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MOOT PROBLEM
IN THE SUPREME COURT OF INASIA
(I) SECURITIES AND EXCHANGE BOARD OF INASIA
v.
LANNISTER MEDILIFE LTD.
[SAT APPEAL NO. 8 OF 2016]
ALONG WITH
(II) DINKLAGE OIL CO. LTD.
v.
LANNISTER MEDILIFE LTD. & ORS.
[SLP (C) 2141 OF 2016]
ALONG WITH
(III) MR. JOHN SNOW
v.
(CHIEF JUSTICE (RETD.) X
CONNECTED WITH
COURT ON ITS OWN MOTION
v.
MR. JOHN SNOW
1. In 1981, Dr. Peter Lannister set up the Lannister Medilife Ltd. (LML) in the Republic
of Inasia. LML was engaged in the research on life sciences, production, manufacture
and supply of various speciality chemicals, medicines and drugs, most notably the
drug named Xenofar widely used for treatment of kidney cancer. Dr. Lannister also
held patent for many other medicines, which he marketed through his company. Over
the years LML has become a leading life sciences and speciality chemicals company
in Inasia. Clegane Chemicals Ltd. (CGL) set up in 1990, is also a leading speciality
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chemicals company in Inasia. Its promoters are the Bolton Group. However, by 2011,
CGLs hold on the market began to gradually decrease. CGLs management was keen
on reviving its prospects. They subsequently entered into talks with LML.
2. Following extensive consultations between CGL and LML in 2012, it was decided
that LML will make a substantial investment in CGL. As to what will be the nature
and mode of investment, no announcement was made. On 06th May 2013, the
shareholders of CGL passed a special resolution under Section 81 (1A) of the
Companies Act, 1956 in the Extraordinary General Meeting authorising allotment of
shares. On July 04, 2013, the Board of Directors of CGL in their meeting issued and
allotted 66, 75,000 fully paid up shares of Rs. 10 each on preferential basis
representing 19.96 per cent of the equity share capital of CGL for cash at a price of
Rs. 84/- per share, (including a premium of Rs. 74 per share) aggregating to Rs. 56,
07, 00,000/- LML was allotted shares representing 18.21 per cent of the post
preferential issue of equity capital. On the same day, i.e. 04th July 2013, a Share
Subscription and Shareholders Agreement was executed between LML, the Bolton
Group and CGL. (The Agreement). This agreement governs the investments of
LML in CGL. The details of this Agreement are provided in Annexure-I.
3. In April-May 2013, around the time when the LML-CGL deal was being finalised,
CGL had entered into a long term supply contract with Dinklage Oil Company Ltd.
(DOCL), which is the largest oil and gas company in Inasia. Under the terms of the
said contract, effective from September 2013, DOCL will supply ethylene to CGLs
site at Lugash in Inasia. This supply contract had an arbitration clause, which read as
follows:
Cl. 21.4- Arbitration
All disputes arising under this agreement, which cannot be resolved by
mediation between the parties in 30 days, shall be resolved by final and binding
arbitration by the Lugash Chamber of Commerce. The place of arbitration shall
be Lugash City in Inasia.
4. Earlier, in 2012, LML attempted to enter into a similar agreement with DOCL but that
did not materialise. The talks between LML and DOCL did not end on a positive note
in 2012. The Board of Directors of DOCL expressed some concerns about LML
acquiring shares in CGL and requested Mr. Percy Dinklage, CEO of DOCL to have
talks with LML to avoid any unnecessary interference by LML in the deal. Mr.
Dinklage met the directors of LML towards the end of July. Later in August 2013, in
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seeking a declaration that the said MOU is void. In the plaint it was specifically
alleged that Mr. Charleston was authorised to only conduct discussions and not to sign
any agreements without the concurrence of the Chairman and the Board of Directors.
Further, it was averred that the defendants (LML, CGL and Mr. Charleston) have
connived together to write off Rs. 109 Crores due to DOCL under the Supply
Agreement, thereby defrauding the plaintiff (DOCL) of its rightful and admitted dues
and causing wrongful loss to the plaintiff and wrongful gain to themselves. DOCL
also filed a petition for temporary injunction. In their counter-affidavit to the petition
for temporary injunction, LML and CGL alleged that the suit is a collusive suit
between the plaintiff and Mr. Charleston to dodge the payment of Rs. 60 Crores
demanded for the breach of earlier contractual obligations. They also pointed out the
arbitration clause in the MOU and requested the Court to direct the parties to
arbitration in terms of the MOU in accordance with Section 8 of the Arbitration and
Conciliation Act, 1996. Mr. Charleston denied the plaint averments and contended
that he had specific authority to sign the MOU in issue. The plaintiff opposed the
Section 8 application on the ground that claims involving serious allegations of fraud
cannot be referred to arbitration.
10. The suit was listed for hearing on the Section 8 application on October 19, 2015.
However, on the said date, the case could not be heard. The case was next posted for
hearing on November 04, 2015. In between the two dates, the Parliament passed the
Arbitration and Conciliation (Amendment) Ordinance, 2015 on October 23, 2015.
The Court heard the case on November 04, 2015. In its judgment dated November 26,
2015, the Court allowed the Section 8 application and referred the parties to
arbitration. The Courts reasoning was that Section 26 of the Amendment Ordinance
applied retrospectively, and the amended Section 8 applied in the instant case, which
enables the Court to refer claims involving fraud to arbitration. This finding is
challenged before the Supreme Court by DOCL in SLP (C) 2141 of 2016. In the
meantime, the Ordinance has become an Act of Parliament and received Presidential
Assent.
11. Mr. John Snow is a respected Senior Advocate of the Supreme Court of Inasia and a
former Law Minister of Inasia. He was instructed to appear for SEBI in its case
against LML in the Supreme Court. In April 2016, he wrote an article titled: Inasian
Judiciary: On its Path to Entropy, the excerpts of which are as under:
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The inefficiency on the bench is really shocking. The judiciary in Inasia has deteriorated in
its standards because such Judges are appointed, as are willing to be influenced by lavish
parties and whisky bottles. There are 4-5 Judges who are practically out every evening,
wining and dining either at a lawyers house or Government houses. No wonder why it is
said: Post-retirement jobs are secured by pre-retirement judgments.
A little later in the said article:
Many Judges, it seems, have forgotten their oath of office. Most Inasian Supreme Court
Judges live in a dream world of their own. There are rhetoric passages in a number of
judgments as to the intellectual and moral qualities which judges should possess and, by
implication, most of them do possess. In my respectful view, it is necessary to point out this
picture of qualities and character possessed by most Judges and the further view that all
Judges are men of integrity and are incorruptible is not justified by matters on record.
In a later paragraph, it was stated:
.... Here, I must make some comment about the impropriety of retired Chief Justice X, about
whose competence and ability, I wish to say nothing. His so-called landmark order to stop
the setting up of a chemical process plant by ARC (another leading chemical company) near
the Lugash Sea was clearly actuated by mala fides. In January, when SEBIs appeal against
LML came up, he refused SEBI to bring certain correspondences on record, later once the
case was listed for final hearing, His Lordship was very keen to hear the case out of turn.
With regret, I have now realized that there is more to it than what met the eye on both
occasions. His nephew, as is widely known, is the CEO of Todd Corporation Ltd., which has
many supply agreements with LML (a known rival of ARC, particularly in the Lugash
market) and is also believed to have played a role in LMLs investment with CGL.
All this doesnt present a happy picture of the judiciary in Inasia. Do you keep everything
under the carpet until all that is under the carpet suddenly blows up in your face? Or do you
dare to expose it? The choice is yours to rescue from the entropy.
....Fortunately, there are few bright spots and that could be the reason why the Inasian
judiciary is still surviving. May their tribe increase.
12. Chief Justice X refused to comment on the allegations. On May 05, 2016, Justice X
filed a criminal contempt case against Mr. Snow under Sections 499 and 500 of the
IPC. Summons was issued to Mr. Snow. On the same day, the Supreme Court suo
motu initiated contempt proceedings against Mr. Snow under Section 2(c) of the
Contempt of Courts Act, 1971. Mr. Snow refused to tender an apology. Mr. Snow has
challenged the issue of summons under Article 32 of the Constitution of Inasia.
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Preliminary objection in this regard has been waived by the defendants. During the
hearing, a question arose as to whether there can be simultaneous proceedings for
criminal defamation and criminal contempt. That issue was referred to a larger bench.
While appearing in the criminal contempt proceeding initiated against him, Mr. Snow
has also challenged the validity of Section 2 (c) (i) of the Contempt of Courts Act,
1971 as violative of Articles 14 & 19 (1) (a) of the Inasian Constitution.
13. Considering the nature of issues involved, the Chief Justice of Inasia constituted a
special bench of 3 Judges to hear all these cases. All three cases, viz. SAT appeal,
appeal against the decision of the High Court of Lugash in the Section 8 application
and the contempt cases are posted for hearing on 10th September 2016.
14. In the SAT appeal, the following issue arises for consideration:
(i)
Whether the Annexure-I agreement gives to LML control over the target
company, viz. CGL?
(ii)
15. In SLP (C) 2141 of 2016, the following issues arise for consideration:
(i)
(ii)
Irrespective of answer to (i), can the Court refer the parties to arbitration under
Section 8 of the Arbitration and Conciliation Act, 1996, when claims involve
serious allegations of fraud?
16. In the Contempt related cases, the following issues arise for consideration:
(i)
(ii)
Is Section 2 (c) (i) of the Contempt of Courts Act, 1971 constitutionally valid?
17. The laws of Inasia are in pari materia to the laws of Republic of India except for the
omission of Article 141 of the Indian Constitution in the Inasian Constitution.
-
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ANNEXURE-I
SHARE SUBSCRIPTION AND SHAREHOLDERS AGREEMENT BETWEEN LML
AND CGL
3.2 (c)- APPOINTMENT OF LMLS NOMINEES
The Board of Directors of CGL shall consist of 12 directors including two nominee directors
of LML. Such nominee directors need not necessarily be mutually agreeable persons.
4.1- COVENANTS
Upon consummation of the actual investment by LML into CGL, the latter shall not deviate
from the basis on which the decision to invest has been made.
In case of vital management decisions likely to affect both parties, LML may exercise its veto
powers.
9. PROTECTIVE PROVISIONS
The parties hereby agree that until such time as LMLs shareholding in the CGL (in this
clause used interchangeably with Company) does not fall beyond 10% of the paid equity
share capital of CGL, the affirmative vote of the Investor Director shall be required in a
meeting of the Board of Directors or any Committee thereof in respect of any of the
following matters:
(a) Any amendment of the Memorandum/Articles of the Company;
(b) Any consolidation, subdivision or alteration of any rights attached to any share capital
of the Company and any of its subsidiaries, any capital calls on shareholders;
(c) Any redemption, retirement, purchase or other acquisition by the Company of any
Shares of the Company;
(d) Approval of annual business plans and any deviations, revisions there from;
(e) The making of any loan or advance by the Company to any Shareholder, or any third
party, or the entry by the Company into any guaranty, indemnity or surety contract or
any contract of a similar nature in favour or for the benefit of any shareholder or any
third party outside the ordinary course of business, of a value in excess of Rupees
Three Crores;
(f) The acquisition by the Company through subscription, purchase or otherwise, of the
securities of any other body corporate;
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(g) To create any lien or to lease, mortgage, charge, pledge, licence any assets, rights,
titles, intellectual property etc. of the Company or its Subsidiaries valued in excess of
5% of the net worth of the company;
(h) The conduct by the Company of any business other than the business and/or the
acquisition of any assets not related to the Business;
(i) Any amalgamation, splitting, reorganization or consolidation of the Company;
(j) To alter the composition and strength of the Board or to delegate the authority or any
of the powers of the Board to any individual or Committee;
(k) The winding up, liquidation or dissolution of the Company;
(l) The incurrence of indebtedness in the Company in excess of 5% of the net worth of
the Company other than as approved in the Annual Business Plan;
(m) Any capital expenditures in excess of 5% of the net worth other than as approved in
the Annual Business Plan;
(n) The appointment of key officials of the Company e.g. COO, CEO, CFO, CS or of
equivalent designation and the determination of their remuneration and powers;
[Up to 2 of such appointments shall be acceptable to LML and LML shall have the
right to reasonably refuse any such appointment in its own discretion]
(o) Any authorization, creation, grant, issue, allotment, redemption of any Shares or
convertible instruments of any class, debentures or warrants, grants, options over
shares etc. ;
(p) Any strategic alliance/joint ventures to be entered into by the Company;
(q) Approval of annual financial statements, distribution of profits and coverage of losses
of the Company and its Subsidiaries;
(r) Transactions with affiliates;
(s) [The decisions relating to the Supply Agreement with DOCL including the right to
recommend the termination of the agreement on reasonable grounds.
Any such decision shall not prejudice the rights of Stark Oil and Gas Company under
its Supply Agreement with LML]
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