Graded Internal Assessment 1

Name: Siram Jaswanth

Jgu email id: - 21jgls-sjaswanth@jgu.edu.in
Jgu id: - 21010456.
Total Marks: 30

Number of Questions: 6

Modules 1, 2, and 3
Question 1 (3 Marks)

Facts of the Case: -

Rajesh is the promoter, director and founder of Steelworks Pvt. Ltd., a company incorporated
under the laws of India. As per the object clause of its MOA, the object of the incorporation
of the company was ‘to make or sell, or lend, or hire, railway carriages and wagons, and all
kinds of railway plants, fittings, machinery and rolling stock; to carry on the business of the
mechanical engineers and the general contractors; to purchase and sell, as merchants, timber,
coal, metals, or other materials; and to buy and sell any such materials on commission, or as
agents. Rajesh entered into a contract with Ravi, for construction of a railway line in Nepal
and for the financing of the construction. The object clause of the company specifically
mentioned that there was a need of a special resolution to indulge in any activity which was
beyond the scope of the object clause in the MOA. However, Rajesh superseded this
requirement and agreed to give Ravi the loan and financing they needed to build the railway
line. The contract which was thus entered into by the company was ratified by all the
members and other shareholders of the company. However, later on, the company reneged on
their side of the deal repudiating the contract that was entered into by Rajesh and Ravi. Ravi
sued Steelworks Pvt. Ltd. for breach of the contract and claimed damages.

Question
Rajesh has now come to you for advice. Whether Steelworks could have entered into a
contract which was beyond the scope of the object clause in the MOA of the company?
Explain with reference to relevant case law. (3 Marks) (200 words)

A) Facts: - Rajesh being the promoter, director and founder of steel works Pvt Ltd, has
entered into contract with Ravi empowered on behalf of the company for contruction of
railway line which was not the object of the company according to the MOA. But the contract
was ratified by the company.
Case Law: Ashbury Railway carriage & Iron company ltd. V Riche, AL Muralidar v.
LIC.
Legal Doctrine: - Doctrine of Ultra Virus.
Legal Advice: - In this case steel works Pvt. Ltd has entered into the contract with Ravi for
grant of loan and financing to construct the railway line in Nepal, which falls outside the
MOA and an area beyond by company cannot travel. Also the need of special resolution is
necessary to modify the MOA which was not done before entering into the contract. So, the
company cannot do or act which are beyond the scope and powers of its MOA of Steel
Works Pvt. Ltd. Hence, the contract which was entered was ultra-vires the MOA and also the
subsequent ratification which cannot be done to validate an invalid contract. Steelworks
could not have entered into a contract which was beyond the scope of the object clause in the
MOA of the company.

Question 2 (7 Marks)

Facts

A company Super Mills Ltd. has its registered office at Mumbai, India (hereinafter referred to
as the “company”) and has two shareholders viz Amit & Bipin who are brothers and they are
the promoters and founders of the said company.

Amit and Bipin enter into an agreement that their sons, as separate branches of the family
making up two halves of the whole family, would hold the shares in equal proportions. If any
of the sons from Amit’s branch or Bipin’s branch wished to sell their shares, they would first
offer the shares to the members from their own branch. Only when such offer was declined,
they would offer the shares to the member of the other branch.
This agreement was not mentioned in the Articles of Association of the company and was not
ratified by the company.

Amit has two sons named Mohit and Naman and a daughter named Richa. Amit along with
his sons and daughters make up for one branch of the family. Bipin has a son and two
daughters namely Parth, Nisha, and Roshni who make up Bipin’s branch of the family.
Amit’s branch and Bipin’s branch of the family hold shares in the company in equal
proportions.

At a later stage Mohit transferred some shares to Roshni without first offering such shares to
any of the members of Amit’s branch. Naman and Richa filed a suit seeking to restrain the
transfer of the shares claiming that such transfer is invalid as it is in violation of the
agreement. Mohit and Roshni stated that this agreement is not ratified by the company. They
stated that the transfer is indeed valid. They claimed that the agreement is against the articles
of association of the company and is invalid. They argued that the agreement is invalid as it is
inconsistent with the AoA of the company and that the transfer is valid.

Arguments by the Plaintiffs

Naman and Richa argued that

(i) the shareholders were bound by the agreement between Amit and Bipin;

(ii) the agreement was entered into to maintain the ownership of the company in the family
and to ensure that the two branches of the family had an equal share in the management and
profits and losses of the company;

(iii) there was nothing in the Articles of Association which prohibited such agreement and

(iv) the two branches of the family being party to the agreement, it was enforceable against
them, and the courts have done nothing more than to enforce the agreement.
Arguments by the Defendants

The Defendants, that is, Mohit and Roshni argued that the agreement in effect imposed an
additional restriction on the right to transfer the shares. The restriction was not envisaged by
any of the Articles of Association. Hence it was not binding on any shareholder or a vendee
of the shares from the shareholders. It was also unenforceable at law and, therefore, not
binding on the company. Hence the sale of the shares was not invalid.

Naman and Richa have now approached you as their lawyer to advise them on the
maintainability of their suit seeking to restrain such share transfer.

Questions

1. Based only on the provisions of the Companies Act, 2013 can a restriction on share
transfer be valid if the same is not incorporated in the Articles of Association? (2 Marks) (80
words)

A) Section 10 of the companies Act which states subject to the companies Act, unless when
restictions on transfer of share in the AOA and MOA are registered then only they are
binding on the Company and its shareholders. Furthur Section 2(7) of sale of goods Act read
with Sec 44 of the Companies Act, defines shares are goods and can be sold and transferred
as movables to anyone.

2. Based on the relevant case law discuss whether the shareholders can enter into an
agreement which is contrary to or inconsistent with the Articles of Association of the
company based on the sections and case laws under the Companies Act? (5 Marks) (400
words)

A) Facts: - there was a private limited company ‘X’ with shareholding of fifty. In which
initially the joint family owned 13 shares and remaining by others. Later, the family
bought those 37 shares in the company. The arrangement was made among the joint
family members that the said guruvaih naidu and buluswamy naidu to hold equal
shares among its branches. And also contained one branch members shall first offer to
sell shares to their branch and if refuses then may sell to others. This agreement was
 not incorporated in the AOA. As a result Bulu swamy Naidu son sold shares that is
sons of Guruvaih Naidu without offering to their own branch members thereby
contravening the agreement.
Case Law: - VB Rangarajan v. V.B Gopalakrishnan and Ors 1, S. P. Jain v Kalinga
Tubes Ltd2
Issue: - Whether Shareholders can enter among themselves agreements which are in-conflict
with the Articles of Assocaition and against free transfer of shares?
Reasoning: - In this case, the trial court was in favour of the plaintiff and held that the
company family agreements in conflict of Articles of Association and restraining the free
transfer of shares. Whereas the high court ruled in favour of plaintiffs by stating that the
agreement entered by the parties is binding on the company and ruled the transfer of shares to
Guruvaiah sons as invalid.
Contention of defendants: - the defendants who are sons of Buluswamy Naidu contended that
the share transfer was valid as per the Articles of Association and also stated that the the said
agreement which is restricting the free transfer of shares is contrary to the Articles of
Association.
Conclusion: - The Supreme court rreferred to Sec 3(iii) defines a private company, sec 26, 28,
31 39, 40, 82, Companies Act also the court held as per the section 82, the Palmer Company
Law, Penningtons Company Law, came to the decision the only restriction in transfer of
shares can be laid down under AOA and so additional restrictions in agreement which is not
specified in AOA are not binding on the shareholders and hence the defendants can freely
transfer the shares.
Here also in the given case Mohit transferred shares to Roshni is valid even though contrary
to the agreement. The only restriction on the transfer of share can be made when the AOA is
restricting the transfer and nothing else like other private agreements.

Question 3 (5 Marks)

Facts

Ram and Shyam are the managing director and working director of the private limited
company Stork Publications Pvt. Ltd. which is engaged in the business of publishing books

1
AIR 1992 SC 453.
2
[1965] 2 SCR 720.
and periodicals. Mr. Rajeev is working as the company secretary of Stork Publications Pvt.
Ltd. Due to a slowdown in the economy, the company wished to take a loan on the
company’s office property and printing press in order to gain access to the working capital
required for the company’s day to day affairs. Stork Publications approached Jeewan Finance
Ltd. to obtain a loan for working capital by mortgaging its office property and machinery. As
a collateral Jeewan Finance Ltd. required the borrower to sign a mortgage deed creating a
mortgage on the properties of Stork Publications Pvt. Ltd. The Articles of Association of
Stork Publications made it mandatory for all the deeds to be signed by the managing director,
the secretary, and a working director on behalf of the company. The Mr. Rajeev and the
Shyam signed a mortgage deed which was executed in the favour of Jeewan Finance Ltd.

Due to a sustained economic slump and falling readership, Stork Publications had to file for
bankruptcy. As part of the bankruptcy process, Stork Publications sold the mortgaged
property. Jeewan Finance Ltd. has now approached you for legal advice.

Question

What legal issues is Jeewan Finance Ltd. likely to face if they decide to file a suit against
Stork Publications or the buyer of the mortgaged property? Can the deed be considered duly
executed? Discuss with reference to relevant case laws. (5 Marks) (250 words).
A) Bird eye view of Facts:- Under AOA it was mentioned for any mortgage of properties
there shall signatures of Managing Director, Working Director and Secretary which was to
be followed. But due the necessities only working and managing director took the loan and
executed mortgage deed in favour of Jeewan Finance Ltd and not according to the AOA.
Relevant Case Law: - Kotla Venkataswamy v. Chinta Ramamurthy3
Relevant Doctrine:- the Doctrine of Constructive Notice
Issue: - Whether the Mortgage deed entered by Stork Publications Pvt. Ltd with
Jeewan Finance Ltd was valid without following Aoa Requirements?
Reasoning:- According to the case law and the provisions of Companies Act, 2013 under
section 2(5) and section 5 the AOA and MOA are the public documents and people entering
into transaction with the companies are to be aware of the companies MOA and AOA as they
provide the details of powers, rules governing the company.

3
AIR 1934 Madras 579.
Now assuming the facts of the present case the similar case where the Working director and
secretary have signed the mortgage deed and not according to the AOA which specified when
entering into mortgage deed the sign of managing director, working director and the secretary
has to sign and ratify the deed on behalf of the company. To conclude, they entered the
contract in violation of the AOA and hence the company is not liable and the mortagage deed
entered by them is invalid.

Question 4 (7 Marks)

Facts

Gurvir and Ramandeep are brothers. Gurvir is the Chairman of Sawan Textiles Pvt. Ltd.
(Sawan) and Ramandeep is the Chairman and Managing Director of Barkha Machines Pvt.
Ltd. (Barkha). A Memorandum of Understanding (MoU) was executed between the two
brothers, under which Gurvir’s family, which held 30% issued share capital of Barkha
Machines Pvt. Ltd., agreed to transfer, without any monetary consideration, the said shares in
favor of Ramandeep. Sawan Textiles Pvt. Ltd owned 40% of the issued capital of Barkha
Machines Pvt. Ltd.

The MoU also provided that, until Sawan holds share capital in Barkha having face value of
INR 10 lacs, Sawan will continue to have a representative on Barkha’s Board of Directors
and that Barkha’s Board shall not have more than three directors – out of these three, two
directors shall be Ramandeep’s nominees and one shall always be the Sawan
nominee/representative. The AoA was never amended to reflect the MoU clauses.
Differences arose between the brothers. Barkha, in its meeting held on 25 th June 1997,
decided to increase its paid-up capital on a pro rata basis to existing shareholders – Sawan’s
nominee director was absent from this meeting.

Accordingly, shares were offered to Sawan on 1:1 basis, with the decision that, upon expiry
of the specified time or upon receipt of intimation from a shareholder declining the offer,
Barkha’s Board would dispose them off in a manner they deem fit –Since no intimation was
received, the shares offered to Sawan were allotted to Ramandeep.
At a subsequent Board Meeting, Barkha decided for a fresh rights issue despite objection
from Sawan’s nominee director – this offer was received by Sawan, which objected to on the
ground that the disputes relating to the 1st Rights issue had not been resolved. Additionally,
Barkha had also proposed to induct a 4th director which was also objected to by Sawan as
such an appointment would be contrary to the MoU. Gurvir has now approached you for legal
advice.

Question

Whether the restrictions of appointment of additional directors, as per the MoU, were
enforceable? Discuss along with relevant case law. (7 Marks) (650 words)

A) Case law: - Rotla India Ltd & Ors v. Venire Industries Ltd4
Gist of the Facts: - Gurvir and Ramandeep are brothers, while Gurvir is the Chairman of
Sawan Company and Ramandeep is the Chairman & MD of Barkha Machines Pvt. Ltd. AN
MOU was executed by both the Chairmans stating that 30 % of share capital of Barkha to be
with Ramandeep. And whereas Sawan hold 40% in Barkha and until the Sawan holds
sharecapital in Barkha face value of 10 lakhs, Sawan to continuw to have representation on
Barkha Board of Directors with restricting board to have not more than three directors out of
three, two are for Ramandeep nominees and one being Gurvir nominee.
Even in rolta the Kamal singh was replaced by Gurvir and for Chetan singh for
Ramandeep. The companies being Sawan and Barkha.
Restriction on right to appointment of additional directors as per MOU is it valid?
The court going thorugh the VB Varadarajan case where the MOA was not amended to
incorporate the shareholder family arrangement agreement found such agreements are
contradictory to the MOA and Companies Act.
So, here also the MOU between Gurvir and Ramandeep is contradictory of the AOA and
MOA as those are not amended to incorporate these changes originally made. Also, by seeing
the companys interest the agreements shall not hinder the boards of directors power which
may benefit the company interests. To conclude by taking consideration of these case laws
the restictions of appointment of additional directors, as per the Memorandum of
Understanding is invalid and cannot be enforceable.

4
[2000 (2) BomCR 241]
Question 5 (3 Marks)

Q 5.1 List five primary types of convertible instruments. (1 Mark) (50 words)

The five primary types of convertible instruments are preferential shares, debentures,
convertible bonds, warrants and loans with convertible options.

Q 5.2 Discuss in brief the potential upsides and drawback of convertible instruments
compared to non-convertible instruments for investors? (2 marks) (100 words)
Convertible bonds are a hybrid model act as debt and equity.
If the value of shares have lesser value than the investor wishes not to convert the bonds to
equity, so he can enforce a contractual right to claim interest and principal against the
company. Or if the investor feels the conversion of bonds into equity is profitable rather
claiming principal interest he converts the bonds into Equity claiming more value than the
interest in bonds.
Drawbacks: -
If the stock of the company performs poorly then the drawback are the investor receiving
less par interest rates than non-convertible bonds.

Question 6 (5 Marks)

Q 6.1 Discuss in brief the major listing requirements and participants in an IPO process. (2
Marks) (200 words)
A) Major Listing Requirements:
The the decision to go for IPO process, the appointment of merchant banker, Due Diligence
in looking litigation risks, later draft offer document to SEBI, Sebi review and observations,
new Final offer document incompliance of observation made by SEBI.
The public issue in public, subscriptions, allotments based on subscriptions.
Participants: -
The participants in an IPO Process are the issuer company where the company shares are
issued to public and the promoter who controls the shares, the third being underwriter, the
banks in which they agree to underwrite the entire issue and subscribe to all the shares
offered by the company. The Fourth the Merchant Banker deals with preparation of offer
document and due diligence, legal compliance of laws, appoints legal compliance officer in
issuing of shares through IPO. The fifth legal counsel appointed by the company and
underwriter to do due diligence and offer document. Also, the auditors and Registrar of the
Issue of shares.

Q 6.2 What is the role of a promoter in an IPO Process? Discuss in brief along with relevant
sections of Companies Act, 2013 and case law. (3 Marks) (300 words)
The promoter obligations in an IPO Process: -
1. Promoter has to make disclosures in company with details of pending litigations, liabilities
and disqualifications.
2. He has to make contribution which shall not be less than 25% of the issuer shares.
3. If he invest 25 % of shares then those shares are subject to three year lock period and in
case of excess investment it shall be subjected to one year of lock period.
Section 2 (69) defines the term promoter as a person whose name is in the prospectus under
section 92, or someone having influence over the Board of Directors and is able to control the
affairs of the company.
According to the section 26(12) of the Companies Act, 2013 the promoters are obliged to
disclose the legal actions pending against the promoter of the company.
26 (14) states the promoter shall disclose the sources of their contributions. Exit offer to
dissenters to be given by promoter incase when they object amendments to prospectus.
Under section 32 and 35 the promoter is liable of misstatements in the prospectus. Both civil
and criminal liability is attracted.
Case Law: -Derry v. Peek5
In this case the court held that A mere misstatement cannot result in attracting liability. That
must establish to the shareholder that statement maker lacked honest belief in stating such
statement.
In RE: Brooks Laboratories
In this brooks not disclosed a number of short term funding arrangements that it had with
related parties. On completion of the public offer, brooks used some of proceeds to settle
these liabilities. So it resulted non-disclosure and resulted no confidence towards the investor,

5
[(1889) 14 App Cas 337]
shareholders in the stock market. The promoters violated disclosure requirements which
ought to be followed in issuing prospectus.