1

Company Law – I
Instructor: Prof. Anindita Jaiswal Jaishiv
Client Memo Writing Assignment

Prathik H Kumar
18010792
BA/LLB Sec ‘A’
 2

A)

To: Anita, Basit, Kapil and Basit

From: Prathik H Kumar, attorney

Subject: recommendations regarding the incorporation of the firm operated by Anita and Basit

Date: 16-10-2020

On the 9th of October 2020, the four of you approached at my offices in order to obtain a legal
opinion and recommendation as to the best means and form into which to incorporate the presently
unregistered partnership firm operated by Anita and Basit. In the following memo I have outlined
the facts of the matter as they were presented to me by the four of you, the crux of your objectives
based on those facts and my analysis and recommendations to best accomplish them

Facts:

Anita and Basit are siblings who operated an unregistered partnership firm; through a tender
application this firm has recently acquired a 10-year contract for the manufacture and purchase of
certain munitions from the defence procurement division of Ministry for Defence; in order to fulfil
this tender, Anita and Basit require an influx of capital for which they have secured loans amounting
to INR 40 Lakhs from ABI bank against certain assets of the company and INR 10 Lakhs from friends
and family in unsecured loans. Kapil and Rati are two investors who are willing to invest in the firm
but are looking to limit their liability as they will not be involved in the management of the firm,
further they wish to ensure an exit option for themselves from any incorporated entity that does not
require the approval of Anita or Basit.

Issues:

What is the optimum form of business that the firm of Anita and Basit can incorporate into that
secures the interests of all four parties?

Brief answer:

It is recommended that the firm incorporate into a Private Limited company limited by shares under
the Companies Act, 2013;1 with certain provisions in the memorandum and articles of association
safeguarding the exit options of Kapil and Rati.

Analysis:

The requirements of the clients in this case are limited liability and the transferability of shares. A
Private limited company limited by shares is the best form into which to incorporate to achieve
these ends. A private limited company not only limits the liability of Kapil and Rati but also that of
Anita and Basit solely to extent of their invested capital; this is a well established principle of law
1
The Companies Act, 2013
 3

with regard to the structure and nature of corporation as a separate legal entity and is codified
within the companies act itself. The sole potential issue with this structure is the limit it places on
the transferability of shares, normally subjecting transfer to approval by other shareholders or the
management of the company; this however can be circumvented by including a clause in the articles
of association allowing Kapil and Rati to freely transfer their shares to any third party without having
to acquire such approval pursuant to certain requirements mandated by the Act. To form a Private
limited company, the existing firm will have to register with the registrar of companies by following
the procedure and adhering to the requirements detailed in Sec 7 of the Companies Act.

Conclusion:

It is recommended that the clients structure their new enterprise as a private limited liability
company and incorporate the exit option desired by Kapil and Rati into the terms memorandum of
association.
 4

B)

To: Anita and Basit

From: Prathik H Kumar, Attorney

Subject: reply to questions on the issue of liability

Date: 24-11-2022

I was approached by the two of you last week seeking a consultation with regard to certain
questions about your personal liability in matters pertaining to the debts of the incorporated form of
your former partnership firm, now the private company ‘A-B Munitions supply Pvt.ltd’ following its
incorporation two years ago. The following is my reply on the matter after an examination of the law
as it stands.

Facts:

ABI Bank has sought the liquidation of the company for non-repayment of the loan of 40 Lakhs it
made two years ago against the collateral of certain assets; the company issued secured debentures
against its assets to Anita for an infusion of capital. Pursuant to these events, the friends and family
who lent money to the company on the basis of goodwill and the word of the two of you are seeking
to pierce the corporate veil and seek repayment of their loans prior to the debentures issued to
Anita and attach the personal property of the two of you on the basis that the company is an alter
ego of the two of you in the event of a liquidation.

Issues:

1) Can the corporate veil be pierced, and the personal assets of the promoters be attached in
such a situation?
2) What is status of the various debts incurred by the company?

Brief Reply:

Should liquidation proceedings be initiated the corporate veil will not be pierced and the two of you
will not be held personally liable for the debts of the company; further Anita’s debentures will be
paid off prior to the unsecured loans made by your friends and family.

Analysis:

The principle of a separate legal personality of companies is well established and was settled in a
case with very similar circumstances to your own in the matter of Solomon v Solomon2 as such there
is no question of your personal assets becoming attached or the corporate veil being pierced.
2
Salomon v A Salomon & Co Ltd UKHL 1, AC 22
 5

As for the various debts of the company, they will be settled as per the procedure established by law
by the appointed liquidator of the company; but it is well established that secured debts take
precedence over unsecured ones and in all likelihood ABI Bank’s loan and Anita’s debentures will be
paid off by the liquidation of the assets they are secured against and any remaining amount
following the repayment of the loan and debentures will be used to service the unsecured loans and
outstanding dues of the company.

Conclusion:

There is no question of the corporate veil being pierced in this scenario and the personal assets of
Anita and Basit are safe from litigiation with regard to the debts of the company; further Anita’s
debentures and ABI’s loan will be paid off and settled prior to the unsecured loans of provided by
friends and family in the event of liquidation.
 6

C)

To: Accurate bullet

From: Prathik H Kumar, attorney

Subject: reply to questions on the proposed Acquisition

Date: 12-1-2023

Following my consultation with representatives of your company on the matter of the proposed
acquisition of ‘A-B Munitions Pvt.Ltd’ I have reviewed the existing law on such acquisitions and the
following memo details my recommendations on this acquisition.

Facts:

The Canadian Defence company “accurate bullet” wishes to acquire the Indian munitions company
‘A-B Munitions Pvt.Ltd’. a large part of the $ 100 million valuation demanded by the Indian company
is premised on the value of the government tender it holds

Issues:

1) Is a government tender of this nature transferable by acquisition?

2) Can a foreign corporation own 100% of an Indian defence company?

Brief answer:

1) Yes, such a tender is transferable

2) Yes, subject to a national security clause per changes in the Foreign direct investment policy
instituted in 2020

Analysis:

In the case of the State of Rajasthan v Gotan Lime stone3; the supreme court held that the
acquisition of and transfer of ownership and share interest was an inevitable part of business and
economic activity; the court ruled that such transfers of ownership do not affect or dissolve the
contractual obligations of companies so long as they continue to operate; to infer otherwise would
amount to cancellation of contracts anytime there was a change in the shareholding pattern,
throttling business activity and rendering the entire purpose behind concept of a limited liability
company redundant. As such the tender in question is transferable and its value is a reasonable basis
on which to determine the value of a company.

3
State Of Rajasthan And Ors vs Gotan Lime Stone Khanij Udyog 2016, 72 (SC)
 7

Per changes to the defence amendment procedure and notifications passed under the Foreign
exchange management Act4, foreign companies can own 100% of Indian defence manufacturers
subject to government approval and 74% via the automatic route subject to a national security
clause. Should accurate bullet wish to acquire 100% of the company they will need to acquire
government approval via the usual procedures or alternatively they can limit themselves to a
purchase of a 74% controlling interest in A-B munitions.

Conclusion:

The tender in question will remain with A-B munitions following an acquisition and as such can be
used in the valuation of the company; should Accurate bullet wish to purchase 100% of the company
they will need to seek government approval per the regular FDI procedures.

D)

To: A-B Munitions Pvt.Ltd

4
Rbi.org.in, foreign exchange management Act notification
 8

From: Prathik H Kumar, attorney

Subject: transfer of registered office

Date: 28-3-2023

Following our consultation on the matter of transferring the registered office of A-B munitions; I
have examined the requirements per the statute books and the following is my recommendation.

Facts:

As a condition precedent to the acquisiton of A-B Munitions by Accurate Bullet, Accurate bullet has
demanded that the registered office of A-B Munitions be relocated Gujarat in order to be closer to
their subsidiary already premised there.

Issues:

Can the location of a registered office of a company be transferred across states? And if yes what is
the procedure for doing so?

Brief answer:

Yes, the registered office of a company can be transferred across states subject to approval by the
central government. The procedure to do so is detailed in Sec 13 of the companies Act.

Analysis:

In order to transfer the registered office of a company to a different state; the company must first
pass a special resolution under Sec 13 (1) altering its memorandum of association to reflect the
same. Transfer of the registered office to another state requires the approval of the central
government per sec 13 (4) and the company must file an application with the central government
seeking it. The central government is required to dispose of this application within a period of 60
days per Sec 13 (5), and during this period and before passing its order may satisfy itself that this
alteration has the consent of all the creditors and debt holders of the company and that sufficient
provision has been made for the discharge of these obligations, failing which the government may
deny the application. Should the application be granted and the changes to the memorandum
approved; the company must file the special resolution passed by the company with the registrar
and per Sec 13 (6) along with a certified copy of the application approved by central government
with both the registrar of the state where the company is presently located and the registrar of the
state it is being shifted to.

Conclusion: It is recommended that A-B munitions consult, settle issues with and structure a
payment plan with their existing creditors prior to attempting to transfer their registered office;
following the creation of a payment plan they may proceed to seek a transfer of their registered
office per the procedure detailed in the analysis section.
 9

E)

To: Accurate Bullet

 10

From: Prathik H Kumar, attorney

Subject: Subsidiary structuring

Date: 15-8-2023

Following my discussion with the representatives of your company regarding their concerns over the
structuring of a subsidiary company; I have drawn up the following memo detailing the law on
subsidiary companies and my recommendations with regard to the type of structure you wish to
employ.

Facts:

After the acquisition of A-B Munitions and the subsequent transfer of its registered office to the
state of Gujarat; concerns have arisen about the need for a second shareholder and the implications
of retaining A-B munitions a wholly owned subsidiary.

Issues:

1) Is there a need or benefit to permitting a second shareholder in A-B Munitions?

2) What are the potential consequences of retaining it as a wholly owned subsidiary?

Brief Answer:

1) There is not any strictly legal or compliance-based benefit to bringing on a second

shareholder. whether there is any business benefit to a joint venture is best determined by
your own internal calculus.
2) If the parent company is not careful to maintain the separate entity of the subsidiary; the
corporate veil could be pierced, and the parent company made liable in suits brought against
the subsidiary.

Analysis:

So long as the fidelity and independent operation of the subsidiary company is maintained; the
parent company can exercise considerable strategic oversight and co-ordination with the subsidiary;
alternatively a second shareholder could be brought on to leverage the benefits of synergies with
them, it is purely a business decision on that front. If however a parent company was to interfere in
the operations of a wholly owned subsidiary too much that the affairs of the two companies become
intricately bound, as in the case of smart chip v secretary5; the corporate veil may be pierced as the
two companies can no longer be meaningfully distinguished from one another. So long as the wholly
owned subsidiary maintains a broad independence from the parent and has its own distinct
competence and primary activities distinguishable from that of the parent there are no dangers to
maintaining a wholly owned subsidiary.

5
M/S. Smart Chip Ltd vs The Secretary To Government, 2017
 11

Conclusion:

So long as Accurate Bullet maintains the independent identity of A-B Munitions as a subsidiary; it is
completely at their discretion whether to retain it as a wholly owned subsidiary or to bring on other
partners subject to their business interests.