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A written submission on behalf of the respondents in a petition invoked under section 280 of the companies act 2013. The case involves sugandha pharma public ltd., the petitioner, and mr. Vikram rajani and mr. Advait jain, the respondents. The main issue is whether the share transfer from mr. Advait jain to mr. Vikram rajani is consistent with the legal framework governing public companies. The relevant sections of the companies act, the articles of association of the companies, and the object clauses of the aoa. It also refers to previous court cases to support the respondents' arguments.
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Sugandha Pharma Ltd (SPL) is a reputable public limited company with its registered office in Vijaybaad (State: Jorhat, Indiana) engaged in the manufacturing and distribution of pharmaceutical products. With a strong presence on the stock exchange, SPL has consistently focused on improving healthcare globally. Its Memorandum of Association (MOA) explicitly outlines its objective, which includes but is not limited to, the development, production, and sale of pharmaceuticals, investment in research and development, and collaboration with other entities to enhance its market position. STATUS OF RELATIONSHIP Moon Pharma Ltd (MPL), a private limited company having its registered office at Vijaybaad, is a newly found subsidiary of SPL (SPL holds 65% shares of MPL) defines its primary object as engaging in the business of research and development of pharmaceutical products, ensuring compliance with regulatory standards but not directly entering into retail or selling of drugs. The MOA restricts MPL from engaging in activities beyond its stated objects without the approval of its shareholders. The object clause of MPL's AOA emphasizes adherence to lawful and ethical business practices within the pharmaceutical industry. DISPUTE BETWEEN THE PARTIES There are 50 shareholders in MPL. The main Managing Director of MPL is Mr. Advait Jain, he has been accused many times by the shareholders of misappropriation of funds as well as involved in activities detrimental to the interests of company. One such accusation was related to unlawful transfer of shares from MPL to SPL by him on which he states that he made such a transfer on the request of Managing Director of SPL (Mr. Vikram Rajani), and thus transferred his own shares i.e. 12 % to Mr. Vikram Rajani without asking the shareholders of MPL first or taking any approval from Board of Directors of MPL. Simultaneously, Mr Vikram Rajani is facing personal financial turmoil, engaged in speculative ventures outside the scope of MPL's MOA. These ventures resulted in substantial financial losses for SPL, jeopardizing its financial stability. Such actions were clearly ultra vires, as they exceeded the boundaries defined by SPL's MOA.
Page 7 of 27 Upon discovering the unauthorized share transfer and ultra vires acts of Mr. Vikram Rajani, the remaining shareholders of SPL initiated legal proceedings against him, arguing that the transfer violated SPL's AOA and that the ultra vires acts had caused financial harm to SPL. MPL shareholders argue that SPL should have been aware of Mr. Vikram Rajani’s financial situation and his actions, citing the principles of constructive notice. SPL, however, contends that it had no reason to suspect irregularities and relies on the doctrine of indoor management for protection. As the dispute unfolds, SPL seeks to invalidate the unauthorized share transfer. Also, to hold that Mr. Advait Jain and Mr. Vikram Rajani both accountable for ultra vires acts, relying on the doctrine of indoor management to protect its interests, defend against claims of constructive notice, and explore the possibility of lifting the corporate veil to hold them personally liable for the alleged wrongdoing. Mr. Advait Jain denying the allegations stated that when a private company is a subsidiary of a public company then that private company is considered as a public company as per Companies Act, 2013 and thus the transfer from Mr. Vikram Rajani to Mr. Advait Jain is not violating the AOA of Private company MPL. SPL is losing is share-value in the market because of all these activities undertaken by the Managing Directors of both the companies and thus majority shareholders of SPL initiate a combined derivate suit against Mr. Vikram Rajani and Mr. Advait Jain at NCLT bench of Vijaybaad.
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It is humbly submitted before the Hon’ble Court that he transferred the shares to Mr. Rajani on the express orders of his superior, Mr. Vikram Rajani, he was obligated to follow the instructions of the SPL Managing Director, believing them to be in the best interests of both companies. The share transfer from Mr. Advait Jain to Mr. Vikram Rajani consistent and within the legal framework governing public companies. The action of Mr. Advait Jain, including the alleged misappropriation of funds and involvement in activities detrimental to MPL were unreasonable as there was lack of evidence. SUB ISSUE 1.1: MPL, BEING A SUBSIDIARY OF SPL, IS CONSIDERED A PUBLIC COMPANY UNDER THE COMPANIES ACT, 2013. It is humbly submitted before the Hon’ble Court that on the interpretation of Section 2(71) of the Companies Act, 2013 which defines a public company, expresses that a private company can be deemed a public company if it has a subsidiary that is itself a public company. SUB ISSUE 1. 2 : THE ACT WAS ULTRA VIRES OR NOT. It is humbly submitted before the Hon’ble Court that the act was within legal framework and the share transfer was justified and necessary for strategic reasons. It was for intended benefits for both companies and his actions were in compliance with MPL's AOA. SUB ISSUE 1. 3 : WHETHER SPL'S SHAREHOLDERS HAD SUFFICIENT REASON TO DOUBT THE LEGALITY OF THE SHARE TRANSFER? It is humbly submitted before the Hon’ble Court that Mr. Vikram Rajani transfer was disclosed internally within SPL and followed established procedures for such transactions. He emphasized that SPL shareholders were not obligated to be directly informed of this specific transfer due to its intra- company nature and size (12% shares). SPL conducted due diligence on the recipient (Mr. Advait), ensuring his suitability and adherence to ethical practices. Relying on the doctrine of indoor
Page 10 of 27 management to assert that shareholders and outsiders should not be penalized for internal irregularities and that they had no reason to doubt the legality of the transfer. ISSUE 2 : WHETHER THE MAJORITY SHAREHOLDERS OF SPL HAVE THE LEGAL STANDING TO BRING A DERIVATIVE SUIT AGAINST MR. VIKRAM RAJANI AND MR. ADVAIT JAIN, CONSIDERING THE PRINCIPLES OF DERIVATIVE ACTIONS AND THE ALLEGED HARM TO THE COMPANY? It is humbly submitted before the Hon’ble Court that The NCLT ought to have taken into consideration the fact that the actions taken by the directors were in a good faith within the company's internal processes. And there were other available remedies or dispute resolution mechanisms before initiating the derivative suit.
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The above-mentioned Sec. has been explicitly included in the submissions that the key clause here "(b) has a subsidiary company which is a public company". It expresses that a company can be deemed a public company if it has a subsidiary that is itself a public company. However, this applies to MPL depends on the specific nature of its relationship with SPL, including: a. The level of control SPL has over MPL 65%, SPL exercises complete control over MPL, influencing all major decisions and effectively treating it as an extension of itself, then MPL being deemed a public company. And according to the provision of a "Deemed Public Company," a subsidiary company of a public company, it will be considered a deemed public company for the purposes of the Act, even if it continues to be classified as a private company in its articles. b. The date of becoming a deemed public company occurs immediately when the private company becomes a subsidiary of a public company. In a case of Hillcrest Realty Sdn. Bhd v. Hotel Queen Road (P.) Ltd 1. the Company Law Board, Delhi Bench, held that the provisions in the Articles maintaining the basic characteristics of a private company, will continue to govern the affairs of the company, even if it is a subsidiary of a public company. The Delhi CLB Bench stated that the basic characteristics of a private company should not be altered solely because it is a subsidiary of a public company, considering that it is a public company. The Bench further clarified that while the company may be a public company under other provisions of the Act, it still retains its basic characteristics as a private company.
Page 13 of 27 (2) The articles shall also contain such matters, as may be prescribed: Provided that nothing prescribed in this sub-section shall be deemed to prevent a company from including such additional matters in its articles as may be considered necessary for its management. (3) The articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of a special resolution, are met or complied with. (4) The provisions for entrenchment referred to in sub-section (3) shall only be made either on formation of a company, or by an amendment in the articles agreed to by all the members of the company in the case of a private company and by a special resolution in the case of a public company. (5) Where the articles contain provisions for entrenchment, whether made on formation or by amendment, the company shall give notice to the Registrar of such provisions in such form and manner as may be prescribed. (6) The articles of a company shall be in respective forms specified in Tables, F, G, H, I and J in Schedule I as may be applicable to such company. (7) A company may adopt all or any of the regulations contained in the model articles applicable to such a company. (8) In case of any company, which is registered after the commencement of this Act, in so far as the registered articles of such company do not exclude or modify the regulations contained in the model articles applicable to such company, those regulations shall, so far as applicable, be the regulations of that company in the same manner and to the extent as if they were contained in the duly registered articles of the company. (9) Nothing in this section shall apply to the articles of a company registered under any previous company law unless amended under this Act. And sec 4 defines MOA in the Act: Sec 4. Memorandum. — (1) The memorandum of a company shall state— (a) the name of the company with the last word ―’Limited’ in the case of a public limited company, or the last words ―’Private Limited’ in the case of a private limited company: Provided that nothing in this clause shall apply to a company registered under section 8; (b) the State in which the registered office of the company is to be situated;
Page 15 of 27 (a) any word or expression which is likely to give the impression that the company is in any way connected with, or having the patronage of, the Central Government, any State Government, or any local authority, corporation or body constituted by the Central Government or any State Government under any law for the time being in force; or (b) such word or expression, as may be prescribed, unless the previous approval of the Central Government has been obtained for the use of any such word or expression. (4) A person may make an application, in such form and manner and accompanied by such fee, as may be prescribed, to the Registrar for the reservation of a name set out in the application as— (a) the name of the proposed company; or (b) the name to which the company proposes to change its name. (5) (i) Upon receipt of an application under sub-section (4), the Registrar may, on the basis of information and documents furnished along with the application, reserve the name for a period of sixty days from the date of the application. (ii) Where after reservation of name under clause (i), it is found that name was applied by furnishing wrong or incorrect information, then, — (a) if the company has not been incorporated, the reserved name shall be cancelled and the person making application under sub-section (4) shall be liable to a penalty which may extend to one lakh rupees; (b) if the company has been incorporated, the Registrar may, after giving the company an opportunity of being heard— (i) either direct the company to change its name within a period of three months, after passing an ordinary resolution; (ii) take action for striking off the name of the company from the register of companies; or (iii) make a petition for winding up of the company. (6) The memorandum of a company shall be in respective forms specified in Tables A, B, C, D and E in Schedule I as may be applicable to such company. (7) Any provision in the memorandum or articles, in the case of a company limited by guarantee and not having a share capital, purporting to give any person a right to participate in the divisible profits of the company otherwise than as a member, shall be void.
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Page 18 of 27 (1) Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company. (2) A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment. (3) A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment. (4) A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company. (5) A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company. (6) A director of a company shall not assign his office and any assignment so made shall be void. (7) If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees. According to sec 58(2) of the Act
58. Refusal of registration and appeal against refusal. — (2) The securities or other interest of any member in a public company shall be freely transferable: Provided that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract.
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