beltie Shah to enter into the agreement and give the necessary deed to Messrs. Bhagwan Das & Co., and to sign and seal and deliver the deed on behalf of the Board.

13.This resolution purports to be signed by three directors, namely Bakhshish Singh, B.N. Sen and Beltie Shah.

14. It has been strenuously contended for the appellant that this is a mere bogus resolution as no meeting of directors was in fact held on 2nd June 1923 and even if some directors did meet together it was not a properly convened meeting in accordance with the procedure laid down in the Articles of Association. It lias been argued for the respondent that it is not open to the defendant on the pleadings to argue that no meeting took place. Para. 16 of the additional pleas at page 6 states:

That the directors' meeting referred to in para. 7 of the plaint was not properly convened inasmuch as due notice had not been given to all the directors and a ratification, if any, by any such improperly convened meeting cannot legally bind the company.

15. We think there is much force in this objection. The defendants did not deny that a meeting took place but they alleged that the meeting had not been properly convene as due notice has not been given to all the directors. On these pleadings we think it was only open to the defendant to contend and establish the fact that the meeting had not been properly convened and therefore any resolution passed by such a meeting was not legally binding upon the company. If the fact of a meeting had been expressly challenged then the plaintiff might have called evidence to prove that in fact a meeting did take place. The defendant did not call any director to prove that no meeting took place as alleged. The question however does not appear to be of much importance since if the meeting of directors had not been properly convened, after due notice, its proceedings would not have been valid and binding upon the company. No trace has been found of any notice convening a meeting on 2nd June 1923 nor is there any trace of the agenda of any such meeting.' From the letter Ex. E. p. 127, dated 7th June 1923 from Mr. Beltie Shah to Mr. Sen, one of the directors, it appears that al' though M. Beltie Shah, Mr. Narsingh Rao and Mr. Sen might have met together on 2nd June 1923 they did not in fact pass the resolution which appears in the company's minute book on that date. The letter of 7th June states the fact of the overdraft having been obtained from Messrs. Bhagwan Das & Co., who were pressing for repayment and wanting security. Mr. Beltie Shah enclosed a draft resolution (to the same effect as the resolution appearing in the company's minute book on 2nd June 1923) asking Mr. Sen to sign it and to get it signed by Mr. Rao and Sardar Bakhshish Singh. In view of this letter we think it is clear that there could not have been a properly convened meeting of directors on 2nd Juno 1923 which passed the resolution set forth above.

16. The next question is whether the plaintiff knew that there could have been no properly convened meeting of directors on 2nd June which passed the resolution mentioned.

17. The appellant contends that the plaintiff Jagmandar Das knew perfectly well that no meeting had been held on 2nd June and that the resolution was a mere bogus resolution. He relies mainly on the letters Ex. Q and Ex. CC. Ex Q (p. 135) is a letter from Mr. Beltie Shah to the plaintiff dated 12th June 1923 Mr. Beltie Shah complains that the plaintiff is unreasonably impatient to' obtain security for his loan and states that the company are doing everything in their power to meet the plaintiff's wishes and adds:

You are perfectly well aware of the fact that in the case of a limited company the procedure laid down by the Articles and law has to be gone through and the delay is only natural as all our directors are nonresidents of Dehra Dun.

18. The appellant argues that the plaintiff on receiving this letter must have known that no resolution sanctioning the execution of a mortgage to secure the overdraft could have been passed by a meeting of directors on 2nd June. Ex. CO (p.139) is a letter dated 16th June 1923 from the plaintiff to Mr. Beltie Shah. The plaintiff complains of the delay in adjusting the overdraft or giving security for it andsays:

Till now you ought to have got the matter settled by the directors by means of correspondence.

19. This is interpreted by the appellant as showing that the plaintiff knew that no resolution sanctioning the mortgage had been passed on 2nd June but he hoped that the business would be settled by means of correspondence. For the respondent it is contended that although no resolution may have been passed at a properly convened meeting of directors on 2nd June the plaintiff was not aware of that fact. Ex. HH (p. 117), which is a letter written by the plaintiff to Mr. Beltie Shah on 26th May 1923, shows that there was a talk about giving security for the overdraft from about 25th May. It was possible therefore for the managing agent to have given one week's notice of a meeting to the directors before 2nd June. Ex. Q does not show for certain that no resolution was passed on 2nd June nor does Ex. CC show for certain that the plaintiff knew that no resolution could have been passed on 2nd June. Buggan Lal, manager of the plaintiff's bank, deposed that Mr. Beltie Shah had shown him the minute book of the company, containing the resolution of 2nd June, a day or two before the execution of the deed i.e., on 18th June. The question was expressly put to him that when he knew from the letter of 12th June (Ex. Q) that Beltie Shah had spoken of the necessity of sanction by the directors why did he not suspect Mr. Beltie Shah of being a tricky and unreliable man when he showed the witness a resolution purporting to have been passed on 2nd June. The'witness answered:

I took him to be extra honest because he had frankly shown me the minute book of the company and because he had said that money, was being expected from Nabha every day.

20. In all the circumstances of this case we think it was very possible that Buggan Lal and the plaintiff were deceived by Mr. Beltie Shah. One must remember that in June 1923 there was no suspicion, that the company would go into liquidation and the plaintiff had no reason to suspect Mr. Beltie Shah of being a tricky and unreliable man. Subsequent events have no doubt cast a lurid light upon his, character and methods and in the light of such subsequent events it may be argued that the plaintiff and Buggan Lal ought not to have put so much trust in Mr. Beltie Shah. It is easy to be wise after the event, but in the circumstances we think that Mr. Beltie Shah who appears to have been a very capable and plausible man persuaded the plaintiff that the execution of the mortgage had really been sanctioned by a properly convened meeting of the directors. Buggan Lal and the plaintiff may have thought it strange that Mr. Beltie Shah did not refer to the resolution in his letter of 12th June but he seems to have explained to them that he was in daily expectation of receiving large sums of money from Nabha out of which he could repay the overdraft, thus rendering the execution of a mortgage deed unnecessary, and therefore he made no previous mention of the resolution sanctioning the mortgage. However this may be, when Mr. Beltie Shah showed Buggan Lal the minute book of the company containing the resolution signed by three of the directors, as we believe he did, we think it would have been difficult for Buggan Lal to disbelieve the representation that the resolution had been duly passed. Moreover, the conduct of the plaintiff in accepting the mortgage supports the view that he believed that the execution of the mortgage had been sanctioned by the Board of Directors. The plaintiff would not have been likely to accept a mortgage which to his knowledge had not been sanctioned by the directors and was not binding upon the company. If the plaintiff: had known or even strongly suspected that the mortgage had not been sanctioned he would not have accepted it but would have sued the company for recovery of the loan.

21. It has further been argued for the appellant that the directors were not authorized under the Articles of Association to empower Mr. Beltie Shah to execute the mortgage. The argument is that as the directors cannot delegate their power to borrow they could not leave the details of the mortgage transaction to be settled by the managing agent. The reply to this is that the loan had already been incurred and there was no question of delegating the power of borrowing any further sums. The only question for the directors was whether they should give the plaintiff a security for the loan which he had already advanced. Under Article 104 we think the Board could legally empower one of the directors to execute the mortgage deed on their behalf and to settle the details of the mortgage transaction.

22. The result is that in our opinion the Board of Directors could legally authorize Mr. Beltie Shah to execute the mortgage on behalf of the company by a resolution passed at a properly convened meeting. As a matter of fact, we hold that there was no properly convened meeting which passed the resolution dated 2nd June but the plaintiff had no reason to suppose that the resolution had not been properly passed and was not binding upon the company. On these facts we consider that the plaintiff is protected in spite of the defect in passing the resolution, and the company is bound by the mortgage so far as company law is concerned. The law on this point is laid down in Halsbury's Laws of England' Vol. 5, p. 302 as follows:

The persons contracting with a company and dealing in good faith may assume that acts within the powers of the company have been properly and duly performed and are not hound to enquire whether acts of internal management have been regular.

23. The case of the Royal British Bank v. Turquand [1856] 6 Ellis. & Bl. 327 is one of the most important cases on this point. In that case the directors of the company were authorized in certain circumstances to give bonds but the company sought to escape liability on the ground that there had been no resolution authorizing the making of the bond in suit. It was held that the plaintiff was entitled to judgment having a right to presume that there had been a resolution at a general meeting authorizing the borrowing of the money on the bond.

24. For an Indian decision on this point we may refer to the case of Bam Baran Singh v. Mufassil Bank Limited : AIR1925All206 in which it was held that a company is liable for all acts done by its directors even though unauthorized by it provided such acts are within the apparent authority of the directors and not ultra vires of the company. Persons dealing bona fide with a managing director are entitled to assume that he has all such powers as he purports to exercise if they are powers which, according to the constitution of the company, a managing director can have.

25. We agree with the Court below therefore in finding that the company is bound by the mortgage so far as company law is concerned.

26. The next question is whether the mortgage is void for want of previous sanction by the Local Government. Under Clause 37 of the Dehra Dun-Mussoorie Tramway Order 1921 it is laid down that

the promoter shall have power to transfer the undertaking with the assent of Government previously obtained, but not otherwise, to any person or persons or to a company.

27. It is argued that as the Local Government did not give their previous assent to the mortgage it is void.

28. The respondent replies that the defendant has never proved that the mortgage was made without the previous sanction of the Local Government, a fact which was within the defendant's special knowledge. In our opinion there is no force in this reply. Issue 3 at p. 20 implies that the mortgage had not been sanctioned by the Local Government. The plaintiff never alleged that such sanction had been obtained. In our opinion the Court below wrongly cast the onus upon the defendant of proving that in fact no sanction had been obtained for the mortgage. The plaintiff himself admits in cross-examination that so far as he is aware no permission or sanction was taken from the Government for the execution of the mortgage-deed; he did not know that any such sanction was necessary, nor did Beltie Shah ever tell him that any such sanction had been obtained. In view of the plaintiff's admissions and in view of the fact that he never alleged that sanction had been obtained and allowed the issue to be framed in such a manner as to imply the absence of sanction we consider that it must be held that the mortgage was executed without previous sanction by the Local Government. The question however remains whether the mortgage is void on that account and this raises several points for determination. The first question is whether the company was a 'promoter' within the meaning of the Indian Tramways Act 1886, and the Tramway order of 1921 made under Sub-section (3), Section 6 of that Act by the Local Government. Promoter' is defined in the Act as meaning a local authority or person in whose favour an order has been made and includes a local authority or person on whom the rights and liabilities conferred and imposed on the promoter by this Act and by the order and any rules made under this Act as to the construction, maintenance and use of the tramway have devolved. Beltie Shah was undoubtedly a 'promoter' and is expressly referred to as the promoter in the tramway order. The question is whether the rights and liabilities conferred and imposed upon him have legally devolved upon the company.

29. It is argued for the respondent that they have not legally devolved upon the company because the Local Government did not give their previous consent to the transfer of the undertaking by Beltie Shah to the company. On 22nd December 1921 an agreement was entered into between Beltie Shah and the company (Ex. H,P.53) whereby the company agreed to take over the benefit and liability of Beltie Shah under the tramway order. It was argued that there was no proof of any previous sanction of this transfer and therefore it was void and the company never became a 'promoter' and was not subject to the conditions laid down in the tramway order. By consent of parties we allowed the appellant to file further evidence on the question of the Local Government's sanction of the transfer of the undertaking by Beltie Shah to the company. It appears that on 27th May 1921 Mr. Beltie Shah first submitted his formal application for permission to transfer the undertaking to a company. This application was made before the concession had been granted to him. On 28th June 1921 Mr. Beltie Shah, writing to Mr. Willmott, the Chief Engineer and Secretary to Government in the Public Works Department, admits that strictly speaking he has not yet received the concession and therefore he will content himself with a letter from Mr. Willmott to the effect that he will have no objection to permit the transfer of the proposed concession for constructing the tramway. He further says it must be understood that this tentative permission is merely to facilitate the incorporation of the company under the Companies Act. Mr. Willmott replies by a letter dated 9th July 1921:

As regards the request made in para 6 of your letter I have to say that if the provisional order becomes valid Government will have no objection to the transfer.

30. After the tramway order had become absolute Mr. Beltie Shah wrote again to Mr. Willmott on 10th January 1922 referring to the previous letter (saying that Government will have no objection to the transfer) and asking that official permission for the transfer shall now be given. By a letter dated 22nd February 1922 the-formal sanction of the Local Government to the transfer of the order, authorizing: the construction of a tramway, was conveyed to Mr. Beltie Shah.

31. For the respondent it is argued that as formal sanction for the transfer was only accorded on 22nd February 1922 the transfer effected by the agreement of 22nd December 1921 was void since there was no previous sanction. The appellant maintains that the letter of 9th July 1921 intimating that Government will have no objection to the transfer is sufficient authority for the transfer. In our opinion the appellant's contention is correct. The tramway order merely lays down in Clause 37 that the undertaking can only be transferred with the assent of Government previously obtained, but does not specify any form in which such assent should be expressed. In our opinion a demi-official letter such as that of 9th July 1921 by a Secretary to Government in the P.W.D., intimating that Government will have no objection to the transfer is sufficient, to convey the previous-assent of Government. We take it therefore that the company did become a 'promoter' in place of Beltie Shah.

32. The next question is whether the land mortgaged formed part of the 'undertaking.' The land was bought by the company on 15th May 1922 for the purpose of a tramway depot, that is for administrative offices and a car, shed. 'Undertaking' is defined as including all moveable and immovable property of the promoter suitable to and used by him for the purposes of the tramway. The fact that the land near the railway station was 'suitable' for the purposes of the tramway can hardly be disputed. It was obviously necessary that the tramway company should have some administrative offices and a car shed, and a site near the railway station was obviously suitable. It is argued however that at the time of the mortgage the property was not used by the company for the purposes of the tramway. The evidence shows that at that time some sleepers intended for the construction of the tramway were stacked upon the land. In our opinion this indicates use of the land for the purposes of the tramway sufficient to bring it within the definition of 'undertaking'. The mere fact that the land was not acquired under the Land Acquisition Act or with the concurrence of the Superintendent of the Doon, as laid down in Clause 13 of the Tramway order, will not take the land out of the category of 'undertaking.' Undoubtedly the land was acquired for the purpose of the tramway and the method of its acquisition is immaterial for the, purpose of deciding whether it is part of the company's undertaking. We find that it is part of the 'undertaking' because it belonged to the company and was suitable for and used by the company for the purposes of the tramway.

33. The mortgage then was made in contravention of Clause 37 of the Tramway order as having been made without the previous assent of Government. On these facts the respondent argues that the transfer would only be voidable at the option of the Local Government and not absolutely void. The appellant maintains that the mortgage is absolutely void and in our opinion his contention is well-founded. The rules laid down in the Tramway order have the force of law and in our opinion the transfer of part of the undertaking without the previous sanction of Government must be held to be absolutely void. In the case of Gauri Shanhar Balmohund v. Ghinumia A.I.R. 1918 P.C. 168 it was held by their Lordships of the Privy Council that a mortgage by a judgment-debtor in contravention of para 11, Section 3, Civil P.C, is void and not merely voidable. We may also refer to the rulings in Dipan Rai v. Bam Khilaivan [1910] 32 All. 383 and Har Prasad Tiwari v. Sheo Gobind Thuari A.I.R. 1922 All. 134 in which the mortgage of an occupancy holding in contravention of the Agra Tenancy Act was held to be void. In our opinion the same principles would apply to a mortgage in contravention of a clause of the tramway order. If the mortgage is void it cannot be ratified nor can it be pleaded that the defendant is estopped from denying his competence to create the mortgage. We hold therefore that the mortgage is void.

34. The appellants being the liquidators of the Dehra-Dun-Mussoorie Electric Tramway Company and all the evidence having been taken in this case we think that instead of the plaintiffs proving their claim in the course of the liquidation proceedings they should be given a decree for money as against the liquidators, They will thus rank as unsecured creditors and will get their money in due course of liquidation.

35. We allow the appeal and vary the decree of 'the trial Court by granting to the plaintiff's a simple money decree for Rs. 29,773-4-3 to be realized by them in due course of liquidation. Interest at the contractual rate will cease as from 29th January 1926. If there are any surplus-assets interest at 6 per cent per annum will be payable out of the surplus up to the date of repayment. The appellants will get half the costs of this appeal and those in the Court below from the respondents. The respondents will bear their own costs.


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