CENTRAL UNIVERSITY OF SOUTH BIHAR

SCHOOL OF LAW AND GOVERNANCE

MOOT COURT EXERCISE AND INTERNSHIP

SUBMITTED TO
Prof. (Dr.) Pawan Kumar Mishra
HEAD & DEAN
School of Law and Governance

SUBMITTED BY
Amit Kumar
B.SC. LL.B. (H.), (10th Sem.)
 CUSB1513115005

1212 R

BEFORE JUDICIAL AUTHORITY

HON’BLE CHIEF JUDGE, CITY-CIVIL COURT

AT HYDERABAD

CASE NO. - O.S. NO. 12 OF 2014

(Under Sections 9 & 15 of the Civil Procedure Code, 1908)

--- In the Matter of ---

M/S. RST PROJECTS LIMITED (RPL).........................................................PLAINTIFF

V/s

PROMOTER DIRECTORS OF PQR INFRA LTD........................................DEFENDANTS

MEMORIAL for DEFENDANTS

Counsel for Defendants

II
 TABLE OF CONTENTS

INDEX OF AUTHORITIES............................................................................................................IV

STATEMENT OF FACTS...............................................................................................................V

STATEMENT OF JURISDICTION.................................................................................................VII

ISSUE FOR CONSIDERATION...................................................................................................VIII

I. WHETHER THERE ARE RELATED PARTY TRANSACTIONS UNDER SECTION 188,

COMPANIES ACT, 2013 IN THE PRESENT MATTER OR NOT?..............................................VIII

II. WHAT THE PIERCING OF THE CORPORATE VEIL IS JUSTIFIED IN THE INSTANT CASE.. VIII

SUMMARY OF ARGUMENTS......................................................................................................IX

ARGUMENTS ADVANCED............................................................................................................1

I. THERE ARE NO RELATED PARTY TRANSACTIONS UNDER SECTION 188, COMPANIES

ACT, 2013 IN THE PRESENT MATTER......................................................................................1

A. The transaction entered between PQRIL and RLP were in “ordinary course of

business”............................................................................................................................1

B. The transactions were entered at arm’s length price................................................3

II. THE PIERCING OF THE CORPORATE VEIL IS A VERY RESTRICTIVE APPROACH AND IS

APPLIED IN EXCEPTIONAL CIRCUMSTANCES ONLY.................................................................4

PRAYER FOR RELIEF...................................................................................................................6

III
 INDEX OF AUTHORITIES
Cases

Dilip Kumar Swain v. Executive Engineer, 1997 I OLR 202; MANU/OR/0136/199..............2

Gilford Motor Co Ltd v. Horne, (1933) Ch. 935 (CA)..............................................................4

IndusInd Bank v. Addl Commissioner of Income Tax, MANU/IU/0262/2012.........................3

Jai Surgicals Ltd. v. ACIT, [2014]150 ITD 60 (Delhi)..............................................................2

Kalapnath Singh v. Surajpal Singh, AIR 1949 ALL 425..........................................................2

Shri Ambica Mills Ltd, Re, (1986) 1 SCC 264...........................................................................4

Vashraj Exports Pvt. Ltd. v. Neeraj Yogeshchand Goyal and Ors., C.A. No. 15 of 2012 in

C.P. No. 39 of 2010 and C.P. No. 39 of 2010........................................................................1

VTB Capital v. Nutritek, 1897 AC 22........................................................................................4

Statutes

Companies Act, 2013, Section 447............................................................................................4

Other Authorities

Grounds for lifting the Corporate Veil, available at https://blog.ipleaders.in/grounds-

corporate-veil-can-lifted/........................................................................................................4

MINISTRY OF CORPORATE AFFAIRS, General Circular No, 3O/2O14.............................3

Notification No GSR 179(E) dated 03.03.2011 Companies (Accounting Standards)

(Amendment) Rules, 2011.....................................................................................................3

Related Party Dealings Ordinary course of business and Arm’s Length, available at

http://ilt.taxmann.com/articles/international%20taxation%20megazine/dec

%202014/Darpan%20Mehta.pdf............................................................................................1

IV
 STATEMENT OF FACTS

The Respondent respectfully showeth that:

The Parties:

1. M/s PQR Infra Public Limited (PQRIL) is a BSE listed company having business in

Constructions and Electrical equipment supply services, consists 8 directors out of

which 4 directors are the promoters.

2. M/s. RST projects limited (RPL) is a SUBSIDIARY of PQR Infra Limited (PQRIL),

PQRIL is holding 45% of the share capital of RPL and 6% is held by the 4 promoter

directors of PQRIL, consists 4 (Four) directors, who are also the promoter directors of

PQRIL.

3. EFG private limited (EFGPL) is a private limited company which was incorporated

on 02.09.2005, carrying on the business of Real Estate, development construction etc.

have directors not related to above parties.

Events that led to dispute:

On 20.12.2013, RPL entered into an agreement with PQRIL appointing PQRIL as the

contractor for undertaking and executing the entire civil construction of the project worth Rs.

120 Crores and another contract on 28.12.2013 for supply of Electrical Equipments for

contract value of Rs. 55 Crores.

On 15.05.2014, EFG private limited (EFGPL) acquired 74% of RPL by way of transfers from

the PQRIL, the existing directors on the Board of RPL resigned and the nominees of EFGPL

were appointed. The entire Management of RPL was taken over by EFGPL.

V
Later, EFGPL on verification of the books of accounts for earlier years formed an opinion

that quite a few impugned transactions were entered between PQRIL and RPL and in so far

as the contract for civil construction is concerned the rates that have been agreed were at a

much higher rates in comparison to the market rates and terminated all the contracts with

PQRIL citing violation of section 188 of the Companies Act, 2013.

PQRIL issued legal notices to RPL for terminating the contracts on untenable grounds while

the directors of PQRIL sent reply notices contesting the very basis of the claim for recovery

of amounts from them and denied any liability on their part for the amounts claimed by RPL

in its notice.

Hence the present matter before this Court.

VI
 STATEMENT OF JURISDICTION

The Counsel for the Respondent most humbly and respectfully submits that this Learned City

Civil Court, Hyderabad has the requisite jurisdiction to hear and adjudicate the present matter

under Section 9 and 15 of the Civil Procedure Code, 1908.

The Respondent most humbly submits that the same is maintainable.

All of which is most humbly and respectfully submitted.

VII
 ISSUE FOR CONSIDERATION

I. WHETHER THERE ARE RELATED PARTY TRANSACTIONS UNDER SECTION 188,

COMPANIES ACT, 2013 IN THE PRESENT MATTER OR NOT?

II. WHAT THE PIERCING OF THE CORPORATE VEIL IS JUSTIFIED IN THE INSTANT

CASE.

VIII
 SUMMARY OF ARGUMENTS

I. THERE ARE NO RELATED PARTY TRANSACTIONS UNDER SECTION 188,

COMPANIES ACT, 2013 IN THE PRESENT MATTER.

It is contended that there is no related party transactions involved in the present matter for the

purpose of section 188 of the Act, as section 188 specifically exempts the requirement of

clause 1 to a transaction between the related parties when the nature of transactions entered

between them is in the nature of “ordinary course of business” and the price involved in the

transaction has been agreed on the ‘arm’s length basis. In the instant case, RPL being a

construction country and PQRIL in the same business had entered into a transaction which

was an ordinary course of business. Thus, there was no requirement to pass a special

resolution and the consent of the Board was enough.

II. THE PIERCING OF THE CORPORATE VEIL IS A VERY RESTRICTIVE APPROACH

AND IS APPLIED IN EXCEPTIONAL CIRCUMSTANCES ONLY.

The Court should not pierce the corporate veil to determine the character of the company as

the circumstances of the instant case do not permit for the same. The piercing of corporate

veil is exercised in the exceptional circumstances, where as in the instant case the contracts

entered were very much under the legal framework of section 188 of the Companies Act. The

Court ought not exercise such a very wide power because for the same there has to be some

conclusive proof to prove a ground lifting the corporate. In many precedents courts have not

exercised the power to lift the corporate veil owing to trivial grounds.

IX
Moreover, RPL should be held liable for breach of contracts as they have unilaterally

rescinded the contracts on untenable grounds.

X
 ARGUMENTS ADVANCED

I. THERE ARE NO RELATED PARTY TRANSACTIONS UNDER SECTION 188,

COMPANIES ACT, 2013 IN THE PRESENT MATTER.

It is humbly submitted before this Learned Court that there are no related party transactions

involved for the purpose of section 188 in the instant matter. As this section excludes

transaction entered into with related parties in “ordinary course of business”.

MCA vide its notification dated 17.07.2014 clarified that Contracts entered into by

companies, after making necessary compliances under Section 297 of the Companies Act,

1956, will not require fresh approval under the said section 188 till the expiry of the original

term of such contracts. Thus, if any modification in such contract is made on or after lst

April, 2014, the requirements under section 188 will have to be complied with. 1 And in the

instant matter since the contract was entered and came into effect in 2013 itself, hence section

188 is not attracted.

A. The transaction entered between PQRIL and RLP were in “ordinary course of

business”.

The third proviso maintains that, “nothing in this sub-section shall apply to any transactions

entered into by the company in its “ordinary course of business” other than transactions

which are not on an arm’s length price”.

Transactions in the “ordinary course of business” may include those which are typically

undertaken uniformly, routinely with an element of continuity and is essential to the conduct

the business.2 It would be reasonable to look upon the object of the company from its

Memorandum of Association to derive the usual nature of business of the Company.3

1
MINISTRY OF CORPORATE AFFAIRS, General Circular No, 3O/2O14.
2
Related Party Dealings Ordinary course of business and Arm’s Length, available at
http://ilt.taxmann.com/articles/international%20taxation%20megazine/dec%202014/Darpan%20Mehta.pdf.
3
Id.

1
In the case of Vashraj Exports Pvt. Ltd.4 where the Respondent was alleged to violate the

provision of section 297 of the Companies Act 1956, (corresponding to Section 188 of the

Act), where the respondent company has purchased shares of the related party but had not

taken the approval of the Central govt. as per the mandate of section 297. The Company Law

Board held that there was no violation of section 297 because the “consent of the Board was

taken and transactions have been disclosed during the statutory audit and are disclosed in the

annual returns of the company and the petitioner had relied on those statements only.”5

The Division Bench of Orissa High Court in the case of Dilip Kumar Swain v. Executive

Engineer6 has defined “ordinary course of business” as “on the ordinary course of a

professional avocation or currant routine of business" which was usually followed by the

person whose declaration it is sought to be introduced. Expression "in the ordinary course of

business" means in the usual course of routine of business.7

In the case of Jai Surgicals Ltd.,8 where the contract was entered between company with a

company being a related party, the Tribunal held that such contracts entered without the

consent of Board or Govt. approval are not void ab intio but voidable at the option of the

Board under section 297 of 1956 Act, and since Board has not objected to the contracts thus

they were valid and will not be a violation of section 297.

Since, the usual business of both PQRIL and RLP were to construction and development

projects only, thus it can be said that transaction entered were in the ordinary course of the

business thus as per section 188 of the Act there was no requirement of special resolution.

4
Vashraj Exports Pvt. Ltd. v. Neeraj Yogeshchand Goyal and Ors., C.A. No. 15 of 2012 in C.P. No. 39 of
2010 and C.P. No. 39 of 2010, decided on 04.03.2015; MANU/CL/0028/2015.
5
Id. at para. 89.
6
Dilip Kumar Swain v. Executive Engineer, 1997 I OLR 202; MANU/OR/0136/1996.
7
Kalapnath Singh v. Surajpal Singh, AIR 1949 ALL 425.
8
Jai Surgicals Ltd. v. ACIT, [2014]150 ITD 60 (Delhi).

2
 B. The transactions were entered at arm’s length price

As per section 188 of the Act the expression "arm's length transaction" means a transaction

between two related parties that is conducted as if they were unrelated, so that there is no

conflict of interest.

The Ministry of Corporate Affairs has explained “arms length transaction”, 9 as fair value is

the amount for which an asset could be exchanged, or a liability settled, between

knowledgeable, willing parties in an arm's length transaction.

In the case of IndusInd Bank,10 the “arms length transactions” have been defined as the

amount for which an asset could be exchanged between a knowledgeable, willing buyer and a

knowledgeable, willing seller in an arm's length transaction. When the contracts entered were

for the consideration at market price at that relevant time it was held not to be in violation of

section 297 of 1956 Act.11

In the instant case the terms were mutually discussed and agreed between the parties, and the

Rates have been quoted by PQRIL keeping in view the specific requirements of RPL where

“off –the- shelf” products were not needed.

II. THE PIERCING OF THE CORPORATE VEIL IS A VERY RESTRICTIVE APPROACH

AND IS APPLIED IN EXCEPTIONAL CIRCUMSTANCES ONLY.

It is contended that the concept of lifting the corporate veil to determine the character of the

company is a very restrictive approach and is not very often used for the trivial issues. The

corporate veil’s sanctity has to be preserved and to be lifted in exceptional circumstances

only. It is there to determine the real culprits who beside the veil indulge into unlawful and

9
Notification No GSR 179(E) dated 03.03.2011 Companies (Accounting Standards) (Amendment) Rules, 2011.
10
IndusInd Bank v. Addl Commissioner of Income Tax, MANU/IU/0262/2012.
11
Vashraj Exports Pvt. Ltd. v. Neeraj Yogeshchand Goyal and Ors., C.A. No. 15 of 2012 in C.P. No. 39 of 2010
and C.P. No. 39 of 2010, decided on 04.03.2015; MANU/CL/0028/2015.

3
illegal activities. There are few grounds such as Fraud,12 Trust, Agency, Enemy Character,

Tax etc. on the basis of which corporate veil is lifted.13

In the case of Gilford Motor Company Ltd.14 the concept of corporate veil was discussed in

length, it was a case of fraud where Mr. Horne incorporated a limited company in his wife's

name and solicited the customers of the company which was against the employment contract

with Gilford Motor. It was held that the main purpose of the company was to perpetuate

fraud, and thus the people behind the offence were held liable.

The most common ground when the courts lift the corporate veil is when the members of the

company are indulged in fraudulent acts. The intention behind it is to find the real interests of

the members. In such cases, the members cannot use Salomon principle to escape from the

liability. In one of the leading cases of Shri Ambica Mills Ltd.,15 the court held that the

corporate veil of the company can be lifted in cases of criminal acts of fraud by officers of a

company. Similarly, the court pierced the corporate veil in the case of VTB Capital16 and held

the directors personally liable for obtaining loan fraudulently.

In the instant case there exists no such ground of Fraud, Trust Agency etc. as discussed

above, thus it is not a fit case to lift the corporate veil as it would be lead to judicial outreach.

Arguendo:- As per section 73 of the Indian Contract Act, 1872 PQRIL is entitled to

compensation for breach of contracts, the respondents being the representative of PQRIL

pleads that in law the unilateral termination of contract on untenable grounds is considered to

be a breach of contract, and this action will cause huge loss to the Respondent’s company

hence compensation should be granted.

12
Companies Act, 2013, Section 447.
13
Grounds for lifting the Corporate Veil, available at https://blog.ipleaders.in/grounds-corporate-veil-can-
lifted/.
14
Gilford Motor Co Ltd v. Horne, (1933) Ch. 935 (CA).
15
Shri Ambica Mills Ltd, Re, (1986) 1 SCC 264.
16
VTB Capital v. Nutritek, 1897 AC 22.

4
5
 PRAYER FOR RELIEF

Wherefore in the light of the facts stated, issues raised, arguments advanced and authorities

cited, it is most respectfully prayed before this Hon’ble Tribunal that it may be pleased to:

 Dismiss the suit filed by the plaintiff; and

 Hold the plaintiff liable for breach of contract under section 73 of the Contract

Act, 1872.

And further pass any other order or decree in favour of the Respondent as this hon’ble

Tribunal may deem fit in the ends of equity, justice and good conscience.

All of which is most humbly and respectfully prayed.

Date: 03. 04. 2017 Counsel for the Respondent

Place: Hyderabad Counsel Code 1212