Study with the several resources on Docsity
Earn points by helping other students or get them with a premium plan
Prepare for your exams
Study with the several resources on Docsity
Earn points to download
Earn points by helping other students or get them with a premium plan
Community
Ask the community for help and clear up your study doubts
Discover the best universities in your country according to Docsity users
Free resources
Download our free guides on studying techniques, anxiety management strategies, and thesis advice from Docsity tutors
It is a moot memorial based on problem of corporate law regarding section 182 of companies act
Typology: Assignments
1 / 23
This page cannot be seen from the preview
Don't miss anything!
Memorandum on Behalf of Petitioner
Under application exercised under
Index of Authorities Statutes Companies (Amendment) Act, 2018 Companies Act, 2013 Books DATTA, ‘COMPANY LAW’ (LEXIS NEXIS, 7TH^ EDITION) Indian Cases Life Insurance Corporation of India v. Escorts Ltd [1986] 59 Comp.Cas. 548 Yella Constructions Limited v. East Coast Railway (2006) 6 ALD 460 Kapila Hingorani v. State of Bihar (2003) 6 SCC 1 Singer India Ltd v. Chander Mohan Chadha (2004) 7 SCC 1 Vipul Gupta v. Trident Projects Ltd (2009) 78 AIC 322 (Del) Foreign Cases United States v. Milwaukee Refrigerator Transit Company (1905) 142 F, edn. 247 Gilford motor company ltd v. Horne and Jones v. Lipman [1933] 1 CH 935 Jones v. Lipman [1962] 1 All ER 442
Statement of Facts Captain Camerica Pvt. Ltd. [“ CCPL ”], a company incorporated in the United States of Camerica, manufactures toys for children. CCPL was operating in India through its subsidiary CCPL India Ltd. Mr. Jeff Thor was the Founder of CCPL and Mr. Mark Wayne was the Chief Operating Officer of CCPL India Ltd. Both, Mr. Thor and Mr. Wayne, were known to be close aides of Mr. Happy Gandhi, Leader of Opposition in Union of Indish. In fact, due to this reason, there were rumors that Mr. Thor had also refused to give any grants to Bhaagiya Janta Party [“ BJP ”], the ruling government in the Union of Indish In March 2014, the BJP amended the Foreign Direct Investment [“ FDI ”] norms in the toys sector. Post amendments, FDI above 51% was only allowed through government route. Thus, in order to increase its shareholding above 51% in CCPL India Ltd., CCPL approached government departments and sought the requisite approvals. After scrutinizing the documents submitted, an in- principle approval was accorded to CCPL. In December 2014, CCPL expanded its shareholding in its Indian subsidiary to 64% and the remaining shares were held by the public. Suddenly, in January 2015, the government officials conducted raids in CCPL India Ltd’s headquarters alleging that the documents submitted to the government were fake and untrue. In fact, it is also rumoured that although the subsidiary is earning huge profits for the last three years, it has not distributed any dividends to its shareholders. Rather, as per the market news, profits are given as grants to Mr. Happy Gandhi. When the public shareholders came to know about such non-verified updates, they filed an application before the relevant court to hold Mr. Thor, Mr. Wayne and other directors criminally liable. They argued that there has been a clear violation of the FDI norms and fraud has also been committed against the shareholders. According to them, such circumstances warrant lifting of corporate veil in the present matter. In reply to the application, CCPL and its subsidiary contended that a company has a separate legal entity. It was also urged that lifting of corporate veil is an exception and not a rule and thus, should only be done in extreme circumstances. In addition, they argued that due to prevailing discords, the BJP is creating false news against both
Statement of Jurisdiction The National company law tribunal Court has the jurisdiction to hear and dispose of the instant case. This court has the jurisdiction as per Sec. 241 of The Companies Act 2013, on the question of facts and laws as well.
Statement of Issue
Arguments Advanced A. WHETHER FRAUD WAS COMMITTED BY THE RESPONDENTS? The Petitioner most humbly submits that based on the alleged reports, Fraud has definitely been committed by the Respondents in various stages on the case. Primarily, Fraud was committed by the Holding Company when they produced fake documents for acquiring government route permissions to hold more than 51% of its Subsidiary’s Shareholding. Secondarily, the Petitioner submits that the Subsidiary Company, Respondent No. 1, has failed miserably on utilization of its dividends. Petitioner contends that on papers, Respondent No. 1 has shown good profits for the previous three years yet none of the Annual General Meetings seem to have followed up on the payment of dividends which were declared to be paid out to its shareholders. It is also contended that the gratification paid to Mr. Happy Gandhi is also not in compliance with provisions of Section 182 of the Companies (Amendment) Act, 2018 since part profits were paid to Mr. Happy Gandhi as gratification After 3 years of the company’s establishment. Whether the Holding Company obtained Government Route approval through filing fake and untrue documents? After the changes made to the FDI policies, foreign companies or resident aiming for more than 51% Shareholding can do so by applying their proposals (in case of Fresh Approvals) with the Foreign Investment Promotion Board (FIPB). Below is the list of documents which the foreign resident or company must adduce^1 ; Certificates of incorporation(s) of the concerned entities. Certificates of Memorandum of Association of the concerned entities. FIRC (^1) Procedure of FDI under Government Route, CS Prem Pyara Tiwari. https://taxguru.in/corporate-law/procedure-fdi- government-route.html
Copies of relevant past FIPB/SIA/RBI approvals, relating to the current proposal. Certificates of Incorporation(s) and Memorandum of Association of the downstream investee company, if already formed. (In case of Downstream Investment). In case of transfer of existing equity – the Board Resolution of the investee company and the consent of transferor shareholder(s). In case of fresh issue of shares – the Board/Shareholders Resolution of the investee / issuing company to that effect. Declaration Under Press Note 1 of 2005 (Existing Investment) from each of the foreign investor / collaborator, on their official letter heads, with full name and contact address of the signatory of the declaration, if any. A copy of the JV agreement/ Shareholders’ agreement/ technology transfer/trademark / brand assignment agreement (as applicable), in case there are existing ventures, if applicable. The comments of the Indian partners/ technical/ trademark collaborators about the new venture, on their official letter heads, with full name and contact address of the signatory of the comments, if applicable. Provide any website link for more information. Diagrammatical representation of the flow and funds from the original investor to the investee company. Any Other information / attachment. Based on the outcomes of the Raid conducted by the Government Officials in the headquarters of Respondent No. 1, the conclusion drawn from the raid is that multiple documents that were proposed for acquiring the Government Route were fake and untrue, the report of the Raid Conducting Officer is (hypothetically) Annexed with and it is a clear indicative that the Company did not approach the Government with Clean Hands, mala fide intention of Fraud was already in the mind of the Company. Referring to the Statement of Facts, it can be clearly inferred that the Company did not negate to the findings of the report but instead tried to politicize the whole scenario. The Respondents cannot question the authority of the raid because it was rightly conducted under the provisions of Section 212 of the Companies (Amendment) Act, 2018. For a better perusal by the Hon’ble Tribunal, the recital of the Section is replicated below;
may be released on bail, if the Special Court so directs:
Provided further that the Special Court shall not take cognizance of any offence referred to this sub-section except upon a complaint in writing made by— (i) the Director, Serious Fraud Investigation Office; or (ii) any officer of the Central Government authorised, by a general or special order in writing in this behalf by that Government. (7) The limitation on granting of bail specified in sub-section (6) is in addition to the limitations under the Code of Criminal Procedure, 1973 or any other law for the time being in force on granting of bail. (8) If the Director, Additional Director or Assistant Director of Serious Fraud Investigation Office authorised in this behalf by the Central Government by general or special order, has on the basis of material in his possession reason to believe (the reason for such belief to be recorded in writing) that any person has been guilty of any offence punishable under sections referred to in sub-section (6), he may arrest such person and shall, as soon as may be, inform him of the grounds for such arrest. (9) The Director, Additional Director or Assistant Director of Serious Fraud Investigation Office shall, immediately after arrest of such person under sub-section (8), forward a copy of the order, along with the material in his possession, referred to in that sub-section, to the Serious Fraud Investigation Office in a sealed envelope, in such manner as may be prescribed and the Serious Fraud Investigation Office shall keep such order and material for such period as may be prescribed. (10) Every person arrested under sub-section (8) shall within twenty-four hours, be taken to a Judical Magistrate or a Metropolitan Magistrate, as the case may be, having jurisdiction: Provided that the period of twenty-four hours shall exclude the time necessary for the journey from the place of arrest to the Magistrate's court. (11) The Central Government if so directs, the Serious Fraud Investigation Office shall submit an interim report to the Central Government. (12) On completion of the investigation, the Serious Fraud Investigation Office shall submit the investigation report to the Central Government. (13) Notwithstanding anything contained in this Act or in any other law for the time being in force, a copy of the investigation report may be obtained by any person concerned by making an application in this regard to the court. (14) On receipt of the investigation report, the Central Government may, after examination of the report (and after taking such legal advice, as it may think fit), direct the Serious Fraud Investigation Office to initiate prosecution against the company and its officers or employees, who are or have been in employment of the company or any other person directly or indirectly connected with the affairs of the company. (15) Notwithstanding anything contained in this Act or in any other law for the time being in force, the investigation report filed with the Special Court for framing of charges shall be deemed to be a report filed by a police officer under section 173 of the Code of Criminal Procedure, 1973.
Focusing on the 3 rd^ Right of the Minority Share Holder shows that this is exactly what the petition is about. All the shareholders which hold up to 36% of the company have filed this common petition alleging fraud by the subsidiary which requires the piercing of the corporate veil. Dividends for Unlisted Companies (Include unlisted Public and Private Limited Company) are given in such a manner: i. It is not necessary to close register. ii. There are few transfers in these Companies. iii. General Meeting can decide the ‘Cut off’ date or could be date of General Meeting. In case of the annual dividend, the persons who are members as on the date of the annual general meeting will be eligible to receive the dividend as the dividend is approved by the members on the day when annual general meeting is held. Listed companies are required to inform the Stock Exchange 1 [at least 7 working days] in advance of closing the Register of members for payment of dividend declared at the annual general meeting for determining the names of shareholders entitled to dividend. This being said, it is not the issue here that dividends were not paid to shareholders despite profit, the issue here is that the right of the share holders with respect to general meetings were infringed. Financial Statements were not provided to the shareholders, no proof of the fact that a percentage of dividend was transferred to companies account which would in turn be used as capital for next financial year was given to the shareholders. The only visible aspect was that unprecedented amount of gratification was paid in kind to Mr. Happy Gandhi who happens to be the Leader of Opposition. Whether the company had authority to pay gratification to Mr. Happy Gandhi? For a in depth understanding as to why the company violated its norms and frauded its shareholders when it paid the gratification to Mr. Happy Gandhi, a closer of Section 182 of the Companies (Amendment) Act, 2018 is required;
182. (1) Notwithstanding anything contained in any other provision of this Act, a company, other than a Government company and a company which has been in existence for less than three financial years, may contribute any amount directly or indirectly to any political party: Provided that the amount referred to in sub-section (1) or, as the case may be, the aggregate of the amount which may be so contributed by the company in any financial year shall not exceed seven and a half per cent. of its average net profits during the three immediately preceding financial years: Provided further that no such contribution shall be made by a company unless a
resolution authorizing the making of such contribution is passed at a meeting of the Board of Directors and such resolution shall, subject to the other provisions of this section, be deemed to be justification in law for the making and the acceptance of the contribution authorized by it. (2) Without prejudice to the generality of the provisions of sub-section (1),— (a) a donation or subscription or payment caused to be given by a company on its behalf or on its account to a person who, to its knowledge, is carrying on any activity which, at the time at which such donation or subscription or payment was given or made, can reasonably be regarded as likely to affect public support for a political party shall also be deemed to be contribution of the amount of such donation, subscription or payment to such person for a political purpose; (b) the amount of expenditure incurred, directly or indirectly, by a company on an advertisement in any publication, being a publication in the nature of a souvenir, brochure, tract, pamphlet or the like, shall also be deemed, — (i) where such publication is by or on behalf of a political party, to be a contribution of such amount to such political party, and (ii) where such publication is not by or on behalf of, but for the advantage of a political party, to be a contribution for a political purpose. (3) Every company shall disclose in its profit and loss account any amount or amounts contributed by it to any political party during the financial year to which that account relates, giving particulars of the total amount contributed and the name of the party to which such amount has been contributed. (4) If a company makes any contribution in contravention of the provisions of this section, the company shall be punishable with fine which may extend to five times the amount so contributed and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months and with fine which may extend to five times the amount so contributed. Explanation.—For the purposes of this section, “political party” means a political party registered under section 29A of the Representation of the People Act, 1951. Sub-section (1) and Sub-section (3) of the Statute are by the Company since there is no record of any such discussion in the general meeting therefore how was such a resolution passed by the board to pay such amounts of gratifications. There’s no proof to show that the gratification so paid was less than 7 and a half percentage of the net average profit of the preceding three financial years. Moreover, there has been no disclosure by the board of directors of any such
Placing reliance on the aforesaid discussion, the petitioner concludes on the First Issue that there was Fraud on Part of the Respondent Companies. B. WHETHER THE CURRENT CIRCUMSTANCES OF THE CASE CALL FOR THE ‘PIERCING OF CORPORATE VEIL’? At times it may happen that the corporate personality of the company is used to commit frauds and improper or illegal acts. Since an artificial person is not capable of doing anything illegal or fraudulent, the façade of corporate personality might have to be removed to identify the persons who are really guilty. This is known as ‘lifting of corporate veil’. The corporate veil may be lifted where the statute itself contemplates lifting the veil or fraud or improper conduct is intended to be prevented. “It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of public interest, the effect on parties who may be affected, etc.”. This was iterated by the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd.^2 By contrast with the limited and careful statutory directions to ‘lift the veil’ judicial inroads into the principle of separate personality are more numerous. Besides statutory provisions for lifting the corporate veil, courts also do lift the corporate veil to see the real state of affairs. This case where the court did lift the veil is as follows: United States v. Milwaukee Refrigerator Transit Company^3 – In this case the U.S. Supreme Court held that “where the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will disregard the corporate entity and treat it as an association of persons.” The courts have been more that prepared to pierce the corporate veil when it fells that fraud is or could be perpetrated behind the veil. The courts will not allow the Solomon principal to be used (^2) [1986] 59 Comp.Cas. 548 (^3) (1905) 142 F, edn. 247
as an engine of fraud. The two classic cases of the fraud exception are Gilford motor company ltd v. Horne and Jones v. Lipman.^4 In the first case, Mr. Horne was an ex-employee of The Gilford motor company and his employment contract provided that he could not solicit the customers of the company. In order to defeat this, he incorporated a limited company in his wife's name and solicited the customers of the company. The company brought an action against him. The Court of appeal was of the view that "the company was formed as a device, a stratagem, in order to mask the effective carrying on of business of Mr. Horne" in this case it was clear that the main purpose of incorporating the new company was to perpetrate fraud. Thus, the court of appeal regarded it as a mere sham to cloak his wrongdoings In the second case of Jones v. Lipman^5 a man contracted to sell his land and thereafter changed his mind in order to avoid an order of specific performance he transferred his property to a company. russel judge specifically referred to the judgments in Gilford v. Horne and held that the company here was " a mask which (Mr. Lipman) holds before his face in an attempt to avoid recognition by the eye of equity" he awarded specific performance both against Mr. Lipman and the company. Under no circumstances will the court allow the any form of abuse of the corporate form and when such abuse occurs, the courts will step in to lift the veil. In Yella Constructions Limited v. East Coast Railway, Bhubaneswar^6 , referring to the definition as given in Words and Phrases Permanent Edition (West Publishing Company - third reprint 1989), this Court explained the principle as under. In Volume 32A of Words and Phrases (West Publishing Company - third reprint 1989 p.84) the term "piercing the corporate veil" is described as, "the Court's unwillingness to permit corporate presence and action to divert judicial course of applying law to ascertain facts." When this principle is invoked, it is permissible to show that the individual hiding behind the corporation is liable to discharge the obligations ignoring the concept of corporation as a separate entity. Generally, an incorporated company is liable as a juristic person. It is different from its (^4) [1933] 1 CH 935 (^5) [1962] 1 All ER 442 (^6) (2006) 6 ALD 460
