COMPANY LAW

MOOT COURT MEMORIAL SUBMISSION

INTERNAL ASSESSMENT-I

Nam Namisha Sharma & Raghav Agarwal

e
PRN 21010122007 & 21010122059

Year 2nd Year, Semester Three

Division -

Course LL.B

PROF. DR. BINDU RONALD, PROF. SHIVANI RAJESH

& PROF. DAMODAR HAKE
(Word Count:2489 words)
 TABLE OF CONTENTS

LIST OF ABBREVIATIONS........................................................................................................ IV

INDEX OF AUTHORITIES..................................................................................................................V

STATEMENT OF JURISDICTION........................................................................................................VI

STATEMENT OF FACTS....................................................................................................................VII

ISSUES RAISED...............................................................................................................................VIII

SUMMARY OF ARGUMENTS OF THE RESPONDENT............................................................IX

ARGUMENTS ADVANCED OF THE RESPONDENT..........................................................................1

1. Issue I:Whether the shareholders can sue Mr. Rajesh for being the promoter, major

shareholder and for having acted out of personal interest?.........................................1

[IA] Whether Rajesh should be sued or not.....................................................................1

[IA.1] Rights and Duties of a promoter...........................................................................1

[IA.2] Rights of Rajesh as a promoter.............................................................................2

[IA.3] Scope of Rajesh as a promoter..............................................................................3

[IB] Did Rajesh act out of his personal interest…………………………………………3

[IB.1] Conduct of Mr. Rajesh……………………………………………………………3

[IB.2] Rajesh act was for the welfare of the company…………………………………..4

[IB.3] Personal Interest of Mr. Rajesh…………………………………………………..5

2. Issue II: Whether the company has acted ultra vires by investing in Apex Limited

[IA] The Company did not act Ultra Vires ....................................................................5

[IA.1] Nature of ultra vires acts.......................................................................................5

[IA.2] Elements of this contract.......................................................................................6

66bgbbgbgbgbgbbgbggbbgbtyhhrthrthrhtrhrhrhr
 [IA.3] Promoter’s Right to make such Contract..............................................................6

[IB] Validity of this Pre-Incorporation Contract………………………………………7

[IB.1] Promoter’s role in Pre- Incorporation Contracts………………………………..7

[IB.2] Liability of the Promoter………………………………………………………..7

[IB.3] Valid contract between Skyline & Co. ltd and Apex ltd………………………..8

Prayer of the Respondent.............................................................................................................9

66bgbbgbgbgbgbbgbggbbgbtyhhrthrthrhtrhrhrhr
 LIST OF ABBREVIATIONS

ABBREVIATION ACTUAL TERM

§ Section

¶ Paragraph

& And

AIR All India Reporter

Anr. Another

CONST. Constitution

Ed. Edition

i.e. That is

Inc. Incoporated

Ltd. Limited

No. Number

Ors. Others

Pvt. Private

SC Supreme Court

ERP Enterprise Resource Planning

SCR Supreme Court Reports

v. Versus
 INDEX OF AUTHORITIES

STATUTES

1. The Companies Act, 2013 § 2(69), Act No. 18 of 2013 ..................................................................1

2. The Companies Act, 2013 §92, Act No. 18 of 2013.........................................................................1

3. The Specific Relief Act, 1963, § 15(h) Act, No. 47 of 1963.........................................................2,6

4. The Specific Relief Act, 1963, § 19(e) Act, No. 47 of 1963.........................................................2,6

5. The Companies Act, 2013 § 4(1)(c), Act No. 18 of 2013...........................................................4,5,6

6. SEBI(LODR) Regulations, in the year 2015....................................................................................3

7. The Companies Act, 2013 § 245(1)(b), Act No. 18 of 2013............................................................5

8. The Companies Act, 2013 § 166(2), Act No. 18 of 2013..........................................................11,14

9.

INDIAN CASES

1. Lindsay International Pvt. Ltd. & vs. Laxmi Niwas Mittal & Ors. AIR 2017 C.S. No. 2 of 20172,7

2. Jai Narayan Parasrampuria v. Pushpa Devi Saraf AIR 1999 C.A. 3801..........................................7

BOOKS REFERRED

1. AVTAR SINGH COMPANY LAW, (17TH ED. 2018)..................................................................2

FOREIGN CASES

2. Newborne v Sensolid [1954] 1 QB 45..............................................................................................3

V
 STATEMENT OF JURISDICTION

The National Company Law Tribunal has the Jurisdiction to try the case. Section 408 of the

Companies Act, 2013 speaks about the Central Government to constitute a Tribunal known as the

National Company Tribunal consisting of a President, Judicial and Technical members as the

Government finds necessary, to exercise their powers as conferred by the Act.

The Jurisdiction of the NCLT has been given in Section 280 of the Companies Act 2013 which

states that the NCLT has the jurisdiction in the following matters:

1. Any suit formed by a company or against any company.

2. Any claim made by or against the company, this extends to any claims by or against

any of its branches in India.

3. Any application made under Section 233.

4. Any Scheme submitted under Section 262.

5. Any matter or questions pertaining to assets, business, actions, rights, duties,

obligations, etc.

The jurisdiction of the NCLT extends to all the above matters, before or after the order for the

winding up of the company is initiated.

VI
 STATEMENT OF FACTS

Mr. Rajesh had for many years carried on a prosperous business as an Electronic goods supplier
merchant. In 2020, he decided to convert it into a Public Limited company and for that purpose
Skyline & Co. Ltd. was formed with Mr. Rajesh as Managing Director who holds 20% of shares.
Being the promoter of the company, Mr. Rajesh, at the pre-incorporation stage, on behalf of the
company, promised to invest in Apex Limited (a software development company), after its
incorporation in return for their services relating to developing the enterprise resource planning
software. The investment was to be to the tune of 120 crores. This promise was duly executed by the
board of directors after the incorporation of the company. Shareholders strongly aggrieved with his
unilateral decision and investment made in Apex Limited. They planned to sue Mr. Rajesh as he was
a major shareholder and promoter of the company for using the company’s capital for personal
interest. The shareholders also claim that such investments are invalid as they are ultra vires. Further,
they also claimed that promoter is duty bound to disclose to company and its shareholders regarding
any contracts that they have entered into at the time of incorporation. Shareholders urged the board to
restore the fund that company invested stating that they did not have any authority to invest such a
huge amount without the approval of the shareholders.

Promoter is citing an exception to Doctrine of Ultra Vires as he has worked in the interest of the
company. Additionally, Mr. Rajesh states that the promise to invest was made for that service of
Apex Ltd. at a time when he did not have the means to pay for the services.

On this response, shareholders plan to approach National Company Law Tribunal on account of
Doctrine of Ultra Vires claiming that the investment in Apex Limited was an Ultra Vires Act and that
the Promoter has not exercised his rights in a responsible manner. The shareholders also claimed that
the act of the company violates due process as mentioned in the Companies Act, 2013.

VII
 ISSUES RAISED

ISSUE I:

1. WHETHER THE SHAREHOLDERS CAN SUE MR. RAJESH FOR BEING THE
PROMOTER, MAJOR SHAREHOLDER AND FOR HAVING ACTED OUT OF

PERSONAL INTEREST?

ISSUE I

2. WHETHER THE COMPANY HAS ACTED ULTRA VIRES BY INVESTING IN

APEX LIMITED

VIII
 SUMMARY OF ARGUMENTS OF THE RESPONDENT

ISSUE I: WHETHER THE SHAREHOLDERS CAN SUE MR. RAJESH FOR BEING THE

PROMOTER, MAJOR SHAREHOLDER AND FOR HAVING ACTED OUT OF PERSONAL

INTEREST?
It is humbly contented before the National Company Law Tribunal that shareholders can not sue
Mr. Rajesh for being the Promoter, Major shareholder as well as for acting out of his personal
interest as Rajesh was always within his capacity as a promoter to fulfill the requirements as well
as to fulfill the objectives of the company while it is in the incorporation stage. This contention is
sought to be established by understanding: firstly, the rights of Rajesh as a promoter as well as the
scope of Rajesh as a promoter. Secondly, the conduct of Mr. Rajesh was not his personal interest
and for the welfare of the company.

ISSUE II: WHETHER THE COMPANY HAS ACTED ULTRA VIRES BY INVESTING IN

APEX LIMITED

It is humbly contented before the National Company Law Tribunal that Mr. Rajesh was well
within his rights of a promoter to enter into this contract on behalf of Skyline & Co. Ltd, and his
entering into this Pre-Incorporation Contract had legal standing and Mr. Rajesh was the
competent party to enter into this agreement. This contention is sought to be established by
understanding: firstly, elucidating the nature of Ultra Vires acts and how the contract between
Skyline and Co ltd. and Apex Ltd does not confine to such acts. Secondly, the promoter, Mr.
Rajesh’s right to enter into such contracts has been touched upon. Lastly, the validity of Pre-
Incorporation Contracts has been determined through highlighting the Promoter’s role in such
contracts, his liability in Pre-Incorporation Contracts and mentioning the valid contract between
Skyline & Co. ltd. and Apex ltd.

IX
 ARGUMENTS ADVANCED OF THE RESPONDENT

ISSUE I(A) Whether the shareholders can sue Mr. Rajesh for being the promoter, major shareholder an

1. The counsel humbly submits to the to the National Company Law Tribunal that there is no
reasonable doubt that the shareholders are not in position to sue Mr. Rajesh for being the
promoter, major shareholder as well as for acting out of his personal interest. This
contention is sought to be proved on three grounds namely: [IA.1]Rights and Duties of a
Promoter [IA.2], Rights of Rajesh as a promoter[IA.3] Scope of Rajesh as a
promoter

[IA.1] RIGHTS AND DUTIES OF A PROMOTER

 2. Section 2(69)1 of the Companies Act 2013 states that the promoter is a person who is
mentioned under the prospectus of the company and identified the same in the annual return
as per the company under Section 922. This person generally exercises control over the
affairs of the company either directly or indirectly. The promoter is generally that person on
whose advise, directions or instructions the Board of Directors of the Company are further
accustomed to act. One of the essential function that a promoter holds is of formation of a
company as well as exploring all the possible opportunities with reference to the growth and
maximization of profit of the company. Therefore, it can be interpreted that the work of the
promoter is to arrange the registration of the company as well as obtain the certificate of
incorporation. He has to define the shape in which he wants the company to be shaped into
and want it to be incorporated.

Therefore, Rajesh is within his capacity as a promoter to fulfil all the requirements and
objectives while the company is in incorporation stage.

[IA.2] RIGHTS OF RAJESH AS A PROMOTER

3. Rajesh as a promoter was under the obligation to bring the company in its legal existence
and hence ensure the successful running of the company by ensuring the activities that work
into maximization of profits of the profits. Therefore it is within the rights of Rajesh to enter 1
into a contract on behalf of the company. Therefore, the contracts entered by Rajesh are
known as Pre-Incorporation Contract. These type of contracts are generally bilateral in
nature.

4. In reference to this Section 15(h)3 of the Specific Relief Act, 1963 states that when a
company forms a contract before its incorporation through its promoters it is deemed that the
company itself has accepted the agreement and moreover warranted the same as well as it
has been communicated to the other party. This means that the promoters of the company are
assumed to be working for the company and therefore the company has accepted the
agreement and complying to this they will incur with all the liabilities of the contract and it
will be assumed that the same has been communicated to the parties. Therefore, making it a
pre- incorporation contract.
1
The Companies Act, 2013 § 2(69), Act No. 18 of 2013
2
The Companies Act, 2013 § 92, Act No. 18 of 2013

3
The Specific Relief Act, 1963, § 15(h) Act, No. 47 of 1963
 5. In Lindsay International Pvt. Ltd. & vs. Laxmi Niwas Mittal & Ors 4 it was held that in the
situations where the promoter of the company who is person engaged in the setting up the
company has entered into contracts with parties will additionally procure its formation and
hence such contracts will be within the limits of the objects of the company and later the
company can after the incorporation sue to enforce the contracts and the other contracting
parties will not be in the position to raise any sort of objection on the grounds of privity.
Therefore it was ratified that the company is bound by this contract by such obligation.

6. In addition Section 19(e)5 of the Specific Relief Act, 1963 states that there is certain relief
given to the promoters of the company who have decided to enter into a contract before its
incorporation that is warranted by the term of incorporation then it is deemed that the
company has been acceptable to the contract and has also communicated the same to the
other parties as well. This section provides relief to the promoters of the company entering
into pre-incorporation contract.
7. In Newborne v Sensolid Ltd6 the situation is of an unformed company who has entered into
a contract and the other contracting party has refused to perform his duty. It was observed
that before the incorporation the company is not into existence this means that the contract
which the unformed company has signed will not be in existence and in case it is not in 2
existence and therefore the company cannot bring any action for the pre incorporation
contract and the promoter will not bring the suit as they were not the party to contract.

[IA.3] SCOPE OF RAJESH AS A PROMOTER

8. Rajesh has been in a fiduciary responsibility towards the company and hence he is bound to
act and perform all the activities that are within the scope of a promoter. Rajesh being the
promoter will act in good faith towards the company and hence before promising to invest
such an amount in resource planning software he has conducted the concerned research the
viability as well as the future possibilities of an enterprise. Therefore, there are no acts that
Rajesh has conducted beyond his authority and therefore he is not entitled to be sued.

4
Lindsay International Pvt. Ltd. & vs. Laxmi Niwas Mittal & Ors. AIR 2017 C.S. No. 2 of 2017
5
The Specific Relief Act, 1963, § 19(e) Act, No. 47 of 1963
6
Newborne v Sensolid [1954] 1 QB 45
ISSUE I (B) Did Mr. Rajesh act out of his Personal Interest interest?

9. The counsel humbly submits to the National Company Law Tribunal that there is no

reasonable doubt regarding the intentions of Mr. Rajesh while he was acting as the

promoter of the company. This contention is sought to be proved on three grounds namely:

[IB.1]The Conduct of Mr. Rajesh [IB.2], Rajesh act was for the welfare of the

company [IB.3] and Personal Interest of Mr. Rajesh.

[IB.1] THE CONDUCT OF MR. RAJESH

10. Rajesh has carried forward the business of Electronic goods supplier merchant for many
years and hence with all these years of his knowledge and expertise he is at a better position
to manage the business and is well versed with the facts of the business and in a position to
take decisions related to it in an effective as well as efficient manner. While converting the
company from private to public Rajesh has been playing the role of the promoter where he
decided to promise investment in the resource planning software. The company has been
dealing with the supply of electronic goods over a large period of time. Before turning into a
3
public company Rajesh was the sole runner and decision maker of the company and hence
was aware of the changes that the company needed if they grow in such a large scale. The
software Rajesh tends to invest in is an investment for the company that in future will help in
3
managing the business smoothly and in a proper manner. Therefore, being the promoter of
the company Rajesh is bound to take decisions in the good faith of company which lead to
maximisation of the profits and give the company a better shape.

[IB.2] RAJESH ACT WAS FOR THE WELFARE OF THE COMPANY

11. In order to make the working of the company more effective and efficient Rajesh has taken
all the decision in the welfare of the company itself. In accordance to this Section 4(1)(c)7 of
the Companies Act 2013 states that under the memorandum of association the object clause

7
The Companies Act, 2013 § 4(1)(c), Act No. 18 of 2013
 states the objects for which the company has been proposed to be incorporated and any
matter considered in furtherance “any matter in furtherance” means that the matter that
seems to facilitate the business further for the company in order to fulfil its objective.
Therefore the act of Mr. Rajesh to promise to invest in resource planning software was an act
that he undertook as a matter in furtherance to the object of the company. Therefore, making
him act for the good faith of the company.

12. Additionally, Company Act 2013 and SEBI (LODR) Regulations, 2015 states that the
interested director has to be disclosed which will help to hold the board meeting of the
company. It states that the interested director has to be absent on the voting and discussion
from the matters in which he himself is interested at the meetings of the board and he will
not be counted for the quorum while discussion of those matters.

13. This means that even if Mr. Rajesh was one who proposed the idea to investing in the
software developing company has himself no voting rights in the decision being the
independent director. Therefore, even if he did act of his personal interest there was no
provision he had any voting rights or sole decision making authority over the particular
matter.

[IB.3] PERSONAL INTEREST OF MR. RAJESH

14. It has been observed that Mr. Rajesh has been working for the welfare of the company as 4
being the promoter as well as the director of the company. The software has been used as an
facilitation tool for the business which will help the business to grow and maximise the
profits in the future when the business is taking a turn towards expansion. Hence, the actions
and decisions taken by Mr. Rajesh are not in his personal interest but for the better
functioning and future of the company.

ISSUE II(A): Whether the company has acted ultra vires by investing in Apex Limited

15. The counsel humbly submits to the National Company Law Tribunal that there is no

reasonable doubt regarding the legal validity of Skyline & Co Ltd by investing in Apex
 Ltd. All the valid elements of a contract are met and the parties were competent to

contract. These contentions are sought to be proved on three grounds namely:

[IIA.1]Nature of ultra vires acts [IIA.2], Elements of this contract [IIA.3] and

Promoter’s Right to make such Contract

[IIA.1] NATURE OF ULTRA VIRES ACTS

16. The ‘Ultra Vires’, derived from Latin, translates to “beyond the authority”. With respect to
company law, it means that no representative of the company can act outside their role’s
purview or beyond the company’s objective. In India, Section 4(1)(c)8 of the companies Act,
speaks about the scope of objects of the company to be mentioned in the memorandum and
Section 245(1)(b)9 provides for a legal remedy to the members or depositors, to file an
application against the company if they are of an opinion that the company’s actions are
“prejudicial to the interests of the company”, hence prevent the company from committing
an act that is “ultra vires the articles or memorandum of the company.”

[IIA.2] ELEMENTS OF THIS CONTRACT

17. When we observe the terms of this contract, Mr Rajesh, being the promoter, entered into a
contract with Apex Limited, to develop an ‘Enterprise Resource Planning Software’, an 5
asset, for Skyline & Co. Ltd, for which the company would pay them Rs 120 crores. The
promoter is purchasing an asset for the company’s use, with the company’s funds, which
would benefit the company, not Mr. Rajesh in any personal capacity. After the company’s
incorporation, even the board of directors “duly executed” this agreement.
[IIA.3] PROMOTER’S RIGHT TO MAKE SUCH CONTRACT

18. The original agreement between Apex Ltd and Mr Rajesh was a ‘Pre-Incorporation
Contract’, which are valid as per Section 15(h)10 and Section 19(e)11 of the Specific Relief
act, 1963. This contract would be valid if-

1. The contract was made before the incorporation of company

2. After incorporation, the company accepts the contract terms

8
The Companies Act, 2013 § 4(1)(c), Act No. 18 of 2013
9
The Companies Act, 2013 § 245(1)(b) Act No. 18 of 2013
 3. Their acceptance is communicated to the other party.

19. Since all these three elements are met, this Promoter entered into a valid contract. It must be
noted that even though purchasing the ‘ERP Software’ would not have been explicitly
mentioned in the memorandum, it still caters to the object clause of the company, hence
cannot be considered ultra-vires’. The Directors on the board are the representatives of
shareholders, who govern the company’s functioning. If any discrepancy regarding the
authority of the directors to duly execute the contract arises, Section 166(2)12 of companies
Act, highlights the duty of the director to “promote the objects of the company” while acting
in good faith and the company’s best interest. Purchasing an ‘ERP software’, essentially an
asset for better management and optimization of resources would only improve the
company’s Electronic goods providing services.

ISSUE II(B): Validity of this Pre-Incorporation Contract

20. The counsel humbly submits to the National Company Law Tribunal that there was a valid

Pre-Incorporation Contract between the promoter and Apex Ltd, hence the company did
6
not act ultra vires. This contention is sought to be proved on three grounds namely:

Promoter’s role in Pre-Incorporation Contracts [IIB.1], Liability of the Promoter [IIB.2]

and valid contract between Skyline & Co. Ltd and Apex Ltd [IIB.3]

[IIB.1] PROMOTER’S ROLE IN PRE-INCORPORATION CONTRACTS

21. The Specific Relief Act, 1963 recognizes the need of pre-incorporation contracts made by
the promoter and has given him the right and relief to enter into such contracts for the
company’s interest. Such contracts help the company gain value through assets and rights. In
this case, Mr. Rajesh formulated a pre-incorporation contract for developing an ‘ERP
software’, which would boost the company’s operational role.

10
The Specific Relief Act, 1963, § 15(h) Act, No. 47 of 1963
11
The Specific Relief Act, 1963, § 19(e) Act, No. 47 of 1963
12
The Companies Act, 2013 § 4(1)(c), Act No. 18 of 2013
 [IIB.2] LIABILITY OF THE PROMOTER

22. To safeguard a company from any misconduct, the promoters would personally liable for
any loss incurred by the company in case of pre-incorporation contracts. Such contracts are
only valid when they executed by the company. Had Mr. Rajesh enter into this contract and
the company decided not to execute it, he would be personally liable. Since the company
executed this contract, by accepting the asset, ‘ERP software’ in exchange of Rs 120 Crores,
Mr. Rajesh’s liability in this contract extinguishes.
23. To further support Mr. Rajesh’s action, in Jai Narayan Parasrampuria v. Pushpa Devi
Saraf13, the court held that even if such contracts are not mentioned in the articles of the
company and the company accepts the ownership of the property (asset), then the transaction
would be considered valid. In our case, Skyline & Co. ltd.’s board of directors readily
accepted the contract.

24. In another case of Lindsay International Pvt. Ltd. vs  Laxmi Niwas Mittal & Ors14, it was
held that even oral pre-incorporation agreements could be valid, after considering the
“conduct and course of dealings” of the parties. Hence, even if Mr. Rajesh had made an oral
promise to Apex Ltd, it would be held valid as Skyline & Co. ltd. executed the contract.
25. It must also be mentioned that Mr. Rajesh did not abuse his authority of the promoter, he is
just a 20% owner of the company, the contract was executed by the “board of directors”, not
7
just Mr. Rajesh. Hence, this decision to invest in Apex Ltd. was not a “unilateral decision”.

[IIB.3] VALID CONTRACT BETWEEN SKYLINE & CO. LTD AND APEX LTD

26. After analysing the legislation, case laws and examining the case facts, it is observed that
there is no ambiguity with respect to this contract and it is not ultra vires. Mr. Rajesh had the
authority to enter into this contract and had acted in the company’s interest.

13
Jai Narayan Parasrampuria v. Pushpa Devi Saraf AIR 1999 C.A. 3801
14
Lindsay International Pvt. Ltd. & vs. Laxmi Niwas Mittal & Ors. AIR 2017 C.S. No. 2 of 2017
 Prayer of the Respondent

8
Wherefore, in light of the Facts stated, Arguments advanced and Authorities cited, it is

humbly prayed before the National Company Law Tribunal to adjudge and declare that:

a. TO DECLARE that Mr. Rajesh acted in his professional capacity as the promoter, hence

cannot be sued by the shareholders.

b. TO HOLD the Investment by Skyline and Co. Ltd. in Apex Ltd. as valid and not ultra

vires in any capacity.

AND/OR

Pass any other order, direction or relief that this Hon’ble Court may deem fit in the

interest of Justice, Equity, and Good Conscience.

All of which is respectfully submitted.

Sd/-

(COUNSELS ON BEHALF OF THE RESPONDENTS)