Legal Analysis of Share Transfer in Sugandha Pharma v. Vikram Rajani and Advait Jain - Pro, Cheat Sheet of Commercial Law

Download Legal Analysis of Share Transfer in Sugandha Pharma v. Vikram Rajani and Advait Jain - Pro and more Cheat Sheet Commercial Law in PDF only on Docsity! R- 04 FACULTY OF LAW, GLS UNIVERSITY MOOT ACTIVITY- SEM IV Before The HON’BLE NATIONAL COMPANY LAW TRIBUNAL OF VIJAYBAAD PETITION INVOKED UNDER SECTION 280 OF THE COMPANIES ACT 2013 IN THE MATTER OF: Sugandha Pharma Public Ltd. (PETITIONER) v. Mr. Vikram Rajani and Mr. Advait Jain (RESPONDENT) WRITTEN SUBMISSION ON BEHALF OF THE RESPONDENT DRAWN AND FILED BY THE COUNSEL APPEARING FOR THE RESPONDENT Page 1 of 27 Memorandum for the respondent TABLE OF CONTENTS CONTENT PAGE NUMBER LIST OF ABBREVIATIONS 2 INDEX OF AUTHORITIES 3 STATEMENT OF JUSIRDICTION 5 STATEMENT OF FACTS 6 ISSUES RAISED 8 SUMMARY ARGUMENTS 9 ADVANCED ARGUMENTS 11 PRAYER 26 Page 4 of 27 Memorandum for the respondent  www.mca.gov.in Page 5 of 27 Memorandum for the respondent STATEMENT OF JURISDICTION The petitioner has humbly approached the Hon’ble NCLT of Vijaybaad under Section 280 of The Companies Act, 2013: 280. Jurisdiction of Tribunal. —The Tribunal shall, notwithstanding anything contained in any other law for the time being in force, have jurisdiction to entertain, or dispose of, — (a) any suit or proceeding by or against the company; (b) any claim made by or against the company, including claims by or against any of its branches in India; (c) any application made under Section 233; (d) any question of priorities or any other question whatsoever, whether of law or facts, including those relating to assets, business, actions, rights, entitlements, privileges, benefits, duties, responsibilities, obligations or in any matter arising out of, or in relation to winding up of the company, whether such suit or proceeding has been instituted, or is instituted, or such claim or question has arisen or arises or such application has been made or is made or such scheme has been submitted, or is submitted, before or after the order for the winding up of the company is made. Page 6 of 27 Memorandum for the respondent STATEMENT OF FACTS INTRODUCTION Sugandha Pharma Ltd (SPL) is a reputable public limited company with its registered office in Vijaybaad (State: Jorhat, Indiana) engaged in the manufacturing and distribution of pharmaceutical products. With a strong presence on the stock exchange, SPL has consistently focused on improving healthcare globally. Its Memorandum of Association (MOA) explicitly outlines its objective, which includes but is not limited to, the development, production, and sale of pharmaceuticals, investment in research and development, and collaboration with other entities to enhance its market position. STATUS OF RELATIONSHIP Moon Pharma Ltd (MPL), a private limited company having its registered office at Vijaybaad, is a newly found subsidiary of SPL (SPL holds 65% shares of MPL) defines its primary object as engaging in the business of research and development of pharmaceutical products, ensuring compliance with regulatory standards but not directly entering into retail or selling of drugs. The MOA restricts MPL from engaging in activities beyond its stated objects without the approval of its shareholders. The object clause of MPL's AOA emphasizes adherence to lawful and ethical business practices within the pharmaceutical industry. DISPUTE BETWEEN THE PARTIES There are 50 shareholders in MPL. The main Managing Director of MPL is Mr. Advait Jain, he has been accused many times by the shareholders of misappropriation of funds as well as involved in activities detrimental to the interests of company. One such accusation was related to unlawful transfer of shares from MPL to SPL by him on which he states that he made such a transfer on the request of Managing Director of SPL (Mr. Vikram Rajani), and thus transferred his own shares i.e. 12 % to Mr. Vikram Rajani without asking the shareholders of MPL first or taking any approval from Board of Directors of MPL. Simultaneously, Mr Vikram Rajani is facing personal financial turmoil, engaged in speculative ventures outside the scope of MPL's MOA. These ventures resulted in substantial financial losses for SPL, jeopardizing its financial stability. Such actions were clearly ultra vires, as they exceeded the boundaries defined by SPL's MOA. Page 9 of 27 Memorandum for the respondent SUMMARY OF ARGUMENTS ISSUE 1: WHETHER THE SHARE TRANSFER FROM MR. ADVAIT JAIN TO MR. VIKRAM RAJANI CONSISTENT WITH THE LEGAL FRAMEWORK GOVERNING PUBLIC COMPANIES? It is humbly submitted before the Hon’ble Court that he transferred the shares to Mr. Rajani on the express orders of his superior, Mr. Vikram Rajani, he was obligated to follow the instructions of the SPL Managing Director, believing them to be in the best interests of both companies. The share transfer from Mr. Advait Jain to Mr. Vikram Rajani consistent and within the legal framework governing public companies. The action of Mr. Advait Jain, including the alleged misappropriation of funds and involvement in activities detrimental to MPL were unreasonable as there was lack of evidence. SUB ISSUE 1.1: MPL, BEING A SUBSIDIARY OF SPL, IS CONSIDERED A PUBLIC COMPANY UNDER THE COMPANIES ACT, 2013. It is humbly submitted before the Hon’ble Court that on the interpretation of Section 2(71) of the Companies Act, 2013 which defines a public company, expresses that a private company can be deemed a public company if it has a subsidiary that is itself a public company. SUB ISSUE 1.2: THE ACT WAS ULTRA VIRES OR NOT. It is humbly submitted before the Hon’ble Court that the act was within legal framework and the share transfer was justified and necessary for strategic reasons. It was for intended benefits for both companies and his actions were in compliance with MPL's AOA. SUB ISSUE 1.3: WHETHER SPL'S SHAREHOLDERS HAD SUFFICIENT REASON TO DOUBT THE LEGALITY OF THE SHARE TRANSFER? It is humbly submitted before the Hon’ble Court that Mr. Vikram Rajani transfer was disclosed internally within SPL and followed established procedures for such transactions. He emphasized that SPL shareholders were not obligated to be directly informed of this specific transfer due to its intra- company nature and size (12% shares). SPL conducted due diligence on the recipient (Mr. Advait), ensuring his suitability and adherence to ethical practices. Relying on the doctrine of indoor Page 10 of 27 Memorandum for the respondent management to assert that shareholders and outsiders should not be penalized for internal irregularities and that they had no reason to doubt the legality of the transfer. ISSUE 2: WHETHER THE MAJORITY SHAREHOLDERS OF SPL HAVE THE LEGAL STANDING TO BRING A DERIVATIVE SUIT AGAINST MR. VIKRAM RAJANI AND MR. ADVAIT JAIN, CONSIDERING THE PRINCIPLES OF DERIVATIVE ACTIONS AND THE ALLEGED HARM TO THE COMPANY? It is humbly submitted before the Hon’ble Court that The NCLT ought to have taken into consideration the fact that the actions taken by the directors were in a good faith within the company's internal processes. And there were other available remedies or dispute resolution mechanisms before initiating the derivative suit. Page 11 of 27 Memorandum for the respondent ADVANCED ARGUMENTS ISSUE 1: WHETHER THE SHARE TRANSFER FROM MR. ADVAIT JAIN TO MR. VIKRAM RAJANI IS CONSISTENT WITH THE LEGAL FRAMEWORK GOVERNING PUBLIC COMPANIES? The Counsel of the Respondent most humbly submitted before the Hon’ble Court that the share transfer from Mr. Advait Jain to Mr. Vikram Rajani is consistent with the legal framework governing public companies. The arguments for the issue are advanced relying on the fact that the Present Respondent deserves to be protected under the Companies Act, 2013, and that share transfer decision made by Mr. Advait Jain were taken in good faith and with the best interests of MPL in mind. 1.1: MPL, BEING A SUBSIDIARY OF SPL, IS CONSIDERED A PUBLIC COMPANY UNDER THE COMPANIES ACT, 2013. The counsel of the Respondent most humbly submits before this Hon’ble Court that the Present Respondent deserves a protection under the Act against liability on both the directors on alleged wrongdoing. 1. The first contention of the Respondent with regard to this issue is about MPL, being a subsidiary of SPL, is considered a public company. There is explicit definition or section expressly talks about subsidiary company being public under the Companies Act, 2013. Section 2(71) of the Act, which defines a public company as: "(71) "public company" means a company which- (a) has a paid-up share capital of more than one hundred crore rupees or such higher paid-up share capital as may be prescribed; or (b) has a subsidiary company which is a public company; or (c) has more than two hundred and fifty shareholders; or (d) has issued its shares or debentures to the public; or (e) has invited deposits from the public;" Page 14 of 27 Memorandum for the respondent (c) the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof; (d) the liability of members of the company, whether limited or unlimited, and also state,— (i) in the case of a company limited by shares, that liability of its members is limited to the amount unpaid, if any, on the shares held by them; and (ii) in the case of a company limited by guarantee, the amount up to which each member undertakes to contribute— (A) to the assets of the company in the event of its being wound-up while he is a member or within one year after he ceases to be a member, for payment of the debts and liabilities of the company or of such debts and liabilities as may have been contracted before he ceases to be a member, as the case may be; and (B) to the costs, charges and expenses of winding-up and for adjustment of the rights of the contributories among themselves; (e) in the case of a company having a share capital, — (i) the amount of share capital with which the company is to be registered and the division thereof into shares of a fixed amount and the number of shares which the subscribers to the memorandum agree to subscribe which shall not be less than one share; and (ii) the number of shares each subscriber to the memorandum intends to take, indicated opposite his name; (f) in the case of One Person Company, the name of the person who, in the event of death of the subscriber, shall become the member of the company. (2) The name stated in the memorandum shall not— (a) be identical with or resemble too nearly to the name of an existing company registered under this Act or any previous company law; or (b) be such that its use by the company— (i) will constitute an offence under any law for the time being in force; or (ii) is undesirable in the opinion of the Central Government. (3) Without prejudice to the provisions of sub-section (2), a company shall not be registered with a name which contains— Page 15 of 27 Memorandum for the respondent (a) any word or expression which is likely to give the impression that the company is in any way connected with, or having the patronage of, the Central Government, any State Government, or any local authority, corporation or body constituted by the Central Government or any State Government under any law for the time being in force; or (b) such word or expression, as may be prescribed, unless the previous approval of the Central Government has been obtained for the use of any such word or expression. (4) A person may make an application, in such form and manner and accompanied by such fee, as may be prescribed, to the Registrar for the reservation of a name set out in the application as— (a) the name of the proposed company; or (b) the name to which the company proposes to change its name. (5) (i) Upon receipt of an application under sub-section (4), the Registrar may, on the basis of information and documents furnished along with the application, reserve the name for a period of sixty days from the date of the application. (ii) Where after reservation of name under clause (i), it is found that name was applied by furnishing wrong or incorrect information, then, — (a) if the company has not been incorporated, the reserved name shall be cancelled and the person making application under sub-section (4) shall be liable to a penalty which may extend to one lakh rupees; (b) if the company has been incorporated, the Registrar may, after giving the company an opportunity of being heard— (i) either direct the company to change its name within a period of three months, after passing an ordinary resolution; (ii) take action for striking off the name of the company from the register of companies; or (iii) make a petition for winding up of the company. (6) The memorandum of a company shall be in respective forms specified in Tables A, B, C, D and E in Schedule I as may be applicable to such company. (7) Any provision in the memorandum or articles, in the case of a company limited by guarantee and not having a share capital, purporting to give any person a right to participate in the divisible profits of the company otherwise than as a member, shall be void. Page 16 of 27 Memorandum for the respondent RELEVANCE WITH THE PRESENT CASE 3. The above-mentioned section was taken as a reference in order to establish the ideal AOA and MOA of the company to rely upon, as AOA of either of the companies, it is not provided we are taking section 5 into consideration, that MPL, being a subsidiary of SPL, is considered a public company as per the Companies Act, 2013, and therefore, the share transfer is not in violation of MPL's AOA. Also, there sec 4(1)(a) suggests that the name of company shall Private limited in case of private limited company, and going according to the factsheets, it itself states ‘Moon Pharma Ltd (MPL)’. In Osborn v. the United States2, case, Johnson J. opined that: “The name of corporation is the symbol of its personal existence”. 4. Notwithstanding with the above contentions, it is important to note that the Present Respondent has not violated any legal framework governing public companies. 1.2: WHETHER THE ACT WAS ULTRA VIRES OR NOT? The Counsel of the Respondent most humbly submitted before the Hon’ble Court that as per the doctrine of ultra vires, the company is not supposed to bypass the boundary set by the Memorandum of Association on the company’s activities. 1. If the company does any act outside its operational scope specified under the Memorandum of Association, such an act will be held ultra vires. Ultra-vires It is a Latin term made up of two words “ultra” which means beyond and “vires” meaning power or authority. So, we can say that anything which is beyond the authority or power is called ultra-vires. In the context of the company, we can say that anything which is done by the company or its directors which is beyond their legal authority or which was outside the scope of the object of the company is ultra-vires. The doctrine of ultra-vires in Companies Act, 2013 Section 4(1)(c) of the Companies Act, 2013, states that all the objects for which incorporation of the company is proposed any other matter which is considered necessary in its furtherance should be stated in the memorandum of the company. 2 Osborn v. the United States, 6 L Ed 204 Page 19 of 27 Memorandum for the respondent 7. Also, Swinfen-Eady J. held in the case of the Percival v Wright5 regarding the directors’ duties towards the shareholders, “The directors of a company are not trustees for individual shareholders and may purchase their shares without disclosing pending negotiations for the sale of the company’s undertaking”. The court distinguished that the directors do not have any fiduciary duty to the shareholders. Mr Cook said that, “would merely exclude any automatic fiduciary duty, leaving open the possibility of such a duty falling on a director in particular circumstances”. RELEVANCE WITH THE CASE 8. In accordance with the above-mentioned sec and the case as the share transfer was done in good faith by the directors as specified and directors were not obliged to disclose this transfer to shareholders as they are outsiders and not internal part of the company. 1.3: WHETHER SPL'S SHAREHOLDERS HAD SUFFICIENT REASON TO DOUBT THE LEGALITY OF THE SHARE TRANSFER. The Counsel of the Respondent most humbly submitted before the Hon’ble Court that Mr. Vikram Rajani transfer was disclosed internally within SPL and followed established procedures for such transactions. He emphasized that SPL shareholders were not obligated to be directly informed of this specific transfer due to its intra-company nature and size i.e., 12% shares. 1. This landmark case in corporate law Salomon v. Salomon & Co. Ltd.6 established the principle of separate legal personality for companies. “Under the ordinary rule of law” observes Cohen LJ “a parent company and a subsidiary company, even a 100 percent of subsidiary company, are distinct legal entities.” Furthermore, Royal British Bank v. Turquand7 commonly known as the "Turquand's Rule," this case established the doctrine of indoor management. It allows third parties dealing with a company to assume that internal company procedures are being followed unless there is evidence to the contrary. 5 Percival v Wright, (1902) 2 Ch 421 6 Salomon v. Salomon & Co. Ltd, 1897 AC 22 (HL) 7 Royal British Bank v. Turquand, (1856) 6 E&B 327: 119 ER 886 Page 20 of 27 Memorandum for the respondent RELEVANCE WITH THE CASE The present Respondent rely on the doctrine of indoor management to assert that shareholders and outsiders should not be penalized for internal irregularities and that they had no reason to doubt the legality of the transfer. And to discussions about lifting the corporate veil and the distinct legal status of MPL and SPL, both are separate legal entities. ISSUE 2: WHETHER THE MAJORITY SHAREHOLDERS OF SPL HAVE THE LEGAL STANDING TO BRING A DERIVATIVE SUIT AGAINST MR. VIKRAM RAJANI AND MR. ADVAIT JAIN, CONSIDERING THE PRINCIPLES OF DERIVATIVE ACTIONS AND THE ALLEGED HARM TO THE COMPANY? The Counsel of the Respondent most humbly submitted before the Hon’ble Court that in the present case, the allegations which were made by the Present Petitioners while filing a suit against the Present Respondent in the NCLT, the counsel have to notice on how they lack proper standing to bring a derivative suit on behalf of the company, asserting that they failed to demonstrate their eligibility as shareholders or that they haven't fulfilled the necessary procedural requirements. There are prerequisites for filing a derivative suit, such as making a demand on the company's board to take action, or other available remedies or dispute resolution mechanisms before initiating the derivative suit. 1. According to section 241 of the Act, it defines the Application to Tribunal for relief in cases of oppression. Section 241- Application to Tribunal for relief in cases of oppression, (1) Any member of a company who complains that-- (a) the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company; or (b) the material change, not being a change brought about by, or in the interests of, any creditors, including debenture holders or any class of shareholders of the company, has taken place in the management or control of the company, whether by an alteration in the Board of Directors, or Page 21 of 27 Memorandum for the respondent manager, or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members. section -244 Right to apply under section 241. (1) The following members of a company shall have the right to apply under section 241, namely: - (b) in the case of a company not having a share capital, not less than one-fifth of the total number of its members. (20%) 3. Furthermore, in the case of, Foss v Harbottle8, in this particular case the court held that individual shareholders or outsiders of the company could not bring legal action against wrongs done to the corporation, as the company and its shareholders are considered separate legal entities, it also stated that a member of the company can take a legal action on its behalf against the wrongdoer only if he is authorised to do so by the board of directors or by an ordinary resolution passed in the general meeting. 2 principles came out in this case which were: ● “Proper Plaintiff Rule,” which states that only the company can sue directors or outsiders for any wrong or loss due to fraudulent or negligent acts. the proper plaintiff rules. This rule states that if a particular wrong has been committed against a company, then only the company has the locus to bring an action and not a shareholder. ● The second rule is the “Majority Principle Rule,” where the court will not interfere if the alleged wrong can be ratified by a majority of members in a general meeting. RELEVANCE WITH THE CASE 8 Foss v Harbottle, (1843) 2 Hare 461: 67 ER 189 Page 24 of 27 Memorandum for the respondent (4) In considering an application under sub-section (1), the Tribunal shall take into account, in particular-- (a) whether the member or depositor is acting in good faith in making the application for seeking an order; (b) any evidence before it as to the involvement of any person other than directors or officers of the company on any of the matters provided in clauses (a) to (f) of subsection (1); (c) whether the cause of action is one which the member or depositor could pursue in his own right rather than through an order under this section; (d) any evidence before it as to the views of the members or depositors of the company who have no personal interest, direct or indirect, in the matter being proceeded under this section; (e) where the cause of action is an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would be likely to be (i) authorised by the company before it occurs; or (ii) ratified by the company after it occurs; (f) where the cause of action is an act or omission that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be, ratified by the company. (5) If an application filed under sub-section (1) is admitted, then the Tribunal shall have regard to the following, namely: -- (a) public notice shall be served on admission of the application to all the members or depositors of the class in such manner as may be prescribed; (b) all similar applications prevalent in any jurisdiction should be consolidated into a single application and the class members or depositors should be allowed to choose the lead applicant and Page 25 of 27 Memorandum for the respondent in the event the members or depositors of the class are unable to come to a consensus, the Tribunal shall have the power to appoint a lead applicant, who shall be in charge of the proceedings from the applicant’s side; (c) two class action applications for the same cause of action shall not be allowed; (d) the cost or expenses connected with the application for class action shall be defrayed by the company or any other person responsible for any oppressive act. (6) Any order passed by the Tribunal shall be binding on the company and all its members, depositors and auditor including audit firm or expert or consultant or advisor or any other person associated with the company. (7) Any company which fails to comply with an order passed by the Tribunal under this section shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty- five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees. (8) Where any application filed before the Tribunal is found to be frivolous or vexatious, it shall, for reasons to be recorded in writing, reject the application and make an order that the applicant shall pay to the opposite party such cost, not exceeding one lakh rupees, as may be specified in the order. (9) Nothing contained in this section shall apply to a banking company. (10) Subject to the compliance of this section, an application may be filed or any other action may be taken under this section by any person, group of persons or any association of persons representing the persons affected by any act or omission, specified in sub-section (1). Page 26 of 27 Memorandum for the respondent PRAYER Wherefore, in the light of the facts presented, arguments advanced and authorities cited, the Appellant humbly submit that the Hon’ble Supreme Court be pleased to adjudge and declare that: 1. To dismiss the petition filed by the petitioner. 2. To declare the actions of Mr. Advait Jain and Mr. Vikram Rajani were justified and within the company’s action. 3. To refrain from issuing any orders removing them from their respective positions as Directors of Moon Pharma Ltd. (MPL) and Sugandha Pharma Ltd. (SPL), respectively. And pass any other relief, that this Hon’ble Company Law Board may deem fit and proper in the interest of justice, equity and good conscience. For this act of kindness, the Appellant shall duty bound forever pray. Sd./ (Counsels for the Appellant)