JGU Id. No.

_____________

O.P. Jindal Global University

Jindal Global Law School
Re-sit Examination

Course Name : Company Law II

Course Code : L-CT-0036
Programme : B.A., LL.B. 2014
Time Allowed : 3 Hours
Maximum Marks : 50

This question paper has fifteen (15) printed pages (including this page).

Instructions to students:

1. This paper has four (4) questions. Question No. 1 carries twenty (20) marks and the remaining 3
questions carry ten (10) marks each. Students are required to attempt ALL four (4) questions.
2. DO NOT write your Name and Student Id. No. anywhere on the answer book except on the space
provided.
3. DO NOT write anything on the question paper except Student Id. No. on the space provided.
4. Start each question on a new page.
5. Use of mobile phone or any electronic storage and access system is prohibited.
6. Students undertaking the examination are requested to adhere to the University norms related to
examinations.

__________________________________________________________________________________________
This is a Closed Book examination. However, students are only allowed to bring the unannotated Bare Acts in
the Examination Hall. Case-list and the relevant sections of the SEBI (Prohibition of Insider Trading) Regulations
2015 are annexed to the question paper.
Warning: Plagiarism in any form is prohibited. Anyone found using unfair means will be penalized
severely.
JGLS [Re-sit Examination – November-December’2018] Page 1
1. Kolkata Car Depot (KCD) is a company incorporated by two friends Jai and Viru. Both of them had equal
shareholding in KCD and was therefore able to nominate an equal number of directors to the Board. KCB
specialized in developing web based applications for the transport industry with Jai and Viru being the
principal technical heads of KCD. Jai and Viru had heavily borrowed from banks, mortgaging their personal
assets to the tune of Rs.10 crore, but in order to realize KCD’s potential they required more funds.

As the company grew further, Jai and Viru realized that they needed specialized personnel with better
management skill and hired Gabbar as the CEO of KCD. Gabbar also became a 10% shareholder of the
company with Jairaj and Viru agreeing to an equal dilution of their respective shareholding. Gabbar
convinced Jai and Viru that they required more funding and should systematically approach private equity
funds and managed to negotiate with India Global Fund (IGF) to invest Rs.30 crore in KCD in return of a
30% shareholding. Given the personal indebtedness of Jai and Viru, IGF realized that it had a better
bargaining position and provided KCD with a counter offer that they were willing to invest 60 crore (double
the amount requisitioned by KCD) provided that they are granted a 50.1% shareholding. IGF sweetened the
deal by suggesting that although they will have a controlling interest in the company, the same shall be subject
to a gradual declining schedule where each year IGF will reduce their shareholding provides KCD achieves
certain performance milestones. Further, they agreed that both Jai and Viru will have a complete say in the
day-to-day administration of the company.

Jai and Viru readily agreed to IGF’s proposal given that Gabbar described it as a “win-win” scenario – where
both Jai and Viru retain administrative control and yet be able to accumulate large investments for KCD
without indebting their personal assets. Jai and Viru entered into a shareholder’s agreement (SSHA) with
IGF, allowing IGF to purchase 50.01% shareholding of KCD. Under the SSHA, although IGF was permitted
to elect 8 of the 12 member board of KCD, the SSHA also constituted a Corporate Governance Committee
(CGC) – which was in-charge of the day-to-day functioning of KCD which constituted of Jairaj, Viru and
Gabbar. Under the SSHA the KCD board in its first meeting would delegate all governance functions of the
board to the CGC. The terms of the SSHA were made a part of the Articles of Association (“AOA”) of KCD.
As per the terms of the SSHA, in two years from the date of the execution of the SSHA, Jai and Viru would
have to confirm to certain business thresholds in order for KCD to go public through an IPO – where IGF
will exit KCD at a minimum valuation of Rs.56 per share.

Post the initial investment, IGF made further rounds of investment into KCD to enable Jai and Viru to meet
their loan liability for their previous indebtedness for KCD and well as for further expansion of KCD’s
business operations. This initially raised IGF’s shareholding in KCD to 76%. All the governance functions
of KCD was still managed by Jai and Viru.

Jai and Viru given that they had personally indebted their assets to procure the initial funding for KCD,
continued to reimburse the amounts of their loan amounts from the company’s account. Their understanding
was that given that a part of IGF’s investment was meant to allow them to repay their personal loan amounts,
the same was legal and permissible under the SSHA. KCD’s accounts were also managed by CGC without
direct or indirect permission from the Board of the KCD. Although, the SSHA expressly mentions that the
day-to-day governance of KCD would be managed by CGC, it is silent on if the CGC also has the authority
to decide KCD’s financial decisions.

JGLS [Re-sit Examination – November-December’2018] Page 2

 About one and a half year from the initial investment, IGF called for a board meeting where they disclosed
valuation reports of KCD’s shares to be Rs.46 per share, much below the valuation threshold fixed under the
SSHA as a pre-requisite for IGF’s exit. The valuation report was prepared by M/s Snehalal Aggarwal Panwala
(Snap). Gabbar on behalf of IGF proposed that given there are only six months left for the date of the IPO,
and given that the company was being mismanaged by Jai and Viru that the CGC should be dissolved and
further shares should be issued to IGF to take total control of KCD at the valuation of Rs.50 per share. This
Gabbar reiterated was more than the current market valuation of KCD’s share and would allow IGF to bring
in professional management into the affairs of the KCD to better its market valuation pending its IPO. The
Board adopted a resolution to dissolve the CGC, call an Extra Ordinary General Meeting (“EOGM”) to
amend the terms of the AOA which reflected the understanding of the SSHA, to increase the authorized share
capital of KCD and issue further shares to IGF to take their shareholding to 96%. It also unanimously adopted
a resolution to issue the additional 20% shareholding at the aforesaid valuation of Rs.50 per share. SNAP’s
valuation report was unquestionably accepted by the board members of KCD. It was later discovered that 5
years prior to joining KCD as CEO, Gabbar was one of the five managing partners of SNAP. Jiajai was
retained as CEO of KCD post the dilution of the shareholding of Gabbar and Viru.

Jai and Viru filed the oppression and mismanagement action alleging that the price of the shares were highly
undervalued, and that IGF and Gabbar acted prejudicially to the interests of KCD by allotting a substantially
higher number of shares to IGF at the cost of diluting Jai and Viru’ shareholding in KCD. IGF and Gabbar
filed a case of mismanagement against Viru and Jai alleging fraud and mismanagement of the company’s
assets.

Mrs. Anandiben Mamata Jaya, (AM) who holds 100 shares in KCD and is a shareholder activist has also
filed a petition before the court challenging the legal validity of the CGC mechanism itself and the resultant
abrogation of the provisions of the Companies Act 2013.

Decide the suits filed by a) Gabbar and Jai, (b) IGF and Gabbar and (c) AMJ. (20 Marks)

2. Garamond Private Limited (hereinafter “Garamond” or “the company”) is a company incorporate in New
Delhi, in the business of producing leather products such as shoes, wallets, belts, bags, etc. The company was
formed as a joint venture between Dr. Mrinalini Chander and XP Partners, a partnership firm, both of whom
hold equal shares in the company. XP has nominated two of its partners: Ms. Kritika Pande and Mr. KP
Mahajan to be directors in the company. Dr. Chander herself also sits on the board of Garamond.

Due to the fact that Dr. Chander is often called away from New Delhi to deliver lectures at various
universities, the management of Garamond lies in the hands of XP and its nominees. Garamond makes most
of its profit because of a single large-scale order it receives from a company (the “buyer”), which sells clothes
and accessories throughout the country. This contract has been in existence between Garamond and the buyer
from the time that Garamond was incorporated.

In October 2017, Dr. Chander is away from New Delhi for a month, and during this time, a Board meeting
is held for Garamond, wherein the contract between Garamond and the buyer was terminated, and a new
contract for ‘distributorship’ was entered into between Garamond and Mr. Mahajan, whereby he undertook

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 to distribute the products of Garamond, and would receive a payment of INR 10 lakh per annum as per the
contract, irrespective of the amount sold in that year. This resolution regarding the distributorship agreement
was passed by the unanimously by the directors present at the meeting.

Subsequently, the buyer places the same order to another private limited company, Threading Private
Limited, which is wholly owned by XP Partners. When Dr. Chander returns to New Delhi in November 2017,
she initiates a suit against XP Partners and the two remaining directors for acting contrary to the provisions
of the Companies Act and in breach of their fiduciary duties.

Determine whether the claims made by Dr. Chander would succeed or not, based on the applicable laws,
cases, and the facts mentioned. Also, discuss the remedy that is available to the Company if the directors are
found to be in violation of the law. (10 Marks)

3. Duraplast Private Limited (“DPL”) manufactures plastic containers for FMCG products in India. It was
incorporated in 2005, with a paid up share capital of INR 10,00,00,000 divided into 1,00,00,000 shares of
INR 10 each. The share capital was entirely owned by Sheila Shah, except for one share that was held by her
brother, Shahid. In 2010, keen to improve their manufacturing technology, she entered into negotiations with
The Plastics Inc., (“TPI”) the leading manufacturer of plastic containers, who quickly agreed to subscribe to
50,00,000 shares of INR 10 each. It was also agreed that they would license their technology to DPL, through
a technology transfer agreement under which DPL would pay an annual fee of INR 20,00,000. They executed
a shareholders’ agreement that provided that Sheila would be continue to be responsible for managing the
day to day affairs of the Company, while TPI would be responsible for training of the employees of the
Company, conducting research and development and regularly updating the manufacturing technology
utilized by the Company.

In the next few years, the DPL’s business grew rapidly, courtesy Sheila’s efforts. While TPI provided the
technological inputs, they were barely involved in the management of DPL, and hardly sent its representatives
to attend meetings. In 2010, DPL took a loan of INR 15,00,00,000 from Best Bank Limited (“BBL”) to fund
their latest plans for expansion. It was agreed between DPL and BBL that they would have a charge over all
assets of DPL, owner by it both in the present and the future; except that DPL would not be permitted to
dispose off its immovable property except with the consent of the lender in writing. The agreement further
provided that the lender, BBL would have the right to intervene and crystallize its charge, in the event that
DPL defaults on its loan, or deals with its assets other than in the ordinary course of business.

DPL continued to expand with these resources at hand, but a couple of years later, disagreements began to
arise between DPL and TPI. Sheila felt that DPL was losing out because of the fast pace at which the
technology for the manufacture of durable plastics was evolving, and felt that TPI was failing at updating its
technology. Sheila was therefore, had begun to consider breaking ties with TPI. Accordingly, the Board
convened an extraordinary general meeting for the sale of particularly the land and plant and machinery of
DPL to a company by the name, Reliable Plastics Private Limited (“RPPL”), owned entirely by Sheila and
Shahid. This meeting was attended only by Sheila and Shahid as usual and it was therefore, unanimously
resolved that the undertaking be sold.

JGLS [Re-sit Examination – November-December’2018] Page 4

 Sheila is now wants to file a petition for winding up of DPL on the grounds that it would be just and equitable
for it to be wound up, considering it no longer runs any business; and approaches you for advice. Meanwhile,
she is also seeking advice on whether DPL is in breach of the loan agreement with BBL. (10 Marks)

4. Ms. Kalpana Sharma is a Chartered Accountant and partner at an auditing firm, RNS Partners. RNS has
various corporate clients, amongst which Ms. Sharma handles the accounts of Fast Track Limited (referred
to as “Fast Track” or the “company”, an infrastructure and Logistics Company. Fast Track is a public
company whose shares are listed on both BSE and NSE. In accordance with the SEBI (Prohibition of Insider
Trading) Regulations, 2015 (PIT Regulations), Fast Track has in place a Code of Conduct for its directors,
CEO and other Key Managerial Personnel (“KMP”), according to which they are only allowed to trade in
Fast Track’s securities during the designated trading window.

Ms. Sharma is appointed as the internal auditor for Fast Track and works closely with the Finance and
Accounts teams in the preparation of financial documents of the company. The internal policy of RNS
Partners is that partners working as internal auditors are not allowed to hold securities in their client
companies.

During one of her conversations with a member of the Finance team, Ms. Sharma is told that the company is
about to initiate winding up proceedings as they are in significant debt and not in a position to pay back the
amounts due to various creditors. She herself holds no shares in the Company so the information is of no
personal interest to her, but she mentions the same to a Mr. Raghav Sinha, her intern at the time, who is
assisting in the internal audit. Unbeknownst to her, Mr. Sinha holds shares in Fast Track and immediately
sells his shares after finding out this information. Subsequently, an action is brought against both Ms. Sharma
as well as Mr. Sinha for violation of the PIT Regulations.

Ms. Sharma claims that she had no intention of sharing UPSI and was doing so only in accordance with her
duties as the internal auditor of the company. Mr. Sinha claims that he would not be considered a ‘connected
person’ under the PIT Regulations, and even if he could be shown to be in possession of UPSI, he had traded
based on his financial acumen as a chartered accountant and not on the basis of the UPSI in his possession.

Determine on the basis of the PIT Regulations, case laws and the facts provided, whether Ms. Sharma or Mr.
Sinha would be held guilty of insider trading, along with reasons. (10 Marks)

JGLS [Re-sit Examination – November-December’2018] Page 5

 Case List

1. Brook Bond India Ltd. v. U.B. Ltd., (1994) 79 Com Cases 346 (Bom).
2. Cede & Co. v. Technicolor, Inc 634 A.2d 345, 361 (Del. 1993)
3. Dale & Carrington v. Prathapan (2005) 1 SCC 212
4. Eclairs Group v. JKX Oil [2015] UKSC 71
5. Ferguson v. Wilson (1866) 2 Ch App 77: 15 LT 230
6. Globe Motors ltd. v. Mehta Teja Singh & Co., (1984) 55 Com Cases 445 (Del)
7. Government Stock Co. v. Manila Railway (1897) A.C. 81
8. Howard Smith Ltd v Ampol Petroleum Ltd, [1974] A.C. 821
9. Illingworth v. Holdsworth (1904) A.C. 355
10. In Re: Yallama Cotton, Wollen & Silk Mills Co. Ltd., (1970) 40 Com Cases 466 (Mys)
11. K.K. Ahuja v. V.K. Vohra, (2009) 10 SCC 48.
12. Krishna Kumar Rohatagi v. State Bank of India (1980) 50 Comp. Cas. 722
13. Maharashtra Power Development Corporation v. Dabhol Power (2004) 120 Com Cases 560 (Bom)
14. N. Narayanan v. Adjudicating Officer, SEBI, (2013) 178 Com Cases 390; N. Narayanan v. Adjudicating
Officer, SEBI, SAT Order dated 5 October 2012, Appeal No. 29 of 2012.
15. Narendra Kumar Maheshwari v. Union of India, (1989) 2 Comp LJ 95
16. Peskin v. Anderson, (200) 2 BCLC 372
17. Regal (Hastings) Ltd v Gulliver, [1967] 2 A.C. 134 HL
18. Reliance Natural Resources v. Reliance Industries Ltd.,
19. Sangramsinh P. Gaekwad & Ors vs Shantadevi P. Gaekwad AIR 2005 SC 809
20. Sunil Bharti Mittal v. Central Bureau of Investigation, Criminal Appeal No. 35 of 2015 (arising out of
Special Leave Petition (Crl.) No. 3161 of 2013).
21. T.M. Paul (Dr.) v. City Hospital (P.) Ltd., (1999) 97 Com Cases 216.
22. Tristar Consultants v. V. Customer Services India P. Ltd., (2007) 78 CLA 365 (Del).
23. Trisure India Ltd. v. A.F. Ferguson, (1987) 61 Com Cases 548 (Bom)
24. V.K. Kaul v. SEBI (2012) 116 SCL 24.
25. Vaishnav Shorilal Puri v. Kishore Kundan Sippy, (2006) 6 Comp LJ 74 (Bom).

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