NUJS-HSF Moot Court Competition, 2016: Winners - Applicants

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IN THE SUPREME COURT OF INDIA, AT NEW DELHI.

Civil Appeal No. __ of 2016 (Art. 133 of the Constitution of India, 1950 read with Order XIX, Rule 1, Supreme Court Rules, 2013)

Abhijit & Piyush

Appellants

v. Flume Capital, Nurture Capital, Arcot, Smith & Brown Ltd. & Flyabhi.com Pvt. Ltd.

Respondents

Civil Appeal No. __ of 2016 (Art. 136 of the Constitution of India, 1950 read with Order XXI, Rule 1, Supreme Court Rules, 2013) Arcot, Smith & Brown Ltd.

Appellant

v. Abhijit & Piyush

Respondents

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TABLE OF CONTENTS

TABLE OF CONTENTS ................................................................................................................ 2 INDEX OF AUTHORITIES ............................................................................................................ 4 STATEMENT OF JURISDICTION .................................................................................................. 7 QUESTIONS PRESENTED ............................................................................................................ 8 STATEMENT OF FACTS .............................................................................................................. 9 SUMMARY OF PLEADINGS ....................................................................................................... 11 PLEADINGS............................................................................................................................... 14 I.

DISPUTES

REGARDING OPPRESSION AND MISMANAGEMENT ARE NOT ARBITRABLE

……………………………………………………………………………………..14 II.

THERE

HAVE BEEN CONTINUING ACTS OF OPPRESSION AND MISMANAGEMENT BY

THE MAJORITY SHAREHOLDER ........................................................................................... 16

[A]. The respondents‟ continuous violation of the AoA was oppressive and unfairly prejudicial to the appellants ............................................................................................. 17 1.

The exclusion of the appellants from participation in the company‟s affairs has

unfairly prejudiced the appellants‟ and the company‟s interests. ................................ 17 2.

The violation of the pre-emption clause in the AoA is oppressive to the

appellants ..................................................................................................................... 19 [B]. The Respondents have committed an act of oppression by using their majority voting power to issue shares to the investors and amending the AoA............................. 20 1.

The respondents have committed an act of oppression by issuing shares to the

investors ....................................................................................................................... 20 2.

The resolution to amend the AoA was an oppressive act. ................................. 21

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[C]. The removal of the appellants from the Board of Directors was oppressive and unfairly prejudicial to their interests qua shareholders. ................................................... 22 1.

The respondents did not give the appellants a reasonable opportunity to be

heard ………………………………………………………………………………....22 2.

The removal of the appellants from the Board of Directors was in violation of

their legitimate expectations as shareholders. .............................................................. 23 [D]. It is just and equitable that the company should be wound up. However the respondents should be directed to sell the securities of the company owned by them to the appellants. .................................................................................................................. 25 1.

It is just and equitable to wind up the company................................................. 25

2.

The equitable remedy lies in directing the respondents to sell the securities of

the company owned by them to the appellants. ........................................................... 26 III.

THE

SCHEME OF MERGER IS ILLEGAL AND UNFAIR AND SHOULD NOT BE

SANCTIONED. ....................................................................................................................... 28

[A]. The sanction of the scheme of merger is violative of Sec. 232 ............................ 28 1.

The meeting of members was not dispensable. ................................................. 29

2.

The founders constitute a separate class and a separate meeting should have

been convened for them ............................................................................................... 30 [B]. ASB does not have the consent of the requisite majority to issue a notice under Sec. 235 ............................................................................................................................ 31 [C]. The scheme of arrangement and notice for acquisition are unfair. ....................... 32 PRAYER .................................................................................................................................... 34

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INDEX OF AUTHORITIES

INDIAN CASES:

1. A. Arumugam v. Pioneer Bakeries Pvt Ltd, [2008] 141 CompCas 391……………..19 2. Akbarali Kalvert v. Konkan Chemicals, [1997] 88 CompCas 245…………………..22 3. Bennett Coleman & Co v. Union of India, [1977] 47 CompCas 92………………....14 4. Bhankerpur Simbhaoli Beverages Pvt Ltd v. PR Pandya, [1996] 86 CompCas 842...23 5. Bhubhaneshwar Singh v. Kanthal India Ltd, [1986] 59 CompCas 46………………19 6. Booz Allen And Hamilton Inc v. SBI Home Finance Ltd, (2011) 5 SCC 532…14, 15 7. Chander Mohan Jain v. Crm Digital Synergies Pvt Ltd, [2008] 142 CompCas 658………………………………………………………………………………..27, 28 8. Chiranjitlal Shrilal Goenka v. Jasjit Singh, 1993 (2) SCC 507……………………....15 9. Dale and Carrington Investment Pvt Ltd v. PK Prathapan, 2005 (1) SCC 212....................................................................................................................19, 21, 27 10. Das Lagerway Wind Turbines Ltd v. Cynosure Investments Pvt Ltd, [2009] 147 CompCas 149………………………………………………………………………..14 11. Enercon GMBH v. Enercon (India) Ltd, [2008] 143 CompCas 687 CLB………….14 12. Haryana Telecom v. Sterlite Industries India Ltd, 1999 (5) SCC 688……………14,15 13. In Re Alpha Drug India Ltd, [2008)] 143 CompCas 2……………………………...33 14. In Re Calcutta Industrial Bank Ltd, [1948] 18 CompCas 144……………………...33 15. In Re Godrej Industries Ltd, [2014] 184 CompCas 441…………………………29, 30 16. In Re Ne Plus Technologies Pvt Ltd, [2002] 112 CompCas 376……………………30 17. In Re Sidhpur Mills Co Ltd, AIR 1962 Guj 305…………………………………......32 18. Jijamata Sugars, C.P. No. 79 of 2011………………………………………………...20 19. Kamal Kumar Dutta v. Ruby General Hospital Ltd, 2006 (7) SCC 613……………23 20. In Re Mafatlal Industries Ltd, (1995) 3 SCL 69………………………………….…33 21. Manavendra Chitnis v. Leela Chitnis Studios Pvt Ltd, 1983 Indlaw MUM 4545….15 22. Marshall Sons & Company Ltd v. Income Tax Officer, (1997) 223 ITR 809……….28 23. Mazda Theatres Pvt Ltd v. New Bank of India Ltd, ILR (1975) Delhi 1……………29 24. Miheer H. Mafatlal v. Mafatlal Industries Ltd, AIR 1997 SC 506…………..….31, 32 25. Needle Industries (India) Ltd v. Needle Industries Newey (India) Holding Ltd, 1981 (3) SCC 333…………………………………………………………………………..21 26. Pearson Education Inc v. Prentice Hall India Ltd, 2005 (84) DRJ 455………….21, 27 4

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27. Pushpa Prabhudas Vora v. Voras Exclusive Tools Ltd, [2000] 101 CompCas 300………………………………………………………………………………..19, 26 28. Rakesh Malhotra v. Rajinder Kumar Malhotra, [2015] 127 CLA 140…………..14, 15 29. S.M. Holding Finance Pvt Ltd v. Mysore Machinery Manufacturers Ltd, [1993] 78 CompCas 432………………………………………………………………………..29 30. Sangramsinh P Gaekwad v. Shantadevi P Gaekwad, 2005 (11) SCC 314…..19, 21, 24 31. SP Jain v. Kalinga Tubes Ltd, AIR 1965 SC 1535………………………………16, 26 32. Sugam Constructions v. Ushakant N Patel, (2012) 2 CompLJ 332…………………20 33. Sukanya Holdings Pvt Ltd v. Jayesh H. Pandya, 2003 (5) SCC 531……………….15 34. Surendra Kumar Dhawan v. R. Vir, 1974 Indlaw Del 40…………………………....15 35. Tea Brokers v. Hemendra Prasad Barooah, [1998] 5 Comp LJ 463…………………26 36. VG

Coelho

v.

Silver

Cloud

Estates

Pvt

Ltd,

[2004]

119

CompCas

172………………........................................................................................................21 37. Vijay

Krishna

Jaidka

v.

Jaidka

Motor

Co,

(1997)

1

CompLJ

268…………………………........................................................................................24 38. Vishwanathan (S.) v. East India Distilleries and Sugar Factories Ltd, [1957] 27 CompCas 175………………………………………………………………………..33 39. Yogeshwari Kumari v. Lake Palace Hotels, [2009] 147 CompCas 406……………..18 ENGLISH CASES:

1. Ebrahimi v. Westbourne Galleries Ltd, [1973] A.C. 360…………………….…...24, 26 2. Elder v. Elder and Watson Ltd, 1952 S.C. 49…………………………………….......23 3. Re Express Engineering Works Ltd (1920) 1 Ch. 466…………………………...…...30 4. Greenhalgh v. Arderne Cinemas Ltd, [1946] 1 All ER 512…………………………..22 5. In Re Carlton Holdings Limited, [1971] 1 W.L.R. 918………………………...…......32 6. In Re Yenidje Tobacoo Co Ltd, [1916] 2 Ch. 426…………………………………....26 7. O‟Neill v. Phillips, [1999] 1 W.L.R. 1092…………………………………………....23 8. Re a company (No.00477 of 1986), [1986] B.C.L.C 376…………………………….23 9. Re Astec BSR plc, [1999] B.C.C. 59…………………………………………………24 10. Re George Newman & Co, [1895] 1 Ch. 674………………………………………...30 11. Re Saul D Harrison and Sons plc, [1995] 1 B.C.L.C. 14…………………………17, 18 12. Re Simo Securities Trust Ltd, [1971] 1 W.L.R. 1455.………………………………..32 13. Scottish Co-op Wholesale Society Ltd v. Meyer, 1959 AC 324………………..….....16 5

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14. Sovereign Life Assurance Co v. Dodd, (1892) 2 QB 573…………………………...30

STATUTES:

1. Companies Act, 2013…………………………………………………………….passim RULES:

1. Companies Management and Administration Rules, 2014…………………………...23 BOOKS: 1. A. Ramaiyya, GUIDE TO THE COMPANIES ACT, Vol.3 (18th edn., 2015)……………...26 2. Gore-Browne on Companies, Vol. I (Alistair Alcock et al eds., 45th edn., 2014)……29 3. Michael J. et al, LAW AND PRACTICE OF COMMERCIAL ARBITRATION IN ENGLAND, (2nd edn.,1989)…………………………………………………………………………….15 4. Palmer’s Company Law, (Geoffrey Morse, 25th edn., 1992)…………………….…..31 5. Russel on Arbitration, 470 (23rd edn., 2007).................................................................15 ARTICLES:

1. M.R. Duggar, Minority Shareholders Buying Out Majority Shareholders: An Analysis, 22(2) NATIONAL LAW SCHOOL OF INDIA REVIEW 105, 106 (2010)……………...……27 2. U. Varotill, Corporate Governance in M&A Transactions, 24(2) NATIONAL LAW SCHOOL

OF

INDIA

REVIEW

51,

60

(2012)………………………………………………………………………………….33

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STATEMENT OF JURISDICTION

I.

CIVIL APPEAL NO. ____/2016

The Appellants have approached this Hon‟ble Court under Art. 133 of the Constitution of India, 1950. The Respondents humbly submit to the jurisdiction of this Hon‟ble Court.

II.

CIVIL APPEAL NO. ____/2016 FROM

SPECIAL LEAVE PETITION (CIVIL) NO.____ OF 2016 The Appellant has approached this Hon‟ble Court under Art. 136 of the Constitution of India, 1950. Subsequent leave has been granted by this court.

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QUESTIONS PRESENTED

I. WHETHER THE DISPUTES RELATING TO OPPRESSION AND MISMANAGEMENT ARE ARBITRABLE? II. WHETHER THE MAJORITY SHAREHOLDERS HAVE COMMITTED ACTS OF OPPRESSION AND MISMANAGEMENT?

III. WHETHER THE SCHEME OF MERGER IS VALID AND THE SHARES OF THE FOUNDERS CAN BE ACQUIRED?

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STATEMENT OF FACTS

THE PARTIES:

1.

Abhijit and Piyush [“the founders”] established flyabhi.com Pvt [“Flyabhi”] Ltd in

Lucknow, with the idea of making private air travel more easily accessible. Piyush‟s family contributed 12 aircrafts, amounting to Rs. 40 Crores and Abhijit assigned all intellectual property rights to the company. Each of them owned 50% of the Rs. 2,000,000 invested as initial share capital. While several investors expressed interest in their idea, Flume Capital and Nurture Capital [“the investors”] convinced the founders that they were long-term investors who fully supported their vision. They invested in optionally convertible debt for a cash consideration of Rs. 100 Crores. Piyush was keen to invest additional equity but he was dissuaded from doing so.

2.

The founders, the investors and BESTCO (the transaction counsel) signed an

investment agreement and the terms of the same were incorporated into the Articles of Association [“AoA”].

Under the AoA, the founders‟ consent was required for the

appointment of key management personnel; and for major decisions involving the company. Further, each party had the right to nominate a director so long as it held at least 10% of the shareholding in the company. The Board of Directors [“Board”] consisted of the founders, Ms. K.S. Kumar, an employee of Flume, Ms. Sush Iyer, a partner at BESTCO nominated by Nurture, and Ms. Scarlet Lester, a tech entrepreneur. SOURING RELATIONSHIPS:

3.

On July 21, 2011 the Board, despite the founders‟ dissenting vote, hired Arjun Iyer

[“Mr. Iyer”] as the CEO. In light of the tough competition posed by Airavata, the company set about on an elaborate international road show to raise Rs. 500 crores. Piyush‟s proposal of providing funds was turned down. Despite the founders‟ dissent, a financing arrangement with Arcot, Smith & Brown Limited [“ASB”] was approved by the Board.

4.

On July 21, 2012, the investors novated the investment agreement to over 20 of their

affiliates as it had come to an end. On August 7, 2012, all the affiliates notified the company that they wished to convert 50% of their debt into equity. Their nominee directors gave notice 9

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of a board meeting to be held on August 14, 2012 to allot and issue Class B equity shares to the investors and called an EGM on the same afternoon to amend the AoA and reconstitute the Board. All three resolutions were approved by a majority of the Board, in spite of the founders‟ protest. As a result of the issue of the shares, the shareholding of each of the founders was reduced to 6% of the equity share capital. The new AoA adopted in the EGM allowed all decisions to be taken by a majority vote of shareholders. The founders were removed from the Board. THE LITIGATION:

5.

On August 24, 2012, the founders filed an application before the Company Law

Board [“CLB”] complaining of continuing acts of oppression and mismanagement by the majority shareholders. The investors sought referral of this dispute to arbitration, which was accepted by the CLB. The High Court dismissed the writ appeal filed by the founders but allowed their oral application for leave to appeal to the Supreme Court.

6.

On July 5, 2014, the Directors resolved to demerge the aircraft business from Flyabhi

and merge it into ASB. The Directors recorded receipt of the letters of consent within hours of the proposal. Subsequently, the scheme of arrangement was filed before the Allahabad High Court. ASB sought and was granted approval from the Calcutta High Court. ASB sent a notice to the founders exercising their right under Sec. 235 of the Companies Act. The founders immediately applied to the Allahabad High Court to hear them before allowing the notice to take effect and an injunction was granted against ASB. ASB appealed against the injunction to the Supreme Court. The Allahabad High Court approved the scheme of arrangement on April 11, 2015 and the founders appealed against this to the Supreme Court. The Supreme Court has now listed all matters connected with Flyabhi for final hearing.

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SUMMARY OF PLEADINGS

I.

1.

DISPUTES REGARDING OPPRESSION AND MISMANAGEMENT ARE NOT ARBITRABLE.

It is well settled that disputes regarding oppression and mismanagement cannot be

referred to arbitration since arbitral tribunals are not competent to grant all the statutorily available reliefs. The NCLT has unrestricted statutory powers to grant relief under Sec. 242. Additionally, an arbitral tribunal is not competent to pass orders for winding up or grant reliefs that involve rights in rem. Further, the application cannot be severed and referred to arbitration in respect of the reliefs that the arbitral tribunal is competent to grant. Thus, this dispute is not arbitrable and the CLB‟s order should be set aside.

II.

THERE

HAVE BEEN CONTINUING ACTS OF OPPRESSION AND MISMANAGEMENT BY

THE MAJORITY SHAREHOLDERS.

2.

The respondents have committed acts of oppression and mismanagement in three

ways. First, they have violated the appellants‟ rights under the AoA by appointing Mr. Iyer as the CEO and entering into a financing agreement with ASB. It is submitted that the Board acted with an improper motive to increase the liabilities of the company in favour of their affiliate, ASB, and to enhance their rights under the Investment Agreement. Further, the respondents transferred shares to their affiliates in violation of the pre-emption clause in the AoA. Such a transfer constitutes oppression even if it was purportedly done to comply with legal requirements.

3.

Second, the Board mala fide issued shares to the investors without giving the

appellants an opportunity to subscribe to the same. This reduced each of the appellants‟ shareholdings to 6 percent of the company‟s share capital, which is an oppressive act. The respondents have committed an additional act of oppression by amending the AoA. This is because the respondents failed to give the mandatory notice required for the EGM to amend the AoA. Further, the new AoA are discriminatory to the appellants as they allow all decisions of the company to be taken by a majority vote of shareholders.

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Third, the removal of the Appellants from the Board was oppressive and unfairly

prejudicial to their interests. The appellants were not given a reasonable opportunity to be heard. Moreover, in the present case the appellants had a legitimate expectation to participate in the management of the company under the Investment Agreement entered into with the respondents, and the AoA. It may be contended that their rights under the AoA terminated upon the reduction of their shareholding. However, it is submitted that the company is a quasi-partnership. Hence, legitimate expectations outside of the AoA may be enforced.

5.

It is submitted that there is a deadlock in the management of the company. Hence it is

just and equitable to wind up the company. However, it would be unfairly prejudicial to wind up the company given that the appellants have vested their intellectual property with the company. Therefore, the Court should direct the respondents to sell their shares to the appellants at the fair market value as an equitable remedy.

III.

THE

SCHEME OF MERGER IS ILLEGAL AND UNFAIR AND SHOULD NOT BE

SANCTIONED.

CONSEQUENTLY,

THE SHARES OF THE FOUNDERS CANNOT BE

ACQUIRED UNDER SEC. 235.

6.

A scheme of arrangement cannot be sanctioned if it is violative of statutory provisions

and is unfair. It is submitted that the scheme of merger is illegal because it violates the provisions of Sec. 232. This is because first, meetings of members have to be convened to obtain consent for the scheme. A scheme of merger necessitates collective decision making by the members at a meeting as it envisages significant changes to the structure and business of the company. Second, founders constitute a separate class of members. This is because they had different rights and interests in the company vis-à-vis other shareholders. Hence, a separate class meeting should have been convened for them. Further, under Sec. 235 of the Companies Act, ASB was required to obtain consent of 90 percent of the shareholders. Since it is an expropriating provision, it has to be construed strictly. Hence it did not have the right to send notice to the founders.

7.

It is submitted that the scheme of merger is unfair because: first, the consent of the

majority shareholders was obtained by improper means, as no meeting was held. Second, the circumstances in which the scheme was proposed indicate that it was designed to suppress 12

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and coerce the minority. Third, the respondents acted in a manner prejudicial to the interests of the minority by denying them an opportunity to put forth their views on the scheme. Hence the scheme should not be sanctioned.

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PLEADINGS

I.

DISPUTES REGARDING OPPRESSION AND MISMANAGEMENT ARE NOT ARBITRABLE In the present case, the CLB referred the founders‟s application complaining of

1.

continuing acts of oppression and mismanagement to arbitration.1 It is submitted that the dispute is not arbitrable as it pertains to oppression and mismanagement. Disputes regarding oppression and mismanagement cannot be referred to arbitration2 irrespective of the remedy sought.3 Further, only such disputes can be referred to arbitration which the arbitrator is competent to decide4 and empowered to give the required remedy for.5 The nature and source of the powers of the NCLT under Sec. 402 of the Companies Act is such that an arbitral tribunal cannot possibly exercise it.6 There are no limitations or restrictions on the power of the NCLT to pass orders that may be required to bring an end to the oppression or mismanagement complained of.7 It is statutorily empowered to grant reliefs such as winding up8 and to make orders against third parties.9 However, an arbitral tribunal is not competent to pass winding up orders10 or

2.

adjudicate upon disputes relating to rights in rem. This is even if there is an arbitration

1

¶23.7, Factsheet.

2

Enercon GMBH v. Enercon (India) Ltd, [2008] 143 CompCas 687 CLB (Company Law Board).

3

Rakesh Malhotra v. Rajinder Kumar Malhotra, [2015] 127 CLA 140 (Bombay High Court). [“Rakesh

Malhotra”] 4

Haryana Telecom v. Sterlite Industries India Ltd, 1999 (5) SCC 688 (Supreme Court of India). [“Haryana

Telecom”] 5

Booz Allen Andhamilton Inc v. SBI Home Finance Ltd, (2011) 5 SCC 532, at ¶20 (Supreme Court of India).

[“Booz Allen”]. 6

Rakesh Malhotra , [2015] 127 CLA 140, at ¶75-76.

7

Bennett Coleman & Co v. Union of India, [1977] 47 CompCas 92 (Bombay High Court).

8

Haryana Telecom, 1999 (5) SCC 688.

9

Das Lagerway Wind Turbines Ltd v. Cynosure Investments Pvt Ltd, [2009] 147 CompCas 149 (Madras High

Court). 10

Haryana Telecom, 1999 (5) SCC 688.

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agreement between the parties.11 The types of remedies that an arbitrator can award are limited by considerations of public policy and the fact that he is appointed by the parties instead of the State.12 Thus, a bona fide application that seeks broad reliefs to prevent acts of oppression and mismanagement cannot be referred to arbitration.13 3.

In the present case, the appellants have sought relief against their removal from the

Board, the resolutions passed in the EGM on 14th August 2012 and the allotment of shares to the investors‟ affiliates. They have also prayed for the sale of the securities owned by the Respondents to them and any such order as the Court may deem fit in the interests of justice, equity and good conscience. Therefore it is submitted that the appellants have made a bona fide application seeking broad reliefs. This requires the exercise of the special powers of the Tribunal under Sec. 242. Referring such disputes to arbitration would unreasonably restrict the reliefs that are statutorily provided and cause injustice to the Appellants.14 4.

Further, it has been held that the bifurcation of cause of action in a suit is an

impermissible procedure beyond the contemplation of arbitration.15 Where an application made under Sec. 241 seeks reliefs some of which are in rem and others in personam, the application cannot be severed and referred to arbitration with respect to those reliefs which are in personam.16 The only exception to the non-arbitrability of oppression and mismanagement disputes is if the petition is mischievous, vexatious and mala fide.17 It is submitted that this exception is not satisfied in the present case. Thus, the CLB‟s order referring the dispute to arbitration should be set aside.

11

Booz Allen, (2011) 5 SCC 532; Chiranjitlal Shrilal Goenka v. Jasjit Singh, 1993 (2) SCC 507 (Supreme Court

of India). 12

Michael J. et al, LAW AND PRACTICE OF COMMERCIAL ARBITRATION IN ENGLAND, 369 (2nd edn., 1989);

Russel on Arbitration, 470 (23rd edn., 2007). 13

Rakesh Malhotra, [2015] 127 CLA 140, at ¶80.

14

Surendra Kumar Dhawan v. R. Vir, 1974 Indlaw DEL 40(Delhi High Court); Manavendra Chitnis v. Leela

Chitnis Studios Pvt Ltd, 1983 Indlaw MUM 4545 (Bombay High Court). 15

Booz Allen, 2011 (5) SCC 532; Sukanya Holdings Pvt Ltd v. Jayesh H. Pandya, 2003 (5) SCC 531 (Supreme

Court of India). 16

Rakesh Malhotra, [2015] 127 CLA 140, at ¶83.

17

Rakesh Malhotra, [2015] 127 CLA 140.

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THERE HAVE BEEN CONTINUING ACTS OF OPPRESSION AND MISMANAGEMENT BY THE MAJORITY SHAREHOLDER

5.

A member may apply for relief against oppression and mismanagement on two

grounds. First, if the affairs of the company have been or are being conducted in a manner prejudicial to the interests of any members or the interests of the company. 18 Second, if by reason of a material change in the management of the company, or the ownership of its shares it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members‟s interests.19 The House of Lords in Scottish Co-op20 laid down the requirements for proving

6.

oppression and mismanagement by the majority. This was approved by the Supreme Court of India in the case of S.P. Jain.21 They are as follows: first, the majority should have committed continuing acts of oppression up to the date of the petition. Second, such conduct has to be in the exercise of their majority voting power in the company‟s affairs. 22 Third, the conduct of the majority shareholders has to be oppressive of the members in their capacity qua shareholders.23 Last, the members applying under Sec. 241 should be holding not less than one-tenth of the issued share capital of the company.24 7.

It is submitted that the above conditions are satisfied in the present case. First, the

respondents‟ continuous violation of the AoA was oppressive and unfairly prejudicial to the appellants [A]. Second, the respondents have committed an act of oppression by using their majority voting power to issue shares to the investors and amending the AoA [B]. Third, the removal of the appellants from the Board of Directors is oppressive and unfairly prejudicial to their interests qua shareholders [C]. Fourth, it is just and equitable that the company should be wound up. However the equitable remedy lies in directing the respondents to sell the securities of the company owned by them to the appellants at a fair market value [D]. 18

Sec. 241(1)(a), Companies Act, 2013.

19

Sec. 241(1)(b), Companies Act, 2013.

20

Scottish Co-op Wholesale Society Ltd v. Meyer, 1959 AC 324 (House of Lords).

21

SP Jain v. Kalinga Tubes Ltd, AIR 1965 SC 1535 (Supreme Court of India). [“SP Jain”]

22

SP Jain, AIR 1965 SC 1535, at ¶20.

23

SP Jain, AIR 1965 SC 1535, at ¶16.

24

Sec. 244(1)(a), Companies Act, 2013.

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Last, each appellant has a holding of six percent of the equity share capital of the company. 25 Since together they hold twelve percent of the share capital of the company, they have the right to make an application under the Sec. 241 of the Companies Act. [A].

THE RESPONDENTS‟ CONTINUOUS VIOLATION OF THE AOA WAS OPPRESSIVE AND UNFAIRLY PREJUDICIAL TO THE APPELLANTS

It is submitted that, the respondents‟ violation of the AoA amounts to continuing acts

8.

of oppression and mismanagement. This is because first, the exclusion of the appellants from participation in the company‟s affairs has unfairly prejudiced the appellants‟ and the company‟s interests (1). Second, the violation of the pre-emption clause in the AoA is oppressive to the appellants (2). 1. The exclusion of the appellants from participation in the company’s affairs has unfairly prejudiced the appellants’ and the company’s interests.

9.

If the conduct of the Board is not accordance with the AoA of the company, it

amounts to unfair prejudice.26 It is well understood that the acts of the management are in reality acts of the majority shareholders who control the management.27 In the present case, the AoA provide that first; founders must approve the appointment of all key management personnel. Second, the founders‟ consent is required for key decisions involving the company.28 The respondents‟ nominee Directors appointed Mr. Iyer as the CEO in spite of the founders‟ objection. Further, the Board approved the financing arrangement with ASB notwithstanding the founders‟ dissent.29 This was even though Mr. Piyush was willing to provide equity and finance on preferential terms.30 Admittedly, the respondents had the 25

¶21.9, Factsheet.

26

Re Saul D Harrison and Sons plc, [1995] 1 B.C.L.C. 14 (Court of Appeal). [“Saul D Harrison”]

27

M.R. Duggar, Minority Shareholders Buying Out Majority Shareholders: An Analysis, 22(2) NATIONAL LAW

SCHOOL OF INDIA REVIEW 105, 106 (2010). 28

¶6.1.4 -¶6.1.6; ¶7, Factsheet.

29

¶12; ¶16, Factsheet.

30

¶17.1-¶17.2, Factsheet.

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preferential right to provide debt to the company.31 However, in a company where there are two groups of shareholders it is equitable that there should be a consensus in the raising of funds.32 10.

If the Directors of a company are trading without any reasonable return on the capital

employed, this indicates that they are committing mismanagement in order to benefit themselves and those who benefit by virtue of association with them. 33 In the present case, in spite of extensive marketing and publicity, the company failed to reach the financial targets set out in the AoA.34 The management team led by Mr. Iyer financed an international road show to raise money for the company.35 However, the road show did not yield any positive results. Moreover, the company continued to be in financial difficulty even after entering into the financing arrangement with ASB.36 11.

Therefore, it is submitted that the actions of the Board resulted in wastage of funds

and increased the liabilities of the company in favour of ASB, which is an affiliate of the respondents.37 Moreover, as a consequence of the failure to reach key financial targets, the investors gained the right to adjustment in the conversion price of the debt to equity.38 They also gained a preferential right to provide further equity and debt, and to put or call all securities owned by the founders and their assignees.39 Hence, it is submitted that the exclusion of the appellants from making decisions relating to the company‟s affairs was done with an improper motive to benefit the investors and their affiliates. Thus it was unfairly prejudicial to the interests of the appellants and the company.

31

¶6.1.3, Factsheet.

32

Yogeshwari Kumari v. Lake Palace Hotels, [2009] 147 CompCas 406 (Company Law Board).

33

Saul D Harrison, [1995] 1 B.C.L.C. 14.

34

¶10.5-¶10.6, Factsheet.

35

¶16.3-¶16.7, Factsheet.

36

¶19.4-¶19.5, Factsheet.

37

¶18.3, Factsheet.

38

¶6.1.3, Factsheet.

39

¶6.1.3, Factsheet.

18

WRITTEN SUBMISSION FOR APPELLANTS/RESPONDENTS

TEAM „E‟

2. The violation of the pre-emption clause in the AoA is oppressive to the appellants

12.

A transfer of shares in violation of a pre-emption clause in the AoA is void40 and

constitutes an act of oppression.41 In the instant case, under the AoA, the investors were bound to offer company's securities to the founders before selling it to any person who was not a shareholder in the company.42 However, they transferred the shares to their affiliates without giving the appellants an opportunity to purchase the shares. 13.

It is immaterial that the transferees were affiliates of the investors. They were not

shareholders in the company. In any event, if the AoA restricts transferability of shares, it indicates the intention of the shareholders that the capital of the company should remain within a closely knit group.43 In the present case, the 20 affiliates of Flume and Nurture were strangers who did not know the founders, their business or their journey.44 A transfer of shares against the letter and spirit of the AoA of a company, whether in favour of a member or a non-member, is invalid.45 14.

If there is a violation of a pre-emption clause, the circumstances under which the

shares were transferred are immaterial.46 Hence, even though the respondents may have been legally required to transfer their assets,47 this does not justify the transfer of shares. In the event that the appellants would have not subscribed to these shares, the respondents were nevertheless obligated to make a formal written offer to them.48 Hence, it is submitted that the transfer of shares was an oppressive act. 40

Sangramsinh P Gaekwad v. Shantadevi P Gaekwad, 2005 (11) SCC 314, at ¶170 (Supreme Court of India).

[“Sangramsinh”] 41

Bhubhaneshwar Singh v. Kanthal India Ltd, [1986] 59 CompCas 46 (Calcutta High Court).

42

¶6.1.8; ¶7.1-7.2, Factsheet.

43

Dale and Carrington Investment Pvt Ltd v. PK Prathapan, 2005 (1) SCC 212, at ¶12 (Supreme Court of India).

[“Dale and Carrington”] 44

¶20.5-¶20.6, Factsheet.

45

A Arumugam v. Pioneer Bakeries Pvt Ltd, [2008] 141 CompCas 391, at ¶5 (Company Law Board, Chennai).

46

Pushpa Prabhudas Vora v. Voras Exclusive Tools Ltd, [2000] 101 CompCas 300 (Company Law Board).

[“Pushpa Vora”] 47

¶20, Factsheet.

48

Pushpa Vora, [2000] 101 CompCas 300.

19

WRITTEN SUBMISSION FOR APPELLANTS/RESPONDENTS [B].

TEAM „E‟

THE RESPONDENTS HAVE COMMITTED AN ACT OF OPPRESSION BY USING THEIR MAJORITY VOTING POWER TO ISSUE SHARES TO THE INVESTORS AND AMENDING THE

AOA.

15.

It is submitted that first, the respondents have committed an act of oppression by

issuing shares to the investors (1). Second, the resolution to amend the AoA was an oppressive act (2). 1. The respondents have committed an act of oppression by issuing shares to the investors

16.

The affiliates of the investors notified the company that they wished to convert 50%

of their debt into equity. In pursuance of this, the Board issued shares to the investors after the Board meeting.49 However, the respondents did not give the appellants an opportunity to subscribe to these shares. Admittedly, under the Companies Act, a company is not bound to offer shares to existing shareholders if the increase in share capital is in the exercise of an optionally convertible debt.50 However, a shareholder has an equitable right to subscribe to additional issue of capital proportionate to his existing holding in the company‟s share capital.51 If the Directors allot increased share capital to one group of shareholders without giving an opportunity to subscribe to shares to other shareholders, it constitutes oppression.52 17.

In the present case, the allotment of shares exclusively to the investors‟ group resulted

in the reduction of each the appellants‟ shareholding to 6 percent of the share capital of the company.53 The AoA provided that all rights of the parties would terminate if each of them held less than 10 percent of the shareholding.54 A reduction in equity stake which affects the

49

¶21, Factsheet.

50

Sec. 62(3), Companies Act, 2013.

51

Jijamata Sugars, C.P. No. 79 of 2011.

52

Sugam Constructions v. Ushakant N Patel, (2012) 2 CompLJ 332, at ¶48 (Gujarat High Court).

53

¶21.10, Factsheet.

54

¶6.1.8, Factsheet.

20

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TEAM „E‟

members‟ right to take managerial decisions is an act of oppression and mismanagement. 55 Admittedly, the investors had the option to convert their debt into shares. 56 However, equity demands that the appellants should have been given the opportunity to acquire further shares when the loans were converted into share capital.57 18.

In any event, even if pre-emption rights do not exist, it still has to be seen whether the

right to issue shares was exercised bona fide and in the interests of the company.58 If issue of share capital exclusively to one group of shareholders is accompanied by the removal of the other group‟s directors, it indicates that the Board was acting mala fide. Such an issue constitutes oppression even if the affairs of the company prosper as a consequence. 59 In this case, the respondents‟ nominee Directors not only issued shares to the exclusion of the appellants, but also removed them from the Board.60 Hence, it is submitted that the allotment of shares was done with a mala fide motive to reduce the appellant‟s shareholding and exclude them from control of the company‟s affairs. 2. The resolution to amend the AoA was an oppressive act.

19.

Under, Sec. 101 of the Companies Act, at least twenty one days‟ notice is required

before calling a general meeting.61 In the present case, the Board gave a notice of the general meeting to amend the AoA on August 07, 2012 whereas the meeting was held on August 14, 2012, thus violating the twenty one day requirement.62 While an isolated illegal act does not constitute oppression, a series of illegal acts in succession will amount to oppression. 63 In the present case, the majority shareholders had violated the pre-emption clause in the AoA prior 55

Pearson Education Inc v. Prentice Hall India Ltd, 2005 (84) DRJ 455, at ¶17 (Delhi High Court). [“Pearson”]

56

¶3.10-¶3.12, Factsheet.

57

VG Coelho v. Silver Cloud Estates Pvt Ltd, [2004] 119 CompCas 172, at ¶9 (Company Law Board).

58

Dale and Carrington, 2005 (1) SCC 212, at ¶21.

59

Sangramsinh, 2005 (11) SCC 314, at ¶190.

60

¶21.11, Factsheet.

61

Sec. 101(1), Companies Act, 2013.

62

¶21.3-¶21.4, Factsheet.

63

Needle Industries (India) Ltd v. Needle Industries Newey (India) Holding Ltd, 1981 (3) SCC 333, at ¶51

(Supreme Court of India).

21

WRITTEN SUBMISSION FOR APPELLANTS/RESPONDENTS

TEAM „E‟

to the issue of the shares. If shares are transferred in violation of the AoA and notice of meetings is not given, such conduct is oppressive.64 20.

Further, a shareholder is entitled to raise an objection if an alteration in the AoA

unfairly discriminates between majority and the minority shareholders.65 In the instant case, under the earlier AoA, the founders‟ consent was required for key decisions involving the company.66 The amendment to the AoA allowed all decisions to be taken by a majority vote of shareholders.67 Therefore, it is submitted that the amendment was discriminatory to the founders as it enabled the majority shareholders to override them in matters relating to the company. Hence, it was an act of oppression towards the appellants. [C].

THE REMOVAL OF THE APPELLANTS FROM THE BOARD OF DIRECTORS WAS OPPRESSIVE AND UNFAIRLY PREJUDICIAL TO THEIR INTERESTS QUA SHAREHOLDERS.

21.

The removal of their appellants from the Board constitutes oppressive and unfairly

prejudicial conduct. This is for two reasons: first, the respondents did not give the appellants a reasonable opportunity to be heard (1). Second, it was in violation of the appellants‟ legitimate expectations as shareholders (2). 1. The respondents did not give the appellants a reasonable opportunity to be heard

22.

Under the Companies Act, a company may remove a Director by an ordinary

resolution68 subject to the following requirements:- first, the members have to give special notice to the company at least fourteen days before the resolution is to be moved, exclusive of the day on which the notice is given and the day of the meeting. 69 Second, the Director is entitled to a reasonable opportunity to be heard on the resolution.70 Shareholders are also

64

Akbarali Kalvert v. Konkan Chemicals, [1997] 88 CompCas 245 (Company Law Board).

65

Greenhalgh v. Arderne Cinemas Ltd, [1946] 1 All ER 512 (Court of Appeal).

66

¶6.1.6; ¶7, Factsheet.

67

¶21.11-¶21.12, Factsheet.

68

Sec. 169(1), Companies Act, 2013.

69

Sec. 169(2), Companies Act, 2013; Rule 23, Companies Management and Administration Rules, 2014.

70

Sec. 169(3), Companies Act, 2013.

22

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TEAM „E‟

entitled to a reasonable opportunity to be acquainted with such a representation.71 A resolution passed in violation of these requirements is invalid.72 23.

It is submitted that these conditions have not been satisfied in the instant case. The

respondents‟ nominee Directors gave notice of the meeting to reconstitute the Board of Directors on August 07, 2012 whereas the meeting was held on August 14, 2012, thus violating the fourteen day requirement.73 While the appellants did not attend the general meeting,74 the insufficiency of the notice indicates lack of probity on the part of the respondent.75 To oust a main promoter from Directorship in their absence constitutes the “grossest act of oppression”.76 2. The removal of the appellants from the Board of Directors was in violation of their legitimate expectations as shareholders.

24.

It may be contended that a member cannot complain of oppressive conduct solely on

the grounds of removal from directorship.77 However, the House of Lords has held that where shareholders have entered into an association upon the understanding that „each of them who has ventured his capital will also participate in the management of the company‟,78 such a member has a legitimate expectation to participate in the management of the company.79 Exclusion from management will be unfairly prejudicial to such a shareholder.80

71

Bhankerpur Simbhaoli Beverages Pvt Ltd v. PR Pandya, [1996] 86 CompCas 842, at ¶17 (Punjab and

Haryana High Court). [“Bhankerpur”] 72

Bhankerpur, [1996] 86 CompCas 842, at ¶17.

73

¶21.1; ¶21.3-¶21.4, Factsheet.

74

¶21.12-¶21.13, Factsheet.

75

Kamal Kumar Dutta v. Ruby General Hospital Ltd, 2006 (7) SCC 613, at ¶32 (Supreme Court of India).

[“Kamal Kumar Dutta”] 76

Kamal Kumar Dutta, 2006 (7) SCC 613, at ¶32.

77

Elder v. Elder and Watson Ltd, 1952 S.C. 49 (Court of Session, Scotland).

78

Per Lord Hoffman L.J., O‟Neill v. Phillips, [1999] 1 W.L.R. 1092, 1102 (Chancery Division). [“O‟Neill”]

79

80

O’Neill, [1999] 1 W.L.R. 1092, 1102. Re a company (No.00477 of 1986), [1986] BCLC 376 (House of Lords).

23

WRITTEN SUBMISSION FOR APPELLANTS/RESPONDENTS 25.

TEAM „E‟

In the present case, under the terms of the Investment Agreement entered into with the

respondents, and incorporated in the AoA,81 the appellants were a part of the first Board.82 The appellants‟ consent was required for approving the appointment of all key management personnel.83 They also had the right to nominate Directors to the company. 84 The appellants therefore had a significant right to participate in the management of the company. Thus they had a legitimate expectation of continuing to participate in the management of the company‟s affairs. Hence their removal from the Board was unfairly prejudicial to their interests as shareholders. 26.

Admittedly, under the AoA, a party‟s rights to participate in the management would

terminate if it ceased to hold 10 percent of the shareholding.85 However, the reduction in shareholding was because of the mala fide actions of the respondents. In any case, shareholders may seek enforcement of legitimate expectations outside of the AoA if the company is a quasi-partnership.86 This will be if first, the association is formed on the basis of mutual confidence. Second, there is an agreement that all shareholders will participate in the management of the business. Thirdly, if there is a restriction upon the transferability of the shares.87 The Supreme Court of India has held that the principles of quasi-partnership can be invoked for granting relief against oppression and mismanagement.88 27.

It is submitted that the aforementioned requirements are satisfied in the present case

because:-first, it is not necessary that the company should have been a family company or a partnership prior to incorporation.89 There should be a personal understanding between parties.90 In the instant case, the investors had convinced the founders that they were best 81

¶7.1, Factsheet.

82

¶6.1.7, Factsheet.

83

¶6.1.4, Factsheet.

84

¶6.1.7, Factsheet.

85

¶6.1.8, Factsheet.

86

Ebrahimi v. Westbourne Galleries Ltd, [1973] A.C. 360, 380 (House of Lords). [“Ebrahimi”]

87

Ebrahimi, [1973] A.C. 360, 380.

88

Sangramsinh, at ¶242, 2005 (11) SCC 314.

89

Vijay Krishna Jaidka v. Jaidka Motor Co, (1997) 1 CompLJ 268, at ¶56 (Company Law Board). [“Vijay

Krishna”] 90

Re Astec BSR plc, [1999] B.C.C. 59 (Chancery Division).

24

WRITTEN SUBMISSION FOR APPELLANTS/RESPONDENTS

TEAM „E‟

placed to partner with them. The founders chose them over other investors on this assurance.91 Additionally, factors such as equal representation on the Board of Directors, loans from family members, and family ownership of the company office and employment of family members or friends also indicate the existence of a quasi-partnership.92 In the instant case, Piyush‟s family had granted finance and aircraft to the company. 93 The company office was owned by Piyush‟s family friend. The employees were college friends of the founders.94 Second, the Investment Agreement and the AoA provided for the participation of the appellants in the management of the company and third, they also provided for pre-emption rights. Hence it is submitted that the principles of quasi-partnership can be applied in this case. [D].

IT IS JUST AND EQUITABLE THAT THE COMPANY SHOULD BE WOUND UP. HOWEVER THE RESPONDENTS SHOULD BE DIRECTED TO SELL THE SECURITIES OF THE COMPANY OWNED BY THEM TO THE APPELLANTS.

28.

In an application under Sec. 241, a member must prove that to wind up the company

would unfairly prejudice such members, but that otherwise on the facts of the case, it is just and equitable that the company should be wound up.95 Hence it is submitted that on the facts of the case it is just and equitable to wind up the company (1). However since to do so would unfairly prejudice the appellants, the equitable remedy is to direct the respondents to sell the securities of the company owned by them to the appellants (2). 1. It is just and equitable to wind up the company.

29.

If the majority shareholders exercising their powers bring about circumstances to

which the minority can reasonably say it did not agree, it will be just and equitable to wind up

91

¶3.4-¶3.5; ¶3.9, Factsheet.

92

Vijay Krishna, (1997) 1 CompLJ 268.

93

¶1.6; ¶3.1, Factsheet.

94

¶8, Factsheet.

95

Sec. 242(1)(b), Companies Act, 2013.

25

WRITTEN SUBMISSION FOR APPELLANTS/RESPONDENTS

TEAM „E‟

the company.96 Hence, if there is a deadlock between two groups of shareholders in the management of a company, the company ought to be wound up. 97 Further, where there is an underlying obligation owed to other members that so long as the association continues they will have a right to participate in the management of the company, the association must be dissolved if such an obligation is broken.98 30.

The issue of shares, in a company akin to a quasi-partnership, exclusively to one

group of shareholders also merits the winding up of the company on just and equitable considerations.99 In the instant case, the appellants and the respondents have disagreed over key decisions involving the company. Moreover, the respondents have excluded the appellants from the management of the company and issued shares to their affiliates to the exclusion of the appellants. Hence, it is submitted that on the facts of the case it would ordinarily be just and equitable to wind up the company. 2. The equitable remedy lies in directing the respondents to sell the securities of the company owned by them to the appellants.

31.

Winding up of the company would unfairly prejudice the oppressed minority if the

company is still solvent100 and it is possible for the minority to regain control of the company and undo the wrongs done by the majority group.101 Further, winding up will unfairly prejudice members whose shareholding has been seriously diminished by those who have de facto control of the company.102 In the present case, the respondents‟ oppressive actions have diluted the appellants‟ shareholding. Hence the Tribunal may provide for an equitable alternative remedy by directing the purchase of shares of any members of the company by other members thereof.103 96

O’Neill, [1999] 1 W.L.R. 1092.

97

In Re Yenidje Tobacco Co. Ltd, [1916] 2 Ch. 426 (Court of Appeal).

98

Ebrahimi, [1973] A.C. 360.

99

Pushpa Vora, [2000] 101 CompCas 300.

100

SP Jain, AIR 1965 SC 1535, at ¶13.

101

Tea Brokers v. Hemendra Prasad Barooah, [1998] 5 Comp LJ 463 (Calcutta High Court).

102

A. Ramaiya, GUIDE TO THE COMPANIES ACT, Vol. 3, 4145 (18th edn., 2015).

103

Sec. 242(2)(b), Companies Act, 2013.

26

WRITTEN SUBMISSION FOR APPELLANTS/RESPONDENTS 32.

TEAM „E‟

The Supreme Court of India has held that asking the oppressed to sell their shares to

the oppressor fails to redress the wrong done to the oppressed.104 Additionally, the contribution of the minority in the form of labour and effort in building the business should not be ignored.105 The appellants contributed initial share capital and aircraft to the company.106 They also took the initiative for recruiting employees and for setting up the office of the company.

107

Further, if the oppressed shareholders have provided intellectual

property to the company, the company cannot take what is not legitimately due to it. 108 In the present case, it is the appellants who had conceived of the idea of Flyabhi109 and had assigned all intellectual property to the company.110 Hence, the respondents cannot appropriate the intellectual property given by the appellants for their own benefit. 33.

Where the majority has acted against the interests of the company, and has indicated

its willingness to go out of the company by entering into an agreement to sell its shares, it loses the right to buy out the minority.111 In the instant case, the investors have committed continuing acts of oppression and mismanagement in the conduct of their company‟s affairs. Further, they have liquidated and distributed their assets to their affiliates. 112 Therefore they have shown their lack of willingness to continue to actively manage the company. In such an event, the shareholder who is interested in continuing the company has the right to purchase the shares of the majority.113 Hence, it is submitted that the appellants should be allowed to control the company and the respondents should be directed to sell their shares to the appellant at a fair market value.

104

Dale and Carrington, 2005 (1) SCC 212, at ¶38.

105

Chander Mohan Jain v. Crm Digital Synergies Pvt Ltd, [2008] 142 CompCas 658 (Company Law Board).

[“Chander Mohan Jain”] 106

¶1; ¶3 Factsheet.

107

¶8, Factsheet.

108

Pearson, 2005 (84) DRJ 455, at ¶30.

109

¶1, Factsheet.

110

¶1.7-¶1.10, Factsheet.

111

Chander Mohan Jain, [2008] 142 CompCas 658.

112

¶20.1-¶20.3, Factsheet.

113

Chander Mohan Jain, [2008] 142 CompCas 658.

27

WRITTEN SUBMISSION FOR APPELLANTS/RESPONDENTS III.

TEAM „E‟

THE SCHEME OF MERGER IS ILLEGAL AND UNFAIR AND SHOULD NOT BE SANCTIONED.

34.

In the present case, the Directors proposed a scheme of arrangement to demerge the

aircraft business from Flyabhi and merge it into ASB.114 The Supreme Court, in Marshall,115 has held that a Court will sanction a scheme of arrangement only if it is satisfied that statutory formalities have been duly complied with. Further, the scheme should fair and reasonable.116 It is submitted that the scheme of merger should not be sanctioned as it is illegal. This is because: first, the scheme is violative of Sec. 232 [A]. Second, ASB does not have the consent of the requisite majority to issue a notice under Sec. 235 [B]. In any event, the scheme is unfair and should not be sanctioned [C]. [A].

35.

THE SANCTION OF THE SCHEME OF MERGER IS VIOLATIVE OF SEC. 232

Under Sec. 232(1) read with Sec. 230(6) of the Companies Act, a scheme of merger

requires the approval of three-fourths‟ majority of the members.117 This approval must be obtained through a meeting convened by the company or the Tribunal.118 In the present case, the Board suggested the scheme of merger at 0900 hours and recorded the consent of the majority at 1400 hours, without convening a meeting.119 Additionally, the Calcutta High Court sanctioned the scheme without directing the company to convene a meeting.120 36.

It is a must for the Tribunal to convene a meeting prior to sanctioning a scheme of

arrangement.121 Admittedly, some High Courts have recognized exceptions to this rule.122 114

¶25.15, Factsheet.

115

Marshall Sons & Co. Ltd v. Income Tax Officer, (1997) 223 ITR 809 (Supreme Court of India). [“Marshall”]

116

Marshall, (1997) 223 ITR 809, at ¶21.

117

Sec. 230(6), Companies Act, 2013.

118

Sec. 230(1), Companies Act, 2013.

119

¶25, Factsheet.

120

¶26, Factsheet.

121

Mazda Theatres Pvt Ltd v. New Bank of India Ltd, ILR (1975) Delhi 1, at ¶14 (Delhi High Court). [“Mazda

Theatres”] 122

Mazda Theatres, ILR (1975) Delhi, at ¶14.

28

WRITTEN SUBMISSION FOR APPELLANTS/RESPONDENTS

TEAM „E‟

However, it is submitted that these exceptions will not apply in the present case as, first the meeting of members was not dispensable (1) and second, the founders constitute a separate class. Therefore, in any event, a separate meeting should have been convened for them (2). 1. The meeting of members was not dispensable.

37.

The Tribunal exercises judicial powers while convening a meeting. 123 It is an

established principle that meetings must be convened so that the Tribunal can gauge approval for a scheme of arrangement.124 Courts have waived this requirement only in exceptional circumstances.125 It is submitted that, these exceptions will not apply in the present case as it is a scheme of merger.126 Indeed, the Companies Act deems a resolution passed by the requisite majority of the shareholders through postal ballot to be one passed at a general meeting.127 However, this provision is applicable only to meetings called by the company, and not those convened by the Tribunal.128 Secs. 230 and 232 continue to vest the power to convene meetings with the Tribunal.129 Consequently, a scheme can be deemed invalid if a meeting is not convened inspite of Sec. 110(2). 38.

Lord Sterndale, in Express Engineering Works observed that –“For the purpose of

binding a company in its corporate capacity individual assents given separately are not equivalent to the assent of a meeting.”130 The Madras High Court has emphasized the importance of collective decisions taken at meetings with respect to schemes of mergers.131 This is because a scheme of merger involves transfer of all shares into a new company and significant structural changes to a company. In such an event, the nature of decisions arrived 123

GORE-BROWNE ON COMPANIES, Vol. I, 12-11(Alistair Alcock et al eds., 45th edn., 2014).

124

S.M. Holding Finance Pvt Ltd v. Mysore Machinery Manufacturers Ltd, [1993] 78 CompCas 432, at ¶31

(Karnataka High Court). [“S.M. Holding”] 125

S.M. Holding, [1993] 78 Com Cases 432, at ¶31.

126

In Re: Ne Plus Technologies Pvt Ltd, [2002] 112 CompCas 376 (Madras High Court). [“Ne Plus”]

127

Sec. 110(2), Companies Act, 2013.

128

In Re Godrej Industries Ltd, [2014] 184 CompCas 441, at ¶15 (Bombay High Court). [“Godrej Industries”]

129

Godrej Industries, [2014] 184 CompCas 441, at ¶15.

130

Per Lord Sterndale L.J., Re Express Engineering Works Ltd (1920) 1 Ch. 466, 470 (Court of Appeal).

131

Ne Plus, [2002] 112 CompCas 376, at ¶5.

29

WRITTEN SUBMISSION FOR APPELLANTS/RESPONDENTS

TEAM „E‟

at after discussions with members present at the meeting would be different from those arrived at by the members individually at their homes or offices.132 Further, shareholders are entitled to exercise their right to vote on the basis of an informed decision.133 Consequently, they have a right to persuade the other shareholders to vote in a particular manner.134 These rights cannot be exercised in the absence of a meeting. 39.

Even in the event that the outcome at the end of the meeting was one that the majority

desired, the company should not be deprived of the benefit of discussions and deliberations at a duly convened meeting.135 Moreover, merely recording receipts of consent without a meeting denies shareholders the opportunity to amend the terms of the scheme. This stands in contravention of the mandate of Secs. 230 and 232.136 40.

Therefore, it is submitted that in the present case, the founders had a right to voice

their concerns about the scheme of merger and to deliberate with the other shareholders about the terms of the agreement. Hence, a meeting of the members was not dispensable. Thus, the scheme of arrangement is violative of Sec. 232 (1). 2. The founders constitute a separate class and a separate meeting should have been convened for them

41.

Any scheme of arrangement needs the approval of 3/4th majority of every class of

shareholders or creditors.137 A separate meeting must be convened for a separate class.138 In Sovereign Life, 139 the Queen‟s Bench interpreted a class as “a group of persons whose rights are not so dissimilar so as to make it impossible for them to consult together with a view to

132

Ne Plus, [2002] 112 CompCas 376, at ¶5.

133

Godrej Industries, [2014] 184 CompCas 441, at ¶11.

134

Godrej Industries, [2014] 184 CompCas 441, at ¶11.

135

Re George Newman & Co, [1895] 1 Ch. 674, (Chancery Division).

136

Godrej Industries, [2014] 184 CompCas 441, at ¶15.

137

Sec. 230(6), Companies Act, 2013.

138

Sovereign Life Assurance Co v. Dodd, (1892) 2 QB 573 (Court of Appeal). [“Sovereign Life”]; PALMER‟S

COMPANY LAW, ¶12.017 (Geoffrey Morse, 25th edn., 1992). 139

Sovereign Life, (1892) 2 QB 573.

30

WRITTEN SUBMISSION FOR APPELLANTS/RESPONDENTS

TEAM „E‟

their common interest.” The Supreme Court of India observed in Mafatlal140 that a group of equity shareholders may form a separate class if they have separate and conflicting interests‟ vis-à-vis the other shareholders in the wider class.141 42.

It is submitted that the founders‟ interests in the company were manifestly different

from the other members‟. This is because they were substantially interested in preserving the character of Flyabhi. They had vested their intellectual property with Flyabhi.142 Moreover, they were a part of the Board before their shareholding was reduced and they were removed by the respondents. Thus, the interests of the founders conflicted with the other members. Hence it is submitted that the founders had separate rights and interests as opposed to the other members. Thus, they constituted a separate class and a separate meeting should have been convened for them. 43.

Therefore, it is submitted that since the scheme of merger has not obtained the

approval required under Sec. 230 (6) read with Sec. 232(1) of the Companies Act, it must be struck down. [B].

ASB DOES NOT HAVE THE CONSENT OF THE REQUISITE MAJORITY TO ISSUE A NOTICE UNDER SEC. 235

44.

In the present case, ASB obtained the consent of all the stakeholders in the company

to the scheme of merger, except for the founders‟.143 The founders collectively hold 12% of the share capital of the company.144 Therefore only 88% of the shareholders consented to the scheme. Under Sec. 235 a transferee company can acquire the shares of a dissenting minority only after its offer has been accepted by of 90% of the shareholders of the company.145 Sec. 235 is an expropriating provision which allows the transferee company to forcibly acquire the shares of the dissenting members. The Court has to construe such a provision strictly.146 140

Miheer H. Mafatlal v. Mafatlal Industries Ltd, AIR 1997 SC 506 (Supreme Court of India). [“Mafatlal”]

141

Mafatlal, AIR 1997 SC 506, at ¶ 38.

142

¶1, Factsheet.

143

¶25.20, Factsheet.

144

¶21.10, Factsheet.

145

Sec. 235(1), Companies Act, 2013.

146

Re Simo Securities Trust Ltd, [1971] 1 W.L.R. 1455, 1464 (Chancery Division).

31

WRITTEN SUBMISSION FOR APPELLANTS/RESPONDENTS 45.

TEAM „E‟

Admittedly, the Court has discretion to grant applications, but this does not extend to

variation of the terms on which the minority‟s shares may be acquired. 147 In the present case, ASB does not have the stipulated majority. Allowing it to expropriate the shares of the founders would necessarily involve a variation of the terms on which the founder‟s shares may be lawfully acquired. Therefore, it is submitted that the scope of the Court‟s discretion does not extend to accepting the application of ASB. Hence, the shares of the founders cannot be acquired under Sec. 235. [C].

46.

THE SCHEME OF ARRANGEMENT AND NOTICE FOR ACQUISITION ARE UNFAIR.

Mere compliance with statutory norms does not bind the Courts to sanction the

scheme.148 The scheme needs to be fair and reasonable.149 If the scheme is unfair, even in the event that 90% of the shareholders approve of the scheme, the shares of the dissenting minority cannot be acquired.150 47.

It is submitted that the scheme is unfair to the founders for three reasons. First, a

scheme will be deemed unfair if the consent of the majority is obtained by improper means.151 In the present case, the statutorily mandated meeting was not convened. The respondents did not give sufficient time and notice to the majority to so as to enable them to deliberate upon the scheme. Hence, their consent was improperly obtained. 48.

Second, the surrounding circumstances are relevant considerations for evaluating the

fairness of a scheme.152 In the instant case, the AoA provided that the founders‟ consent was required for key decisions involving the company. However, at the time of the scheme of merger, the founders were removed from the Board. They had filed suits complaining oppression and mismanagement. Therefore, it is submitted the respondents strategically

147

In Re Carlton Holdings Limited, [1971] 1 W.L.R. 918, 925 (Chancery Division).

148

Mafatlal , AIR 1997 SC 506, at ¶28.

149

In Re: Sidhpur Mills Co Ltd, AIR 1962 Guj 305(Gujarat High Court).

150

In Re Alpha Drug India Ltd, [2008] 143 CompCas 2 (Punjab and Haryana High Court); U. Varotill,

Corporate Governance in M&A Transactions, 24(2) NATIONAL LAW SCHOOL OF INDIA REVIEW 51, 60 (2012). 151

Vishwanathan (S.) v. East India Distilleries and Sugar Factories Ltd. [1957] 27 CompCas 175 (Madras High

Court). 152

In Re Calcutta Industrial Bank Ltd, [1948] 18 CompCas 144 (Calcutta High Court).

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WRITTEN SUBMISSION FOR APPELLANTS/RESPONDENTS

TEAM „E‟

floated the scheme at a time when the founders could not exercise their right under the AoA and were not in a position to give approval. 49.

Third, if the majority shareholders act in a manner prejudicial to the minority‟s

interest, it indicates the unfairness of the scheme.153 In the present case, the respondents recorded consent of the shareholders within a few hours of the proposal of the scheme.154 The founders were neither informed about the scheme, nor were they presented with an opportunity to put forth their views about the scheme. This indicates the systematic exclusion of the minority from participating in any decisions made in the company. Thus, it was prejudicial to their interests. 50.

Therefore, it is submitted that the scheme of merger should not be sanctioned as it was

manifestly unfair and was floated only to suppress and coerce the minority. Consequently, ASB cannot acquire the shares of the founders.

153

In Re Mafatlal Industries Ltd, (1995) 3 SCL 69 (Gujarat High Court).

154

¶20, Factsheet.

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TEAM „E‟

WRITTEN SUBMISSION FOR APPELLANTS/RESPONDENTS PRAYER

Wherefore, in light of the issues raised, arguments advanced and authorities cited, it is humbly prayed that this Honourable Court may be pleased to adjudge and declare that:

I.

The petition claiming relief for oppression and mismanagement cannot be referred to

arbitration; II. The allotment of shares to the investors‟ affiliates is invalid; III. The resolutions passed in the EGM on 14th August, 2012 be declared invalid; IV. The removal of Appellants from the Board of Directors is null and void; V. The Respondents be directed to sell the securities of Flyabhi owned by them to the Appellants; VI. The Scheme of Arrangement is illegal; VII. The application against the notice for acquisition of shares is allowed;

And pass any other order that this Honourable Court may deem fit in the interests of justice, equity and good conscience.

All of which is humbly prayed, Team „E‟, Counsel for the Appellants/Respondents.

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