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TEAM CODE-R

IN
THE HONORABLE SUPREME COURT OF INDIA
CIVIL APPEAL UNDER ARTICLE 133 OF THE CONSTITUTION OF INDIA

ABHIJIT AND PIYUSH


(APPELLANTS)

V.

FLUME CAPITAL & ORS.


(RESPONDENTS)

WRITTEN SUBMISSION FOR RESPONDENTS


TABLE OF CONTENT

LIST OF ABBREVIATIONS...................................................................................................III
INDEX OF AUTHORITIES.....................................................................................................V
STATEMENT OF JURISDICTION..........................................................................................X
QUESTIONS PRESENTED....................................................................................................XI
STATEMENT OF FACTS......................................................................................................XII
SUMMARY OF PLEADINGS............................................................................................XVII
PLEADINGS..............................................................................................................................1
A. That the matter shall be referred to SIAC arbitration in Singapore..................................1
[I] Section 45 of the Arbitration and Conciliation Act, 1996 contemplates compulsory
reference to arbitration.......................................................................................................1
[II] All the matters concerning sections 397/398 can be referred to arbitration................2
(i) Sections 397/398 do not preclude referral to arbitration...........................................2
(ii) The allegations can be judged with reference to the Arbitration Clause..................3
(iii) Arbitrator has the power to grant relief...................................................................4
B. The acts of the majority of shareholders did not Constitute Oppression and
Mismanagement.....................................................................................................................6
[I] The termination of the investment agreement...............................................................6
(i) Novation was valid under the AoA of Flyabhi.com..................................................6
(ii) The novation took place by consent of all the parties..............................................7
(iii) The conversion of debt into shares was valid.........................................................7
[II] The amendments to the articles of association............................................................8
(i) The amendment was done in the exercise of statutory power of the company.........8
(ii) The amendment was bona fide for the company as a whole....................................9
[III] The removal of the Appellants from the Board of Directors....................................10
2

(i) The removal took place in accordance with the AoA of Flyabhi.com....................10
(ii) There was no legitimate expectation on the part of the founders to stay on board 11
(iii) The removal was done after proper compliance with the procedure....................12
[IV] Affairs of the company were always carried out for benefit of the company..........13
C. The scheme of Arrangement and notice are valid...........................................................15
[I] Statutory Compliances U/S. 232 r/w S.230 of the Act have been met with..............15
(i)The Court sanctions a scheme after being satisfied about its procedural compliance
......................................................................................................................................15
(ii) Consent letters were given by the requisite majority.............................................15
(iii) Use of Consent letters is valid in the instant case.................................................16
[II] Scheme and Notice are Fair and Reasonable.............................................................17
PRAYER...............................................................................................................................XIX

LIST OF ABBREVIATIONS
AC

Appeal Cases

AIR

All India Reporter

All ER

All England Rporter

AoA

Articles of Association

ASB

Arcot Smith and Brown Limited

BCC

British Company Law Cases

BCLC

Butterworths Company Law Cases

BOD

Board of Directors

Bom

Bombay

CA

Court of Appeals

Cal

Calcutta

CCD

Compulsorily Convertible Debentures

CEO

Chief Executive Officer

Ch.

Chancery Division

CLA

Company Law Advisor

CLB

Company Law Board

Com Cases

Company Cases

CompLJ

Company Law Journal

CA

Court of Appeals

CTO

Chief Technical Officer

Del

Delhi

E.W.H.C

High Court of England and Wales

ECB

External Commercial Borrowings

EGM

Extraordinary General Meeting

FDI

Foreign Direct Investment


4

FEM

Foreign Exchange Management

Honble

Honorable

i.e.

That is

ICSI

Institute of Company Secretaries of India

ILR

Indian Law Reports

KB

Law Reports, Kings Bench

Ker

Kerala

LT

Law Times Reports

Ltd.

Limited

Mad.

Madras

NBFC

Non-Banking Financial Company

OCD

Optionally Convertible Debt

P&H

Punjab & Haryana

P.

Private

Pvt.

Private

QB

Queens Bench Reports

RBI

Reserve Bank of India

S.

Section

SC

Supreme Court

SCC

Supreme Court Cases

SCL

SEBI and Corporate Laws

SEBI

Securities and Exchange Board of India

SIAC

Singapore International Arbitration Centre

TISPRO

Transfer or Issue of Security by a person Resident outside India

TLR

Times Law Reports

&

And
5

INDEX OF AUTHORITIES
INDIAN JUDGEMENTS:
CASE
20th Century Finance v. RFB Latex Ltd.

CITATION

PAGE NO.

(1999) 21 SCL 285

(CLB)
Airtouch International (Mauritius) Ltd. v. RPG
Cellular Investments and Holdings Pvt. Ltd.

(2004) Com Cas 647

(CLB)

All India Rly. Mens Benefit Fund v. Jamadar

AIR 1945 Nag 187

(2003) 42 SCL 197

16

(2002) 111 Com Cas

Baheshwarnath Bali.
Alstom Power Boilers Ltd. v. State Bank of India
& IDBI.
Bhadresh

Kantilal

Shah

v.

Megotteaux

International & Ors.

220 (CLB)

Richardson & Cruddas Ltd. v. Haridas Mundra.

AIR 1959 Cal 695

14

Dale and Carrington Investment (P) Ltd. and Anr.

(2005) 1 SCC 212

14

(2004) 56 SCL 566

17

(2010) 2 Comp LJ 485

AIR 1965 All 45

10

(2007) 139 CC 11

(2007) 137 Com Cas

v. P.K. Prathapan and Ors.


Deepika Chit Fund (P) Ltd., In re.
Dhir

and

Dhir

Asset

Reconstruction

and

Securitization Co. Ltd. v. Jaipur Metals and


Electrical Ltd.
Dr. (Mrs.) Shabbir Fatima v. The Chancellor,
Univiersity of Allahabad.
E. Logistics (P) Ltd. v. Financial Technologies
(India) Ltd.
Gautam Kapur & Ors. v. Limrose Engineering &
Ors.
Hemendra Prasad Barooah v. Bahadur Tea Co.
Pvt. Ltd.
Highway Cycle Industries Ltd., In re.

513 (CLB)
(1991) 70 Com Cases

792 (Gau)
(2003) 115 Com Cas

17

260
Hindustan Petroleum Corporation Ltd. v. Pinkcity

(2003) 6 SCC 503

Midway Petroleums.
6

Jiwan Mehta v. Emmbros Metals Pvt. Ltd.

(2008) 143 Com Cases

13

245
Kasturi & Sons v. Sporting Pastime India Ltd.

(2007) 80 SCL 483

(CLB)
Khandwala Securities Ltd. v. Kowa Spinning Ltd.

(1999) 21 SCL 269

Life Insurance Corporation of India v. Escorts (1986) 59 Com Cas 548


Ltd.
M.S.D.C. Radharamanan v. M.S.D.Chandrasekara

3
13

(SC)
AIR 2008 SC 1738

(1970) 2 Comp LJ 300

15

Raja and Anr.


Maneck Chowk and Ahmedabad Mfg Co. Ltd., In
re.
Mather and Platt (India) Ltd., In re.

(Guj)
(2004) 119 Com Cases

16

433
Mazda Theatres P. Ltd v. New Bank of India Ltd.
Miheer H Mafatlal v. Mafatlal Industries Ltd.
Navin Kedia v. Chennai Power Generation Ltd.

ILR (1975) 1 Delhi

16

(1996) 4 Comp.LJ 124

15

(1998) 17 SCL 327

2, 3

(CLB)
Needle Industries (India) Ltd. and Ors. v. Needle

(1981) 3 SCR 698

14

(2003) 115 Com Cas

12

Industries Newey (India) Holding Ltd. and Ors.


Praful M. Patel v. Wonderweld Electrodes (P.)
Ltd.
Ravi Prakash Singh v. Venus Sugar Ltd.

377
(2008) 82 CLA 88

11

(Del)
Renusagar Power Co. P. Ltd. v. GE Company

AIR 1985 SC 1156

S. Krishnaswany v. South India Film Chamber.

AIR 1969 Mad 42

13

(1993) 78 Com Cas 432

16

S.M. Holding Finance P. Ltd. v. Mysore


Machinery Manufacturers Ltd.

(Kar)

S.P. Jain v. Kalinga Tubes Ltd.

(1965) 35 Com Cas 351

13

(SC)
Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre

(2005) 7 SCC 234

(2003) 47 SCL 631

16

Ltd.
SIEL Ltd., In re.

(Delhi)
7

Sidhpur Mills Co. Ltd., In re.

(1980) 50 Com Cases 7

17

(Guj)
Sunil Dev v. DDCA.

(1990) 2 Comp LJ 245

13

Surajmull Nagarmull v. Shew Bhagwan Jalan.

(1973) ILR 1 Cal 207

12

Tarlok Chand Khanna v. Raj Kumar Kapoor.

(1983) 54 Com Cas 12

12

(Del)
Union of India v. Kishorilal Gupta and Bros.

AIR 1959 SC 1362

V.S Krishnan v. Westfort Hi-tech Hospital Ltd. &

(2008) 3 SCC 363

13, 14

(2007) 77 CLA 222

13

CITATION

PAGE NO.

A Co. (No. 007936 of 1994).

1995 BCC 705

11

Allen v. Gold Reefs of West Africa.

(1900) 1 Ch 656

(1907) Ltd., (1920) 2

Ors.
Vasudev P. Hanji v. Ashok Iron Works Private
Limited.
FOREIGN JUDGEMENTS:
CASE

Dafen Tinplate Co. Ltd. v. Llanelly Steel Co.

Ch 124
Greenhalgh v. Ardene Cinemas.

(1950) 2 All ER 1120

(CA)
Hoare & Co. Ltd., Re.

(1933) 150 LT 374

18

Holmes v. Keyes.

(1958) 2 All ER 129

13

In Re, Sussex Brick Co.

(1960) 1 All ER 401

18

Peters American Delicacy Co. Ltd. v. Heath.

(1939) 61 CLR 457

Rayfields v. Hands.

(1958) 2 All ER 194

13

Re, Westbourne Galleries Ltd.

(1972) 2 All ER 492

11

(HL)
Read v. Astoria Garage (Streatham) Ltd.

(1952) 2 All ER 292

11

(CA)
Shuttleworth v. Cox Bros. & Co. (Maidenhead)

(1927) 2 KB 9

Ltd.

STATUTES AND CONSTITUTIONS REFERRED:


8

NAME
Companies Act, 1956.
Companies Act, 2013.
Foreign Exchange Management Act, 1999.
Indian Contract Act, 1872.
The Constitution of India.
The Arbitration and Conciliation Act, 1996.
TREATISES:
NAME
ARVIND P. DATAR, COMMENTARY ON THE CONSTITUTION OF INDIA (2ND ED., 2007)
A. RAMAIYA, GUIDE TO THE COMPANIES ACT (17TH ED., 2010)
A. RAMAIYA, GUIDE TO THE COMPANIES ACT (18TH ED., 2015)
POLLOCK & MULLA, INDIAN CONTRACT AND SPECIFIC RELIEF ACTS (13TH ED., 2006)
GOWER AND DAVIES, PRINCIPLES OF MODERN COMPANY LAW (8TH ED., 2008)
SRIDHARAN AND PANDIAN, GUIDE TO TAKEOVERS AND MERGERS (2ND ED., 2006)
HALSBURY LAWS OF ENGLAND (4TH ED., 2007)
DICTIONARIES REFERRED:

GARNER BRYAN A., BLACKS LAW DICTIONARY (8TH EDN., 2002)

PEARSALL JUDY, CONCISE OXFORD DICTIONARY (10TH EDN., 2006)

P RAMANATHA AIYAR, ADVANCED LAW LEXICON (3RD EDN., 2007)


STATEMENT OF JURISDICTION

Counsels on behalf of the Appellants have endorsed their pleadings before the Honorable
Supreme Court of India under Article 133 of the Constitution of India.
Respondents submit to the jurisdiction of this Court.

10

QUESTIONS PRESENTED
The following questions are presented before the Honorable Supreme Court:

A. WHETHER THE MATTER SHALL BE REFERRED TO SIAC ARBITRATION IN SINGAPORE.


B. WHETHER

THE ACTS OF THE MAJORITY OF SHAREHOLDERS CONSTITUTED OPPRESSION

AND MISMANAGEMENT.

C. WHETHER

THE SCHEME OF ARRANGEMENT AND THE NOTICE UNDER

SECTION 235(1)

IS

VALID.

11

STATEMENT OF FACTS
THE IDEA
1. Abhijit and Piyush, inspired by Netjets, came up with the idea of making air travel more
efficient in India by maximising the use of private aircraft owned by air charter companies
and private aircraft owned by the rich and famous to make private air travel more easily
accessible to the rich. Piyushs family contributed aircrafts (valued at about Rs. 40 Crores)
and Abhijit assigned all the current and future copyright in the software, all rights to the idea,
the business plan and processes and all other IPR, whether registerable in India or not, to the
company. Flyabhi.com Pvt. Ltd was established in Lucknow with Abhijit and Piyush each
owning 50% of the Rs 2,000,000 invested as initial share capital.
THE INVESTMENT
2. A prototype was created and presented to the potential investors at Bangalore, where Flume
Capital and Nurture Capital, both angel investors incorporated in Singapore convinced the
founders that they were best positioned to partner with them and provide expertise. They beat
Snowflake Capital to invest in optionally convertible debt of Flyabhi.com for a cash
consideration of Rs. 100 Crores, which was convertible into Class B equity shares at the
investors' option over a three year period based on the EBITDA of the company and subject
to the company meeting business targets and milestones.
3. At this stage, when founders were presented with a complex convertible debt financing
structure with a myriad of government approvals, rather than plain equity investment which
they had been expecting, they became apprehensive about their interests being protected. But
they were assured by BESTCO that this is a commonplace in the VC community and
BESTCO is acting as a transaction counsel to protect every stakeholders interest.
THE INVESTMENT AGREEMENT
4. For providing experience to the founders, Ms. K.S. Kumar (employee at Flume) and Ms.
Sush Iyer were inducted on to the Board. The founders, Abhijit and Piyush, and the investors,
Flume and Nurture, and the company represented by Ms. Iyer (partner at BESTCO) signed
the investment agreement in the offices of BESTCO, the key terms of which included
preferential right, by themselves or their affiliates, to provide all further equity and debt to the
company (Clause 6.1.3), founders and investors' directors had to approve the appointment of
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all key management personnel (Clause 6.1.4), consent of founders and investors directors in
key decisions involving the company (Clause 6.1.6), the two founders, two nominees of the
investors and an experienced independent person who would be chairman of the company
would form the first board of directors, with right to nominating a director being there till
each party held 10% of shares of the company (Clause 6.1.7).
5. Further, all the rights granted by the agreement would however terminate if that party
(together with affiliates and permitted assignees) held less than 10% shareholding in the
company on a fully diluted basis assuming conversion of investor debt based on the EBITDA
of the preceding fiscal quarter (Clause 6.1.8) and that all the disputes were subject to SIAC
arbitration, Singapore (Clause 6.1.9). Further, all these key terms were also included in the
articles of the company and that besides Abhijit and Piyush, the board of directors included
Ms. K.S. Kumar, Ms. Sush Iyer, a partner at BESTCO nominated by Nurture, and Ms. Scarlet
Lester, a well-known tech entrepreneur who was on the board of many companies in which
Flume and Nurture had invested.
APPOINTMENT OF CEO AND LOAN
6. The board had been meeting every month to discuss the state of the business and there was
significant skepticism about companys business model, the young inexperienced
management team and whether the company could deliver on its promises. By a majority
vote, need for an experienced CEO was felt, and in pursuance of it, after a global research
process, Arjun Iyer was appointed as the CEO. He was given 5% Class A equity stake in the
company, $1 million per annum of stock options which would vest at a nominal price of Rs.
100 over a period of 3 years and an annual salary of Rs. 1 Crore and was free to sell the
shares to the investor, founders or the company at the fair market value immediately upon
exercise of the stock options. He immediately set on the ground and increased business
prospects for the company. The company faced unexpected competition from Airavata, to
deal with which the CEO presented a financing plan and set about on an international road
show to raise 500 Crores, which however could not yield positive results.
7. To deal with unexpected stiff competition, need for additional funding was felt by all the
directors. Piyush, though ready to invest, was stopped and told that it would be better for the
company's image as a young professional tech start up if the cash was injected by investors
and not his family.

13

8. A financing arrangement with Arcot, Smith & Brown Limited, a 100 year old listed Indian
NBFC and affiliate of Flume and Nurture was approved by the majority to provide a bridge
loan of Rs. 20 Crores to enable the company to pay its routine expenses until next round of
equity was successfully raised on certain terms, but most of the cash was used to finance the
dry lease of aircrafts. However, the company was still in financial difficulty.
THE NOVATION
9. Since Flume and Nurture had reached the end of the investment term and were required,
under the terms of their constitution to liquidate and distribute all their assets to their
investors, the Agreement was novated to over 20 of their affiliates. As per BESTCOs opinion
to the company, the novation was valid under the companys articles and that the transfer of
shares by Flume and Nurture should be registered. Further, the change in shareholding was
merely a legal requirement and as the composition of the board of directors remained
unchanged, for all practical purposes, nothing had changed at an operational level for the
founders.
THE CONVERSION, AMENDMENT AND RECONSTITUTION OF BOARD
10. The company was notified on August 07, 2012 by all the affiliates about their wish to
convert 50% of their debt into equity with immediate effect based on the EBITDA as set out
in the unaudited accounts dated June 30, 2012. On the same day, their nominee directors gave
notice of a board meeting to be held at 0900 hrs on August 14, 2012 in the offices of
BESTCO to allot and issue Class B equity shares to the investors, calling an EGM on the
same day and venue at 1600 hrs to amend to the articles of association and reconstitute the
board of directors, which were approved by the majority of directors. However, the allotment
reduced the founders share each to 6% of equity share capital. In the EGM, new articles were
adopted and the founders were removed from the Board. The articles now allowed for all the
decisions to be taken by the majority vote of shareholders. The meeting however was not
attended by the founders.
THE COMPANY PETITION
11. On August 16, 2012, it was written by the founders to BESTCO that the termination of
the investment agreement, the amendments to the articles of association and the removal of
the founders from the board of directors was illegal and it was accompanied by an offer by
the founders to purchase all the securities of the company owned by the investors at a fair
14

market value. On August 24, 2012, an application complaining of continuous acts of


oppression and mismanagement was filed before the CLB, in response to which each of the
investors filed identical applications under Section 45 of the Arbitration and Conciliation Act,
1996 and the same was accepted by the CLB. An appeal by founders later treated as a writ
was preferred to the High Court which was dismissed and a writ appeal was made before the
division bench which was also dismissed, but leave to appeal to the Supreme Court was
allowed.
EFFECTS OF THE DISPUTE ON THE COMPANY
12. As news of the dispute between the founders and the investors made front page news,
there were reports of the companies financial position worsening, employees leaving the
company, customers getting concerned and creditors and service partners getting nervous.
Arjun Iyer, left Flyabhi.com and sold all the Class A equity shares that he received by the
periodic exercise of stock options to the investors. The investors now held a little over 50%
of Class A equity shares of the company. Moreover, Ms. Kumar and Ms. Lester also resigned
from the Board of directors.
THE SCHEME OF ARRANGEMENT AND PRESENT MATTER
13. On July 05, 2014, the remaining directors of Flyabhi.com met in the offices of BESTCO
at 0900 hrs and resolved to restructure the business of Flyabhi.com and recommended to the
shareholders and proposed that the aircraft business be demerged from Flyabhi.com and
merged into Arcot, Smith & Brown Limited, a listed NBFC with its registered office in
Calcutta. The auditors of the company had suggested a share exchange ratio that was also
confirmed by the auditors of Arcot, Smith & Brown and an independent merchant bank. The
directors of Flyabhi.com met again at 1400 hrs to record receipt of the letters of consent for
the scheme of arrangement of (i) all the Class B equity shareholders, (ii) more than 50% of
Class A shareholders and (iii) all secured and unsecured creditors. The board immediately
instructed BESTCO to file the scheme of arrangement before the Allahabad High Court.
14. On July 14, 2014, Arcot, Smith & Brown Limited began the process of seeking approval
for the scheme of arrangement. On December 06, 2014, the Calcutta High Court approved the
scheme. The founders challenged the scheme of arrangement before the Allahabad High
Court, Lucknow Bench. On July 15, 2014, Arcot, Smith & Brown sent a notice to the
founders exercising their right under s. 235(1) of the Companies Act.
15

15. The founders immediately applied to the Allahabad High Court, Lucknow Bench to hear
them before allowing the notice to take effect. Pending the disposal of the scheme of
arrangement, the court allowed the founders' application and injuncted Arcot, Smith & Brown
from taking any action pursuant to the notice or the scheme. Arcot, Smith & Brown
approached the Supreme Court under Article 136 of the Constitution of India against this
order and although leave to appeal was granted, the injunction remained. After hearing all the
parties, the Allahabad High Court approved the scheme of arrangement on April 11, 2015 but
stayed the implementation of the scheme for a period of 90 days to enable the founders to
appeal the decision to the Supreme Court. The appeal by the founders to the Supreme Court
was heard and the injunction granted by the High Court continued until further orders.
16. The Supreme Court has now listed all the matters connected with Flyabhi.com for final
hearing on all procedural and substantive issues.

16

SUMMARY OF PLEADINGS
A. The matter shall be referred to SIAC arbitration in Singapore
1. The matter shall be referred to SIAC arbitration in Singapore as there was a valid
arbitration clause under the Investment agreement. Section 45 of the Arbitration and
Conciliation Act, 1996 contemplates compulsory reference to arbitration and nothing in the
investment agreement suggests or establishes the nullity, inoperativeness or incapability of
the arbitration clause which was validly entered into by both the parties.
2. Further, all the matters concerning Sections 397/398 of the Companies Act can be referred
to arbitration as the matters in the instant case necessarily arise out of the investment
agreement for which the arbitrator has the power to grant relief looking into the factual
matrix of the present case.
B. The Acts of the Majority of Shareholders do not Constitute Oppression and
Mismanagement
3. The acts of the majority of shareholders do not constitute oppression and mismanagement
on the minority shareholders and were carried out for the benefit of the company. The
termination of the investment agreement is valid because it was mandatory for the investors
under their constitution to liquidate and distribute all their assets to their affiliates and hence
the termination of the investment agreement was valid. Also, the novation and the transfer to
the permitted assignees were valid under the articles of Flyabhi.com. Further, the novation
also took place by consent of all the parties. Also, the conversion of debt into shares was
valid as the conversion was based on the terms agreed upon by both the parties before the
investment agreement.
4. Further, the amendments to the articles of association was valid as it was the shareholders
prerogative to decide what was in the benefit of the company and the alteration was bona fide
for the company as a whole. Also the removal of the Appellants from the Board of Directors
was valid as the removal took place in accordance with the AoA of Flyabhi.com as the
shareholding of each of the founders fell below 10 percent and the removal was done after
proper compliance with the procedure. The affairs of the company were being carried out in
the interest of the company and the shareholders. Further, the decisions taken were bona fide
in nature.
17

C. The Scheme of Arrangement and the notice are valid


5. The Scheme of arrangement and the notice under Section 235(1) are valid in the present
case as all the statutory procedural requirements are met have been met with in the instant
case. Further, the use of consent letters in relation to the scheme is valid because the requisite
majority of the shareholders had approved the scheme. In furtherance of this, the scheme and
notice are fair and reasonable given the factual scenario and the hardships the company was
facing.

PLEADINGS
A. THAT

THE MATTER SHALL BE REFERRED TO

SIAC

ARBITRATION IN

SINGAPORE
1. It is humbly submitted before the Honorable Supreme Court that Clause 6.1.9 of the
Investment Agreement clearly states that All disputes would be subject to SIAC arbitration
in Singapore1 and that the same had also been incorporated in the Articles of Association of
Flyabhi.com Pvt. Ltd. (hereinafter referred to as Flyabhi.com). 2 Thus the clause is binding on
parties and therefore the decisions of the Company Law Board and the High Court referring
the dispute to arbitration were valid. The matter shall be referred to arbitration as [I] section
45 of the Arbitration and Conciliation Act, 1996 contemplates compulsory reference to
arbitration and [II] all the matters concerning sections 397/398 can be referred to arbitration.
[I] SECTION 45 OF THE ARBITRATION AND CONCILIATION ACT, 1996 CONTEMPLATES
COMPULSORY REFERENCE TO ARBITRATION

2. It is humbly submitted that Section 45 of the Arbitration and Conciliation Act, 1996
(hereinafter referred to as the Act) states the power of the judicial authorities to refer a
dispute to the arbitration when parties have entered into an agreement referred to under

1 6, Moot Proposition.
2 7, Moot Proposition.
18

Section 44 of the Act, unless such judicial authority finds the agreement to be null and void,
inoperative or incapable of being performed.
3. Therefore, in the light of this provision it is put forth since the agreement is in no manner
void, inoperative or incapable of being performed, the same shall be duly referred to the
arbitration and hence the decisions of the Company Law Board and the High Court are valid
in this regard.
4. Y.K. Sabharwal J. in Shin-Etsu Chemical Co. Ltd.,3 stated that the word shall under
Section 45 has to be interpreted in its ordinary significance as mandatory unless it leads to
absurd or inconvenient consequence. In absence of the four irregularities mentioned under
section 45 of the Act, the matter has to be referred to arbitration.4
5. In the same judgment, B.N. Srikrishna J. and D.M. Dharmadhikari J. contemplated that the
courts approach has to be one of a prima facie finding as to the validity or otherwise of the
arbitration agreement.
6. The Act clearly stipulates that unless the given arbitration agreement is null and void,
inoperative or incapable of being performed; the judicial authority has to refer the parties to
arbitration.5 It was held in Navin Kedia6 that the grievance of the party pertaining to sections
397/398 of the Companies Act, 1956 had necessarily to be referred to arbitration as it had not
been established that the said agreement, by virtue of section 45 of the Act was null and void,
inoperative or incapable of being performed.
7. It is most humbly submitted before this Honble Court that in the instant matter, nothing
suggests or establishes the nullity, inoperativeness or incapability of the arbitration clause
which was validly entered into by both the parties. Therefore, in the light of the above
mentioned judicial pronouncements, the matter squarely falls within the purview of
arbitration.

3 Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd., (2005) 7 SCC 234.
4 Renusagar Power Co. P. Ltd. v. General Electric Company, AIR 1985 SC 1156.
5 The Arbitration and Conciliation Act, 1996, 45.
6 Navin Kedia v. Chennai Power Generation Ltd., (1998) 17 SCL 327 (CLB).
2

[II] ALL THE MATTERS CONCERNING SECTIONS 397/398 CAN BE REFERRED TO ARBITRATION.
8. Respondents submit that all the matters concerning Sections 397/398 can be referred to
arbitration as (i) Sections 397/398 do not preclude referral to arbitration, (ii) The allegations
can be judged with reference to the Arbitration Clause and (iii) Arbitrator has the power to
grant relief.
(i) Sections 397/398 do not preclude referral to arbitration
9. It is humbly submitted that even though the matters allegedly concern oppression and
mismanagement, the same shall be referred to SIAC arbitration in Singapore in the presence
of arbitration clause since the disputes in the instant matter can be decided by the arbitrator.
10. It is a settled position that if there is a provision for arbitration, CLB must refer the matter
to arbitration, even if there are specific powers under Sections 397 and 398 of the 1956 Act,
in view of specific provisions in the Arbitration Act.7
11. Therefore, the contention of the founders concerning the arbitrability of the dispute shall
also be put forth before the SIAC.
12. It is further submitted that only if complaint under Sections 397/398 are independent of
those arising out of agreement which referred to arbitration, the CLB can proceed with the
petition confining itself to allegations not covered in the arbitration agreement. 8 It was
observed by CLB in Naveen Kedia9 and Megotteaux10 that mere existence of exclusive power
with CLB under S.402 of the Companies Act, 1956 does not take away power of the
arbitrator under S.45 of the Arbitration and Conciliation Act, 1996 if the requirements
provided under S.45 are fulfilled. However, it shall be noted that in the instant matter the
alleged grievances of the Appellants are duly arising in context of the Investment Agreement
and shall therefore be referred to arbitration.
7 Id.; 20th Century Finance v. RFB Latex Ltd., (1999) 21 SCL 285 (CLB); S. Kasturi & Sons
v. Sporting Pastime India Ltd., (2007) 80 SCL 483 (CLB).
8 Khandwala Securities Ltd. v. Kowa Spinning Ltd., (1999) 21 SCL 269.
9 supra note 6.
10 Bhadresh Kantilal Shah v. Megotteaux International & Ors., (2002) 111 Com Cases 220
(CLB).
3

13. In Triveni Bialetti Industries Pvt. Ltd.,11 the CLB, while considering the facts, similar to
that of the instant case, held that since primarily the grievances of the party applying before
the CLB for oppression and mismanagement emanated from the agreement entered into by
both the parties, arbitrator had to initially decide on the issues. Hence, the authority to decide
upon the contentions of the aggrieved founders rests with the arbitrator in the instant case, in
presence of an arbitration clause in the Agreement.
14. It shall further be noted that Sections 397/398 do not contain any non-obstante clause
which bars the authority of the arbitrator to deal with the disputes raised herein and therefore
if a petition to refer the matter to arbitration is filed under S.8 or 45 of the Arbitration and
Conciliation Act, 1996, the same shall be done.12
(ii) The allegations can be judged with reference to the Arbitration Clause
15. It is further submitted that since the grievances which arose in the affairs of the company
are on account of the Investment Agreement entered into by both the parties, the dispute has
to be referred to arbitration. The grievances of the founders concerning termination of the
Investment Agreement, amendment of articles and their removal from the Board at the EGM
are sufficiently arising out of the Investment Agreement. If the grievances raised in the affairs
of the Company are on account of the agreements, the disputes cannot be adjudicated before
the CLB, without any reference to the terms of the agreements and if the agreements are in
force, the parties are to refer the disputes arising out of the agreements for arbitration.13
16. It has been categorically held that if the allegations pertaining to oppression and
mismanagement can be adjudged with reference to the terms of the arbitration agreement,
then the same shall be referred to arbitration and CLB shall not have the power to adjudicate
upon them.14
17. In the instant case, the grievances of the founders are not arising out of any statutory
duties, but are consequent upon the contractual obligations between the parties to the
11 Triveni Bialetti Industries Pvt. Ltd., Company Application No. 123 of 2011 (CLB
Mumbai).
12 Hindustan Petroleum Corporation Ltd. v. Pinkcity Midway Petroleums, (2003) 6 SCC 503.
13 E. Logistics (P) Ltd. v. Financial Technologies (India) Ltd., (2007) 139 CC 11.
14 Gautam Kapur & Ors. v. Limrose Engineering & Ors., (2007) 137 Com Cases 513 (CLB).
4

Investment Agreement. The alleged acts of oppression and mismanagement are either
obligations or rights of either of the applicants or the respondents, as contemplated in the
relevant Clauses of the Investment Agreement. It is therefore submitted that for the breach of
any such clause of the Agreement, the recourse has to be made to the arbitrator, as agreed
upon by both the parties under Clause 6.1.9 of the Agreement.
(iii) Arbitrator has the power to grant relief
18. It is submitted that it cannot be prima facie concluded that an arbitrator per se does not
have the power to grant relief in the case of grievances falling under Sections 397/398 of the
Companies Act, 1956. Moreover it was stated in Gautam Kapur,15 whether such matters are
arbitral or not would depend upon the facts of each case and on whether such allegations can
be referred to without referring to the terms of the arbitration agreement and that it is not
correct

as

proposition

to

state

that

matters

covered

in

petition

under

Sections 397 & 398 are not arbitral. Same proposition was followed in Airtouch
International.16 It is therefore submitted that the arbitrator can adjudicate upon the matter.
19. Thus the Respondents submit that since there is a valid arbitration clause, which is in no
manner null and void or incapable of being performed, Sections 397/398 do not preclude the
reference of dispute to arbitration. Further, all the matters arise out of the arbitration clause to
the Investment Agreement entered into by both the parties and hence the matter shall be
referred to arbitration.

15 Id.
16 Airtouch International (Mauritius) Ltd. v. RPG Cellular Investments and Holdings Pvt.
Ltd., (2004) Com Cases 647 (CLB).
5

B. THE

ACTS OF THE MAJORITY OF SHAREHOLDERS DID NOT

OPPRESSION

AND

CONSTITUTE

MISMANAGEMENT

20. Respondents submit that the acts of the majority of shareholders did not constitute
oppression and mismanagement on the minority shareholders. The alleged acts wherein the
Appellants pleaded for oppression and mismanagement are, [I] the termination of the
investment agreement; [II] the amendments to the articles of association and [III] the
removal of the Appellants from the Board of Directors. Respondents further submit that [IV]
the affairs of the company were carried out for the benefit of the company.
[I] THE TERMINATION OF THE INVESTMENT AGREEMENT
21. Respondents submit that the termination of the investment agreement was valid as (i) the
novation was valid under the articles of association of Flyabhi.com; (ii) the novation took
place by consent of both the parties and (iii) the conversion of debt into shares was valid.
(i) Novation was valid under the AoA of Flyabhi.com
22. The novation was valid under the AoA of Flyabhi.com. Firstly, As per Clause 6.1.8 of the
Investment Agreement,17 which was incorporated in the AoA of Flyabhi.com, 18 party to the
agreement included within its ambit affiliates and permitted assignees. Therefore, transfer to
permitted assignees and affiliates were permitted under the AoA of Flyabhi.com. Respondents
submit that the transfer by Flume and Nurture of the companys securities i.e. OCD was done
to the affiliates of Flume and Nurture, 19 and hence the transfer is valid in accordance with the
AoA of Flyabhi.com.
23. In Hemendra Prasad Barooah,20 the facts revolved around the point that where the
articles of a company enabled members to transfer shares to their relatives or other members
without sanction of the Board of Directors and restricted only the right of transfer to
17 supra note 1.
18 supra note 2.
19 20, Moot Proposition.
20 Hemendra Prasad Barooah v. Bahadur Tea Co. Pvt. Ltd., (1991) 70 Com Cases 792, 795
(Gau).
6

outsiders, it was held that the restrictions as to transfer of shares could not be used to defeat a
transmission. The dictum of the said case applies to the facts of the present case, and hence it
can be concluded that the novation was valid under the AoA of Flyabhi.com.
24. Secondly, the novation was necessary and mandatory on the part of Flume and Nurture as
they had reached the end of the investment term and the transfer took place in accordance
with the terms of their constitution.21 Therefore, it was a mandate upon Flume and Nurture,
which reflects the lack of mala fide intention on their part in relation to the novation.
25. Hence, Respondents maintain that the novation was a mandate upon Flume and Nurture
which took place in accordance with the AoA of Flyabhi.com and did not constitute
oppression and mismanagement.
(ii) The novation took place by consent of all the parties
26. In Kishorilal Gupta,22 it is well settled that the parties to an original contract can, by
mutual agreement, enter into a new contract in substitution of the old one. The consent of the
parties may be established by circumstances showing such assent as well as by express
words.23
27. In light of the above dictum, Respondents submit that the consent of the Appellants can
be gathered from the facts and circumstances of the case.24 The founders never objected to the
novation earlier, in pursuance of which the transfer was registered by Flyabhi.com. Hence,
the novation took place by consent of all the parties and did not constitute oppression and
mismanagement.
(iii) The conversion of debt into shares was valid
28. Respondents submit that the conversion of debt into shares was valid as the conversion
was based on the terms agreed upon by both the parties. 25 The right to convert debt into

21 supra note 19.


22 Union of India v. Kishorilal Gupta and Bros, AIR 1959 SC 1362.
23 POLLOCK

AND

MULLA, INDIAN CONTRACT

AND

SPECIFIC RELIEF ACTS 1226 (Dr. R.G.

Padia ed., 2006).


24 supra note 19.
7

shares was with the investors and accordingly they exercised their right. In Dhir & Dhir, it
was held that the denial of such a right constituted oppression.26
29. Further, the conversion of debt into shares benefitted the company as the investors were
ready to participate in the risks associated with the company. Hence the conversion of debt
into shares was valid and did not constitute oppression and mismanagement.
[II] THE AMENDMENTS TO THE ARTICLES OF ASSOCIATION
30. Respondents submit that the amendment to the articles of association was valid as (i) the
alteration was done in the exercise of statutory power of the company and (ii) the alteration
was bona fide for the company as a whole.
(i) The amendment was done in the exercise of statutory power of the company
31. The power to alter articles is a statutory power and a company cannot contract itself out
of the power, and provide that any of its articles are to remain unaltered. 27 The articles of
association concern themselves with the internal administration of a company. Such matters
cannot remain static for all time and so alterations must be possible. It is for this very reason
that the power of alteration has not been subjected to any limitation except that the power is
subject to the Act and the memorandum.28
32. In Greenhalgh,29 it was held that a shareholder has no right to assume that his companys
articles would always remain in a particular form and he cannot object to an alteration as
fraudulent provided it was passed bona fide and did not unfairly discriminate. Respondents
submit that in the present case the alteration was done by the majority of shareholders, so as
to conduct the internal administration in a proper manner given the change of the structure of
the company,30 and hence is neither oppression nor mismanagement in the eyes of law.

25 3, Moot Proposition.
26 Dhir and Dhir Asset Reconstruction and Securitization Co. Ltd. v. Jaipur Metals and
Electrical Ltd., (2010) 2 Comp LJ 485.
27 A. RAMAIYYA, GUIDE TO THE COMPANIES ACT 593 (Arvind P. Datar ed., 2015).
28 A. RAMAIYYA, GUIDE TO THE COMPANIES ACT 594 (Arvind P. Datar ed., 2015).
29 Greenhalgh v. Ardene Cinemas, (1950) 2 All ER 1120 (CA).
8

33. It is further submitted that it is for the shareholders to decide what is in the interest of the
company and as stated by Scrutton J. in Dafen,31 for court to enquire that whether an act of
the shareholders was in the benefit of the company would be to just make the court a manager
of innumerable companies instead of shareholders themselves.
(ii) The amendment was bona fide for the company as a whole
34. The golden rule for alteration was laid down in Shuttleworth,32 enunciating that the power
of alteration of the articles must be exercised bona fide for the benefit of the company as a
whole. In Allen,33 which was followed in All India Rly. Mens Benefit Fund,34 it was expressed
by Lindley M.R., that if the condition of benefit of the company is complied with, there is
no ground of judicially putting any other restrictions on the power conferred by the section
than those contained in it.35 Further, the expression for the benefit of the company as a
whole means for the benefit of the shareholders as a general body.36
35. Respondents submit that the alteration in the present case was done for the benefit of the
shareholders as a general body as the new articles provided for decisions to be taken by a
majority vote of shareholders,37 which is in furtherance of corporate democracy. In M.S.D.C.
Radharamanan,38 it was specifically held that in a matter of oppression and mismanagement,
the interests of the shareholders as a whole is important and not just the interest of the

30 supra note 19.


31 Dafen Tinplate Co. Ltd. v. Llanelly Steel Co. (1907) Ltd., (1920) 2 Ch 124.
32 Shuttleworth v. Cox Bros. & Co. (Maidenhead) Ltd., (1927) 2 KB 9.
33 Allen v. Gold Reefs of West Africa, (1900) 1 Ch 656.
34 All India Rly. Mens Benefit Fund v. Jamadar Baheshwarnath Bali, AIR 1945 Nag 187.
35 LORD MACKAY OF CLASHFERN, HALSBURYS LAWS

OF

ENGLAND 381 554 (Vol. 7(1) 4th

Ed., Reissue, 1988).


36 Id.; A. RAMAIYYA, GUIDE TO THE COMPANIES ACT 595 (Arvind P. Datar ed., 2015).
37 21, Moot Proposition.
38 M.S.D.C. Radharamanan v. M.S.D. Chandrasekara Raja and Anr., AIR 2008 SC 1738.
9

applicant. Hence, there is no case of oppression and mismanagement made out in the present
matter given the acts of the majority of shareholders.
36. Furthermore, as stated by Latham C.J. in Peters American Delicacy,39 although the power
to alter must be exercised bona fide, the fact that an alteration prejudices or diminishes some
(or all) of rights of shareholders is no ground for attacking the validity of the alteration.
Therefore, even if the resultant amendment results into curtailment of certain rights of the
founders, the same cannot stand as a ground for declaring the alteration as invalid. It is
therefore most respectfully submitted that the alteration was valid and did not constitute
oppression and mismanagement.
[III] THE REMOVAL OF THE APPELLANTS FROM THE BOARD OF DIRECTORS
37. The removal of the Appellants from the Board of Directors is valid as (i) the removal took
place in accordance with the AoA of Flyabhi.com, (ii) there was no legitimate expectation on
the part of the founders to stay on Board and (iii) the removal was done after proper
compliance with the procedure.
(i) The removal took place in accordance with the AoA of Flyabhi.com
38. The shareholding of both Piyush and Abhijit went down to 6% of the equity share capital
each after the conversion of the debt into equity.40 According to Clause 6.1.8 if the Investment
agreement,41 which was incorporated in the AoA of Flyabhi.com,42 all rights granted by the
investment agreement to a party would terminate if that party held less than 10%
shareholding in the company. Further, in accordance with Clause 6.1.7 of the Investment
Agreement,43 each party had the right to nominate a director so long as it held at least 10%
shareholding in the company.
39. Hence, the intention of the agreement gathered from the above mentioned facts was that
the interest of the parties should be represented on the board as long as the party held more
39 Peters American Delicacy Co. Ltd. v. Heath, (1939) 61 CLR 457.
40 supra note 37.
41 supra note 1.
42 supra note 2.
43 supra note 1.
10

than 10% shareholding. Nomination does not generally exclude nominating oneself,44 and this
is how the founders were on board read along with Clause 6.1.7. Therefore, Respondents
submit that the articles provided for removal of any party from the board if the party held less
than 10% shareholding, which highlights the fact that the removal was done in accordance
with the AoA of Flyabhi.com.
40. In Ravi Prakash Singh,45 it was held that removal of director in accordance with the
articles is not defective. Therefore, Respondents submit that the removal of founders from the
Board took place in accordance with AoA of Flyabhi.com and did not constitute oppression
and mismanagement.
(ii) There was no legitimate expectation on the part of the founders to stay on board
41. Respondents submit that firstly, there was no special contract with the founders that the
founders will continue to stay on the board. In Read,46 it was held that in absence of a special
contract, where a managing director or manager is appointed as per the Articles of a
company, the removal of such person or termination of his services in accordance with the
Articles or the provisions of the Act does not give rise to an action for damages for wrongful
dismissal. Hence, there was no special contract that gave rise to special expectation on the
part of the founders.
42. It is well settled that there cannot be mere allegation relating to legitimate expectation
without disclosing the grounds on how it arose.47 Respondents submit that only in a limited
few circumstances would the case of legitimate expectation arise, the elements of which are
summarized in the case of Re, Westbourne Galleries Ltd.,48 (a) association formed or
continued on personal relationship, involving mutual confidence (b) an agreement or
understanding that all, or some of the shareholders shall participate in the conduct of the

44 Dr. (Mrs.) Shabbir Fatima v. The Chancellor, Univiersity of Allahabad, AIR 1965 All 45,
51.
45 Ravi Prakash Singh v. Venus Sugar Ltd., (2008) 82 CLA 88 (Del).
46 Read v. Astoria Garage (Streatham) Ltd., (1952) 2 All ER 292 (CA).
47 A Co. (No. 007936 of 1994), 1995 BCC 705.
48 Re, Westbourne Galleries Ltd., (1972) 2 All ER 492 (HL).
11

business (c) restriction upon the transfer of members interest in the company, so that if
confidence is lost, he cannot take his share and go out of the company.
43. Respondents submit that none of the above-mentioned elements are present in the instant
case, and hence there cannot be a circumstance of legitimate expectation arising, thereby
highlighting the fact that there is no case of oppression and mismanagement made out.
44. Secondly, directorial complaints cannot be agitated in a Section 397 petition. In closely
held family companies and companies in a nature of quasi-partnership or in companies
wherein the articles provide for permanent directorship, removal of director could be
challenged in a proceeding under Section 397.49 In the instant case, none of the elements is
satisfied, and hence directorial complaints cannot be entertained.
(iii) The removal was done after proper compliance with the procedure
45. Respondents submit that the removal of the founders from the board was done after
proper compliance with the procedure. Firstly, even though the EGM was called on a shorter
notice, but in the context of the present case, it does not render the EGM invalid.
46. In Surajmull Nagarmull,50 it was held in relation to length of notice of general meetings
that, the real, if not the only, object of these provisions is to give the shareholders proper and
reasonable opportunity for participating effectively in the meetings of the company and, it is
with this object in view, these provisions have been enacted in the interest of the
shareholders.
47. While the shareholders have no power, apart from that given in the statute or the articles,
to intervene in the management of the companys affairs, this S.284 is designed to enable
them to have control over the directors by their removal51 and accountability of the directors
to the shareholders is obviously enhanced if shareholders can influence directly the choice of
those who sit on the board.52 Further, it will be unreasonable to construe S.171(2) to mean

49 Praful M. Patel v. Wonderweld Electrodes (P.) Ltd., (2003) 115 Com Cases 377.
50 Surajmull Nagarmull v. Shew Bhagwan Jalan, (1973) ILR 1 Cal 207.
51 Tarlok Chand Khanna v. Raj Kumar Kapoor, (1983) 54 Com Cases 12 (Del).
52 GOWER AND DAVIES, PRINCIPLES OF MODERN COMPANY LAW 389 (8th ed., 2008).
12

that prior consent of the members must necessarily be obtained for calling a meeting at a
shorter notice.
48. Respondents submit that the notice of EGM and the special business of reconstitution of
board53 were already known to the Appellants, in furtherance of which they had the
reasonable opportunity for participating effectively in the EGM. Therefore, the EGM is valid
and the removal was done after proper compliance with the procedure, as it was ensured by
the majority of the shareholders that the object of giving notice was fulfilled.
49. Secondly, the notice of removal of the founders from the board was proper. In V.S.
Krishnan,54 it was held that a person attending meeting cannot complain of notice. Also, in
Kalinga Tubes,55 it was held that if a shareholder is aware of the facts, he cannot complain of
notice. Respondents submit that the founders were aware of the fact thereby making the
removal proper.
50. Thirdly, in Life Insurance Corporation of India,56 it was held that is not necessary to give
reasons in the special notice given to the company or in the companys notice to the
members, or in the resolution proposed by the company Board itself, for removal of director.
Respondents submit that the reasons for removal of the founders were well known by the
founders and hence it was not necessary to give reasons in the notice.
[IV] AFFAIRS OF THE COMPANY WERE ALWAYS CARRIED OUT FOR BENEFIT OF THE COMPANY
51. Respondents submit that, along with the above-raised submissions, the affairs of the
company before these events were also always carried out for the benefit of the company.
52. The judicial pronouncements, in relation to the affairs of a company, have maintained the
position that firstly, when something is in practice for many times, it becomes an indication
that articles are understood in that sense;57 secondly, AoA is of commercial nature and should
53 supra note 37.
54 V.S Krishnan v. Westfort Hi-tech Hospital Ltd. & Ors., (2008) 3 SCC 363.
55 S.P. Jain v. Kalinga Tubes Ltd., (1965) 35 Com Cases 351 (SC).
56 Life Insurance Corporation of India v. Escorts Ltd., (1986) 59 Com Cases 548 (SC).
57 Sunil Dev v. DDCA, (1990) 2 Comp LJ 245, 255; S. Krishnaswany v. South India Film
Chamber, AIR 1969 Mad 42.
13

be interpreted for conveyance;58 thirdly, AoA should be used for business efficacy and not in
a manner which is unworkable;59 fourthly, the court does not interfere with business
decisions;60 and fifthly, in past events, principle of estoppel is applied.61
53. Keeping the above dicta in mind, Respondents submit that all the decisions taken by the
majority of board members were always for the benefit of the company. The appointment of
Arjun Iyer as the CEO of Flyabhi.com 62 was for the benefit of the company, as also
reflected.63 Further, the loan from ASB, was also for the benefit of the company.64
54. Oppression is defined under S. 397 of the Companies Act. 65 The judicial pronouncement
of the Honorable Supreme Court of India in V.S. Krishnan66 while referring to the landmark
cases of Needle Industries,67 Dale and Carrington Investment,68 et al stated that a conduct
would result in oppression if it is harsh, burdensome and wrong, or the action is against
probity and good conduct, or the oppressive act complained of may be fully permissible
under law but may yet be oppressive or where the conduct is mala fide and is for a collateral
purpose, where although the ultimate objective may be in the interest of the company, the
immediate purpose would result in an advantage for some shareholders vis-a-vis the others.

58 Rayfields v. Hands, (1958) 2 All ER 194.


59 Holmes v. Keyes, (1958) 2 All ER 129; Rayfields v. Hands, (1958) 2 All ER 194.
60 Vasudev P. Hanji v. Ashok Iron Works Private Limited, (2007) 77 CLA 222.
61 Jiwan Mehta v. Emmbros Metals Pvt. Ltd., (2008) 143 Com Cases 245.
62 11, Moot Proposition.
63 13, Moot Proposition.
64 18, Moot Proposition.
65 Companies Act, 1956, 397.
66 supra note 54.
67 Needle Industries (India) Ltd. and Ors. v. Needle Industries Newey (India) Holding Ltd. and Ors., (1981) 3
SCR 698.

68 Dale and Carrington Investment (P) Ltd. and Anr. v. P.K. Prathapan and Ors., (2005) 1 SCC 212.
14

55. Further, mismanagement is defined under S.398 of the Companies Act. 69 Mismanagement
is said to be constituted if the affairs of the company are conducted in a manner prejudicial to
the interests of the company or to the public interest.70
56. Respondents reiterate that the acts of the majority of shareholders were not oppressive to
the majority of shareholders and did not constitute mismanagement of the affairs of the
company and were neither against public interest.

69 Companies Act, 1956, 398.


70 Richardson & Cruddas Ltd. v. Haridas Mundra, AIR 1959 Cal 695.
15

C. THE

SCHEME OF

ARRANGEMENT

AND NOTICE ARE VALID

57. The respondents humbly submit before the Honble Supreme Court that the scheme of
arrangement proposing merger of the aircraft business of Flyabhi Pvt. Ltd. into Arcot, Smith
and Brown Limited, a listed NBFC is valid in law. The respondents primarily submit under
two main heads, namely [I] statutory compliances under S.232 r/w 230 of the act have been
met with and [II] scheme and the notice are fair and reasonable.
[I] STATUTORY COMPLIANCES U/S. 232

R/W

S.230 OF THE ACT HAVE BEEN MET WITH

58. The respondents humbly submit before the Honble Supreme Court that all the necessary
statutory compliances have been met with as (i) the Court sanctions a scheme after being
satisfied about its procedural compliance under S.230, (ii) consent letters were given by the
requisite majority and (iii) use of consent letters is valid in the instant case.
(i)The Court sanctions a scheme after being satisfied about its procedural compliance
59. In the exercise of its discretion the court before sanctioning the scheme of arrangement
has to see that all the requisite statutory procedure for supporting such a scheme has been
complied with and also that the scheme is backed by requisite majority vote.71
60. In the present case, the Calcutta High Court as well as the Allahabad High Court,
Lucknow Bench, has sanctioned the scheme of arrangement.72 The fact that the scheme was
approved by both the High Courts clearly indicates that the scheme was devoid of any lacuna
and that all the required provisions of Companies Act have been complied with. Therefore,
the respondents humbly submit before the Honorable Supreme Court that since the scheme is
sanctioned by the respective High Courts it shows that there is no procedural infirmity in the
scheme thereby making the scheme of arrangement valid.
(ii) Consent letters were given by the requisite majority
61. The group who are styled as a class must have commonality of interest and ordinarily
be homogeneous and they should have been offered an identical compromise. 73 Different
71 Miheer H Mafatlal v. Mafatlal Industries Ltd., (1996) 4 Comp LJ 124.
72 26, Moot proposition.
73 Maneck Chowk and Ahmedabad Mfg Co. Ltd., In re, (1970) 2 Comp LJ 300 (Guj).
16

terms offered under the scheme of compromise can only be a criterion for identifying a class
for purpose of convening a separate meeting of such class. 74 The classification has to be on
the basis of broad interest of classes.75
62. It is evident from the facts of the case that the scheme offered to both Class A as well as
Class B shareholders is the same and thereby they constitute a single class of equity
shareholders with reference to the scheme. The respondents thus humbly submit that the
scheme received the consensus of all class B shareholders and more than fifty per cent class
A shareholders76 which amounts to a requisite majority both in number and value as per
S.230(6), highlighting the fact that the scheme is valid.
(iii) Use of Consent letters is valid in the instant case
63. The respondents humbly submit before the Honble Supreme Court that the requisite
three-fourth majority of equity shareholders needed for approval of the scheme under
S.230(6) of the act was obtained outside the meetings.
64. Jagannatha K. Reddy in the case of S.M. Holding Finance P. Ltd. v. Mysore Machinery
Manufacturers Ltd.77 analysed S.391 (2) as not mandatory but directory and said that where
there has been substantial compliance by three-fourths value of unsecured creditors who have
agreed to the scheme, it cannot be said that there was no proper compliance with the act.
65. Where the consent of all or virtually all the shareholders is given even outside a meeting
it is sufficient to comply with the requirements of a meeting.78 The objector who holds small
percentage of shares cannot be heard to question of commercial wisdom of large body of
shareholders which has approved the scheme of arrangement.79

74 SIEL Ltd., In re, (2003) 47 SCL 631 (Delhi).


75 Alstom Power Boilers Ltd. v. State Bank of India & IDBI, (2003) 42 SCL 197.
76 25, Moot proposition.
77 S.M. Holding Finance P. Ltd. v. Mysore Machinery Manufacturers Ltd., (1993) 78 Com
Cases 432 (Kar).
78 Mazda Theatres P. Ltd v. New Bank of India Ltd., ILR (1975) 1 Delhi.
79 Mather and Platt (India) Ltd., In re, (2004) 119 Com Cases 433.
17

66. It is true that when a statute confers a discretionary power on the court such power has to
be exercised judicially as and when occasion arises and that therefore, ordinarily discretion
must be brought to bear on every case as and when it comes up before the court. The rule,
however, does not preclude the court from evolving in advance and following certain rules,
precedents, standards or policy to guide it in exercise of its discretion.80
67. In the instant case, there has been substantial compliance of the provision as almost all the
shareholders holding more than three-fourths value of the shareholding of the company have
approved for the scheme, and hence recording of the receipt of consent letter by the BOD was
valid in the instant case. Moreover, as per the provision of S.232 the Court has the power to
apply its own judicial discretion with regard to holding of meetings and like matters while
sanctioning a scheme of arrangement.
[II] SCHEME AND NOTICE ARE FAIR AND REASONABLE
68. It is a settled principle of law that internal management and running of the business is
primarily a matter which falls in the domain of management for internal affairs of the
company. Until and unless such scheme is impermissible in law or bad in law, and/or opposed
to public policy the Court would not interfere in the sanctioning of such a scheme.81
69. Also, the Court held in the case of Deepika Chit Fund (P) Ltd., In re82 that the object and
purpose of S.391 is to revive/ reconstruct the companies instead administering them civil
death.
70. Thus the respondents humbly submit before this Honble Court that the scheme of
arrangement was completely fair, just and reasonable as it was meant to lift the company
from financial losses. It shall be noted that at a number of instances the company had been
facing financial turmoil and from time to time efforts had been made to overcome the losses
through infusion of funds83 and bridge finance.84
80 Sidhpur Mills Co. Ltd., In re., (1980) 50 Com Cases 7 (Guj).
81 Highway Cycle Industries Ltd., In re, (2003) 115 Com Cases 260.
82 Deepika Chit Fund (P) Ltd., In re, (2004) 56 SCL 566.
83 16, Moot proposition.
84 supra note 64.
18

71. After the instant dispute arose, the condition of the company had been further been
deteriorated with the companys financial position worsening, employees leaving the
company, customers getting more and more concerned and creditors and service partners
getting nervous.85 In the given situation, to pull out the company from its state of affairs, it
was then resolved by the directors at the offices of the BESTCO that restructuring was
required.
72. Therefore, it is humbly submitted that the scheme was fair and reasonable as it was
proposed as an alternative to winding-up. Moreover the scheme was permissible in law and
there was no illegality involved in it.
73. It was held by the Court in the case of Hoare & Co. Ltd., Re86 that the Court will not order
otherwise, on an application made by dissenting shareholders in pursuance of notice, unless it
is affirmatively established that, notwithstanding the views of the very large majority of
shareholders, the scheme was unfair. Further in the case of In Re, Sussex Brick Co.87 it was
observed that the Courts intervention would be necessary only when the scheme was
obviously unfair, patently unfair and unfair to the meanest intelligence.
74. It is thus humbly submitted that since the scheme is fair and reasonable as proved above
the notice should take effect as it has been approved by the required ninety per cent majority
as per S.235 of the Act.

85 24, Moot Proposition.


86 Hoare & Co. Ltd., Re, (1933) 150 LT 374.
87 In Re, Sussex Brick Co., (1960) 1 All ER 401.
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PRAYER
Wherefore, in the light of the issues raised, arguments advanced and authorities cited, it is
most humbly prayed that this Honble Court may be pleased to adjudge and declare that:

The appeal be dismissed.

The matter be referred to arbitration

The acts of the majority of shareholders did not constitute oppression and
mismanagement.

The scheme of arrangement is valid and be allowed to take effect.

The notice under Section 235(1) is valid and be allowed to take effect.

The Court may also be pleased to pass any other order, in light of justice, equity and good
conscience.
All of which is most humbly submitted.

Place: New Delhi

S/d-

Date:

On Behalf of the Respondents

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