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 APPELLANTS

TABLE OF CONTENT

LIST OF ABBREVIATIONS....................................................................................................II
INDEX OF AUTHORITIES....................................................................................................IV

STATEMENT OF JURISDICTION........................................................................................XI
QUESTIONS PRESENTED..................................................................................................XII
STATEMENT OF FACTS.....................................................................................................XIII
SUMMARY OF PLEADINGS..........................................................................................XVIII
PLEADINGS..............................................................................................................................1
A. The Investment is not valid in law....................................................................................1
[I] Investment made in optionally convertible debt is not within the ambit of Portfolio
Investment Scheme............................................................................................................1
[II] Investment does not fall within the ambit of FDI Scheme..........................................1
B. The matter cannot be referred to arbitration......................................................................3
[I] The matter doesnt fall within the purview of arbitration clause..................................3
[II] The CLB/ Court alone has the jurisdiction to entertain the instant case......................3
(i) CLB/Court has exclusive jurisdiction under sections 397/398.................................3
(ii) The powers of CLB/ Court are wider under Sections 397/398 than that of an
arbitrator.........................................................................................................................4
(iv) There is no commonality of parties.........................................................................5
C. The acts of majority of shareholders constitute oppression and mismanagement............7
[I] The termination of the investment agreement...............................................................7
(i) Transfer of debt is in clear contravention with the terms of constitution of Flume
and Nurture.....................................................................................................................8
(ii) Transfer of debt required permission of RBI which was not obtained by investors 8
(iii) Transfer of debt was not in accordance with the AoA of Flyabhi.com...................9
(iv) The conversion of debt into shares was not valid..................................................10
[II] The amendments to the articles of association..........................................................10
(i) Amendment breaches an obligation with the founders...........................................10
(ii) Amendment is done solely to oppress minority and to violate the agreement.......11
[III] The removal of the Appellants from the Board of Directors....................................12
2

(i) Removal of founders is violative of investment agreement and AoA.....................12

(ii) The EGM in which the removal took place was invalid........................................13
(iii) There was no special notice served to the founders before removal.....................14
[IV] The appointment of Mr. Arjun Iyer as the CEO and the loan from Arcot, Smith and
Brown...............................................................................................................................14
(i) The appointment and the loan is violative of the investment agreement and AoA. 14
(ii) Arjun Iyer could not have been given Class A equity stake without the consent of
the founders..................................................................................................................15
[V] Hampering the doctrine of legitimate expectation conclusively proving oppression15
D. The Scheme of Arrangement and the Notice are not valid..............................................17
[I] Prior Written Approval of RBI was Not Obtained......................................................17
[II] Procedural Compliance U/S. 232 r/w 230 of the Act has not been met with...........17
(i) Courts directions were not obtained for conducting the meeting of members.......17
(ii) Holding of meeting cannot be dispensed with.......................................................18
(iii) Consent letter cannot substitute class meeting......................................................19
(iv) Class A has not been fairly represented.................................................................19
[III] Scheme and Notice are not fair and reasonable........................................................20
PRAYER FOR RELIEF.........................................................................................................XX

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

3

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

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

4

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
INDEX OF AUTHORITIES

INDIAN JUDGEMENTS:
CASE
Ansys Software P. Ltd., Re.

CITATION

PAGE NO.

(2004) 122 Com Cases

20
5

526
Atmaram Modi v. ECL Agrotech Ltd.

(1994) 4 Comp LJ 379

13

(CLB)
B V Gupta v. Bangalore Plastics.

CA No. 1676/1981

19

decided on 19-08-1981
Bedrock Ltd., In re.

(1998) 17 SCL 385

20

(Bom)
Bhadresh

Kantilal

Shah

v.

Magotteaux

International.
Bihari Mills Ltd., In re.

(2002) 36 CLA 76

(CLB)
(1985) 58 Com Cases 6

20

(Guj)
Biswanath v. New Central Jute Mills Co. Ltd.

(1961) 31 Com Cases

13

125 (Cal)
C.G. Therbor v. Union of India.

AIR 1968 Del 292

Richardson & Cruddas Ltd. v. Haridas Mundra.

AIR 1959 Cal 695

(1973) 88 ITR 429 (SC)

(2005) 1 SCC 212

(2009) 147 Com Cases

CWT v. Spencer.
Dale and Carrington Investment (P) Ltd. and Anr.
v. P.K. Prathapan and Ors.
Das Lagerway Wind Turbines Ltd. v. Cynosure
Investments Pvt. Limited.
DGIR v. Deepak Fertilizers.

149 (Mad)
(1996) 81 Com Cases

341
Dr. G.L. Purohit v. Dr. S.S. Agarwal & Ors.

(2011) 163 Com Cases

205 (CLB)
G.E Capital Transportation Financial Services
Ltd. Re.
In re. Emgee Housing (P.) Ltd.

(2009) 149 Com Cases

19

52
(2013) 114 CLA 416

(CLB)
LMN India Ltd., In Re.

AAR No. 769 of 2007

Manavendra Chitnis v. Leela Chitnis Studios.

(1985) Com Cases 113

Matrubhumi Printing & Publishing Co. Ltd. v.

(1992) 73 Com Cases

11

Vardhaman Publishers Ltd.

80 (Ker)
6

Mazda Theatres P. Ltd. v. New Bank of India Ltd.

Miheer H. Mafatlal v. Mafatlal Industries Ltd.

ILR (1975) 1 Delhi

19

(1996) 87 Com Cases

21

792 (SC)
Miss Varsha Ben S. Trivedi v. Sadguru Switch
Gears P. Ltd.

(2013) 116 CLA 153

14

(CLB)

Naginder Singh Shiena v. R.S. Infrastructures Pvt.

Ltd.

(2007) 139 Com Cases

14

246 (CLB)

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

(1981) 3 SCR 698

(1977) 47 Com Cases

Industries Newey (India) Holding Ltd. and Ors.

O.P. Gupta v. Sfflv General Finance (P) Ltd. &
Ors.

279 (Delhi)

Pearson Education Inc. v. Prentice-Hall of India P.

Ltd.

(2004) 56 SCL 365

10

(CLB)

Queens Kuries and Loans Pvt. Ltd v. Sheena Jose.

(1993) 76 Com Cases

14

821 (Ker.)
Rakesh Malhotra v. Rajinder Kumar Malhotra.

(2015) 127 CLA 140

(Bom)
S.M. Holding Finance P. Ltd. v. Mysore
Machinery Manufacturers Ltd.
Sanghram

Singh

P. Gaekwad

(1993) 78 Com Cases

19

432 (Kar)
&

Ors.

v.

AIR 2005 SC 809

10

Shailesh v. Matushree Textiles Ltd.

AIR 1994 Bom 20

13

Shanti Prasad Jain v. Kalinga Tubes Ltd.

AIR 1965 SC 1535

16

(2008) 142 Com Cases

Shantadevi P. Gaekwad.

Shri V.S. Krishnan & Ors. v. Westfort Hi-tech

Hospital Ltd. & Ors.
Smt. Sudershan Chopra v. CLB.

235 (SC)
(2004) 60 CLA 214

(P&H)
Sporting Pastime (India) Ltd. v. Kasthuri & Sons
Ltd.
Sukanya Holdings (P.) Ltd. v. Jayesh H. Pandya.
Tarlok Chand Khanna v. Raj Kapoor.

(2007) 81 CLA 208

(Mad)
(2003) 5 SCC 531

(1983) 54 Com Cases

14, 16

12, 28 (Del.)
Vimal Chand Ghevarchand Jain and Ors. v.

2009 (5) SCALE 59

9
7

Ramakant Eknath Jajoo.

Viswanathan (S.) v. East India Distilleries and
Sugar Factories Ltd.

(1957) 27 Com Cases

21

175

FOREIGN JUDGEMENTS:
CASE

CITATION

PAGE NO.

Allen v. Gold Reefs.

(1900) 1 Ch 656

12

Baily v. British Equitable Assurance Co. Ltd.

(1901) 1 Ch 374

10

British Murrac Syndicate Ltd. v. Alperton Rubber

(1915) 2 Ch 186

11

(1987) Ch 1

11

328 N E 2d 505, 515

13

(1952) SC 49

16

71 E.R. 361

10

(1954) SC 381

16

Hume v. Rundell.

57 ER 311

In re H.R Harmer.

(1958) 3 All ER 689

11

In re. Saul D. Harrison & Sons.

(1994) BCC 475

16

Kaye v. Croydon Tramways Co.

(1898) 1 Ch 358 (CA)

13

(1894) 11 TLR 407

(1920) 1 Ch 77

10

(1903) 2 Ch. 506

10

Read v. Astoria Garage (Streatham) Ltd.

(1952) 2 All ER 292

Scottish Co-operative Wholesale Society Ltd. v.

(1958) 3 All ER 56

16

Shuttle Worth v. Cox Brothers & Co.

(1897) 2 KB 9

12

Southern Foundries Ltd v. Shirlaw.

(1940) AC 701

12

Co. Ltd.
Cumbrian Newspapers Group Ltd. v. Cumberland
& Westmorland Herald Newspaper & Printing
Co. Ltd.
Donahue v. Rodd Electrotype Co.
Elder v. Eider and Watson.
Fraser v. Whalley.
George Meyer v. Scottish Co-operative Wholesale
Society Ltd.

Mell v. Atlanta.
Piercy v. S. Mills & Co.
Punt v. Symons.

Meyer.

STATUTES AND CONSTITUTIONS REFERRED:

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.
The Sale of Goods Act, 1930.

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)
DAVID ST. JOHN SUTTON, RUSSELL ON ARBITRATION (22ND ED., 1997)
HALSBURY LAWS OF ENGLAND (4TH ED., 2007)
H.G BEALE, CHITTY ON CONTRACTS (21ST

ED.,

1994)

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)
TAXMANN, COMPANY LAW, (3RD ED., 2014)

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)

10

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.

11

QUESTIONS PRESENTED
The following questions are presented before the Honorable Supreme Court of India:
A. WHETHER THE INVESTMENT IS VALID IN LAW.
B. WHETHER THE MATTER SHALL BE REFERRED TO SIAC ARBITRATION IN SINGAPORE.
C. WHETHER THE ACTS OF THE MAJORITY OF SHAREHOLDERS CONSTITUTED OPPRESSION AND
MISMANAGEMENT.

D. WHETHER

THE SCHEME OF ARRANGEMENT AND THE NOTICE UNDER

SECTION 235(1)

ARE

VALID.

12

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. For the same purpose, 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 of them owning 50% of the Rs 2,000,000 invested as initial share
capital.
THE INVESTMENT
2. After this, 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 invested 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 the 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
were assured by BESTCO, a prominent law firm primarily representing investors in Indian
start ups.
THE INVESTMENT AGREEMENT
4. The founders, Abhijit and Piyush, and the investors, Flume and Nurture, and the company
represented by Ms. Iyer 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 all key management personnel (Clause 6.1.4), consent of
13

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 atleast 10% of shareholding in the
company.(Clause 6.1.7).
5. Further, all the rights 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. By a majority
vote, need for an experienced CEO was felt, and in pursuance of it Mr. Arjun Iyer was
appointed as the CEO and was given 5% Class A equity stake (same class as the founders) 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. He 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.
7. The founders however did not see any value in such expensive hire and voted against the
same at the meeting. The company faced unexpected competition from Airavata, to deal with
which Arjun Iyer presented a financing plan and set about on an international road show to
raise 500 Crores, which however did not fructify. Piyush, willing to provide equity,
convertible debt or even bridge finance on preferential terms was once again stopped by the
investors and their nominee directors.
8. Though BESTCO advised the investors that they had the right as per the Agreement and
the articles to make further investment in equity and debt, yet the board approved, by a
majority vote (the founders dissenting), a financing arrangement with Arcot, Smith & Brown
Limited, a 100 year old listed Indian NBFC and an affiliate of the two angel investors to
14

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.
THE NOVATION
9. On July 21, 2012, Flume and Nurture novated the investment agreement to over 20 of their
affiliates as they had reached the end of the investment term and as per terms of their
constitution were required to liquidate and distribute all their assets to their investors. The
founders were extremely concerned that the relationship with the angel investors was now
virtually over and they now had to deal with over 20 investors who didn't know them, their
business and their journey at all. BESTCO provided an opinion to the company that the
novation was valid under the articles of association and the transfer of shares by Flume and
Nurture should be registered. The founders were assured that 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.
CONVERSION, AMENDMENT AND REMOVAL OF DIRECTORS
10. On August 07, 2012, all the affiliates of Flume and Nurture expressed 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 and 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.
11. Despite the founders' protest, all three resolutions were approved by a majority of the
board of directors. The company issued shares in demat form to the investors immediately
after the board meeting and as a result the shareholding of each of Piyush and Abhijit was
reduced to 6% of the equity share capital. In the EGM held that same afternoon, new articles
of association were adopted by the company and Piyush and Abhijit were removed from the
board. The articles of association allowed all decisions to be taken by a majority vote of
shareholders. Abhijit and Piyush did not attend the EGM, in protest against the recent actions
of the other shareholders.
15

THE COMPANY PETITION

12. 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. The letter also contained an offer by the
founders to purchase all the securities of the company owned by the investors at a fair market
value.
13. On August 24, 2012, an application complaining continuous acts of oppression and
mismanagement was filed before the CLB and rather than responding to these allegations,
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, later treated as a
writ was preferred to the High Court which was rejected 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
14. 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
15. 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

16

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.
16. 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.
17. On July 15, 2014, Arcot, Smith & Brown sent a notice to the founders exercising their
right under S.. 235(1) of the Companies Act. 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.
18. 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.
19. The Supreme Court has now listed all the matters connected with Flyabhi.com for final
hearing on all procedural and substantive issues.

17

SUMMARY OF PLEADINGS
A. THE

INVESTMENT IS NOT VALID IN LAW

1. The investment made by Flume and Nurture Capital is not valid because according to
regulation 5(2) of FEM (TISPRO) Regulations, 2000 purchase of convertible debentures is
subjected to Schedule 2 of the said regulation. In the present case the purchase of convertible
debentures by the investors does not fulfill the conditions laid down in Schedule 2.
2. Moreover, the said investment does not fall under the ambit of FDI scheme as optionally
convertible debt is essentially a debt like instrument and thereby does not form a part of the
capital as per the definition given under the FDI scheme of 2010.
3. Consequently all funds raised through these instruments form a part of debt and need to
comply with the ECB guidelines. However in the present case the parties to investment do
not fulfill the criteria of eligible borrowers and recognized lenders. Thus, the investment is
not valid.
B. THE

MATTER CANNOT BE REFERRED TO ARBITRATION

4. The dispute cannot be referred to SIAC arbitration in Singapore as the matters concerning
oppression and mismanagement constitute a different sphere, granting statutory right to the
shareholders and being an act by majority of shareholders over the minority, they cannot be
said to have arisen out of the Investment Agreement in the instant case. Also, an arbitration
clause cannot oust the jurisdiction of the CLB under sections 397/398.
5. Further, since the CLB has been vested with wide powers and reliefs in such cases, and
considering the source and nature of power, the same cannot be granted by the arbitrator.
Also, the parties to the Investment Agreement are not the same parties in case of oppression
and mismanagement and therefore no question of referring of dispute to the arbitrator arises.
C. THE

ACTS OF MAJORITY OF SHAREHOLDERS CONSTITUTE OPPRESSION AND

MISMANAGEMENT

6. The acts of majority of shareholders constitute oppression and mismanagement in the

instant case as right after the transfer of debt to the affiliates the same had been converted into
shares and in furtherance of the same the articles of the company were altered, constituting
violation of the agreement and the articles of association. The founders who had originally
18

envisaged the idea of the company were removed from the Board without following proper
procedure with regards to the same. Moreover, the transfer of debt itself contravenes the
articles of the company and conversion thereof was also not valid.
7. Further, compliance to the Investment Agreement and AoA of the Flyabhi.com was not
done. Also, the legitimate expectation of the founders from their own business was defeated
at each and every stage. Furthermore, the acts of the directors, acting on behalf of the
majority of shareholders have been oppressive to the founders as well as to the affairs of the
company and therefore constitute mismanagement as well.
D. THE

SCHEME OF ARRANGEMENT AND NOTICE ARE NOT VALID IN LAW

8. The scheme of arrangement and notice are not valid in the given case as the legal
requirement of obtaining prior written approval of RBI has not been complied with by the
Board of Flyabhi.com. Further, the meetings of members were not held in accordance with
S.232 r/w S.230 of the Companies Act, 2013 which is a statutory requirement and cannot be
dispensed with.
9. Moreover, the shareholders who approved the scheme of arrangement do not fairly
represent the interests of the minority who dissented to the scheme. Further, it is submitted
that the scheme and the notice are not fair and reasonable as looking into the series of
oppressive acts committed by the majority it can be concluded that the scheme of demerger
was proposed just to squeeze out the minority.
PLEADINGS
A. THE INVESTMENT

IS NOT VALID IN LAW

1. Appellants submit that the investment made by the investors i.e. Flume and Nurture is not
valid in law. The submissions can be structured under the following heads, namely [I]
Investment made in optionally convertible is not within the ambit of Portfolio Investment
Scheme and [II] Investment does not fall within the ambit of FDI Scheme.
[I] INVESTMENT

MADE IN OPTIONALLY CONVERTIBLE DEBT IS NOT WITHIN THE

AMBIT OF

PORTFOLIO INVESTMENT SCHEME

2. Appellants submit that the investment made in optionally convertible debt does not fall
within the ambit of Portfolio investment Scheme. Under regulation 5(2) of FEM (Transfer or
19

Issue of Security by a person Resident outside India) Regulations, 2000, (TISPRO), purchase
of convertible debentures is subjected to Schedule 2 of the said Regulations. 1 Under Schedule
2, it is specifically mentioned that the purchase is to be done through registered brokers on
recognized stock exchanges in India, which is not the case here as Flyabhi.com is a private
company,2 and hence its shares are not listed.
[II] INVESTMENT

DOES NOT FALL WITHIN THE AMBIT OF

FDI SCHEME

3. The FDI Scheme, under Regulation 5(1) of TISPRO is subjected to sectoral caps
mentioned in the FDI policy.3 Under the FDI policy, Indian companies can only issue equity
shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily
and mandatorily convertible preference shares. Further, optionally convertible or partially
convertible debentures for the issue of which funds have been received on or after May 1,
2007 are considered as debt and accordingly all norms applicable to ECB will apply.4
4. RBI vide its notification5 dated June 8, 2007 has clarified that only instruments which are
fully or mandatorily convertible into equity, would be reckoned as a part of equity under the
FDI policy and funds raised through optionally convertible debentures are intrinsically debtlike instruments. Consequently, all funds raised through such instruments are considered as
debt, requiring compliance with ECB guidelines framed under the Foreign Exchange
Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000.6

1 FEM (Transfer or Issue of Security to a person resident outside India) Regulations, 2000.
2 1, Moot Proposition.
3 FDI policy (Circular 2 of 2010).
4 Id.
5 A.P. (DIR Series) Circular No. 74, RBI/2006-2007/435 dated June 8, 2007.
6 Notification No. FEMA 3/2000-RB dated May 3, 2000.
2

5. Further, the judicial pronouncements, in the case of Deepak Fertilizers,7 Spencer8 and
LMN India Ltd., In Re.,9 have additionally held that CCDs are intrinsically debt-like
instruments until converted. Appellants submit that the same is applicable to optionally
convertible debt.
6. Hence, it is submitted before the Honorable Supreme Court that OCD will not form a part
of equity in accordance with FDI policy and hence while calculating the foreign investment
the capital of the company as defined under the FDI policy 10 will not include optionally
convertible debt, making the investment liable to fall outside the sectoral caps of the FDI
policy.
7. It is further submitted, that the said investment does not fall under the ambit of ECB
guidelines as well. This is because of the fact that the parties to the investment do not fall
under Eligible borrowers and Recognized lenders as stipulated by the ECB guidelines, 11 and
hence it is outside the purview of ECB. Therefore, Appellants reiterate that the investment is
not valid in law.

7 DGIR v. Deepak Fertilizers, (1996) 81 Com Cases 341.

8 CWT v. Spencer, (1973) 88 ITR 429 (SC).
9 LMN India Ltd., In Re., AAR No. 769 of 2007.
10 supra note 3.
11 ECB Guidelines, RBI/2010-11/8, Master Circular No. 8 /2010-11.
3

B. THE

MATTER CANNOT BE REFERRED TO ARBITRATION

8. It is humbly submitted before this Honorable Supreme Court that the matter concerning
oppression and mismanagement cannot be referred to arbitration as [I] the matter doesnt fall
within the purview of the arbitration clause and [II] the CLB/Court alone has the jurisdiction
to entertain the cases pertaining to oppression and mismanagement under Sections 397/398.
[I] THE

MATTER DOESNT FALL WITHIN THE PURVIEW OF ARBITRATION CLAUSE

9. The Honorable Supreme Court of India has extracted the view that if the subject matter of
the petition is not totally covered under the clauses of the agreement, the application for
referring the case to the arbitration cannot be allowed.12
10. It is therefore submitted that since the matters pertaining to oppression and
mismanagement constitute altogether different sphere, granting statutory right in capacity of a
shareholder, different from that of the ones emanating from the Investment Agreement and
the same cannot be subject to the arbitration clause.
[II] THE CLB/ COURT

ALONE HAS THE JURISDICTION TO ENTERTAIN THE

INSTANT CASE

11. Appellants submit that the CLB/Court alone has the jurisdiction to entertain the instant
case as (i) CLB/Court has exclusive jurisdiction under Sections 397/398, (ii) the powers of
CLB/ Court are wider under Sections 397/398 than that of an arbitrator and; (iii) there is no
commonality of parties.
(i) CLB/Court has exclusive jurisdiction under sections 397/398
12. It is submitted that right of shareholders under sections 397/398 of the Companies Act,
1956 is a statutory right to approach the CLB/Court in the cases of oppression and/or
mismanagement and the same cannot be ousted by a provision for arbitration, even through
its incorporation in the AoA of a company.13
13. The presence of an arbitration clause in an agreement does not fetter the power of the
CLB/Court to deal with the cases pertaining to oppression and mismanagement, as the
12 Sukanya Holdings (P.) Ltd. v. Jayesh H. Pandya, (2003) 5 SCC 531.
13 In re. Emgee Housing (P.) Ltd., (2013) 114 CLA 416 (CLB).
4

matters which may form subject-matter of a petition under Sections 397 and 398 of the 1956
Act cannot be the subject-matter of arbitration.14 Moreover in the same case, the CLB stated
that the scheme of Sections 397, 398 and 402 of the Companies Act, 1956 constitute a code
by itself for granting a relief to the oppressed minority shareholders. Similar view was
extracted by the court in Manavendra Chitnis.15
14. Further, the view extracted by the Court in Malhotra16 that for a matter to be referred to
arbitration under S.8 or 45 of the Arbitration and Conciliation Act, 1996, must be necessarily
the one which can be referred to arbitration and that the nature of power vested under S.402
of the Companies Act, 1956 stipulates that a matter pertaining to oppression and
mismanagement cannot be referred to arbitration and this necessarily excludes arbitrability.
Further, the only yardstick for the CLB/Court is to see that whether the dispute falls under
Part VI of the Companies Act, 1956. If it does, the matter shall not be referred for
arbitration.17
15. As Russell points out certain matters are reserved for the court alone and if a tribunal
purports to deal with them the resulting award will be unenforceable. These include matters
where the type of remedy required is not one which an Arbitral Tribunal is empowered to
give.18 Therefore, since the CLB/Court exclusively has the power hence the instant matter
cannot be referred to arbitration.

14 A. RAMAIYYA, GUIDE TO THE COMPANIES ACT 4154 (Arvind P. Datar ed., 2015).
15 Manavendra Chitnis v. Leela Chitnis Studios, (1985) Com Cases 113.
16 Rakesh Malhotra v. Rajinder Kumar Malhotra, (2015) 127 CLA 140 (Bom).
17 Id.
18 DAVID ST. JOHN SUTTON, RUSSELL ON ARBITRATION 28 (22nd ed., 1997).
5

(ii) The powers of CLB/ Court are wider under Sections 397/398
than that of an arbitrator
16. The power of the court under Sections 397/398 to provide relief is much wider than that
of an arbitrator19 and the arbitrator cannot grant relief of the nature specified in S.402 or 403
of the Act.20
17. Under Sections 397 and 398 of the Indian Companies Act, 1956, the words such order as
it thinks fit give very wide power to the CLB/Court while exercising its jurisdiction in the
cases pertaining to oppression and mismanagement and it can grant any relief to put an end to
oppression/mismanagement complained of and further that an arbitrator does not have the
powers enshrined under S.402 or 403 of the Act.21
18. An arbitrator on the other hand can only grant the reliefs which have been prayed before
him in the petition and not the reliefs which the person has not prayed for, while the court
may grant any relief which even though has not been prayed for before it to bring an end to
the alleged acts of oppression and mismanagement.22
19. Furthermore, the reliefs claimed in the company petition, namely, (a) remedy for
prejudice caused by the termination of the Investment Agreement which was illegal; (b)
declaring the amendments to the Articles of Association as illegal; and (c) removal of
founders from the Board of Directors as illegal, and that the above acts by the majority of
shareholders were oppressive, are available under the provisions of Sections 397 and 398 of
the Act from the CLB alone, as was reiterated in Das Lagerway Wind Turbines Ltd. v.
Cynosure Investments Private Limited.23

19 supra note 15.

20 Dr. G.L. Purohit v. Dr. S.S. Agarwal & Ors., (2011) 163 Com Cases 205 (CLB).
21 O.P. Gupta v. Sfflv General Finance (P) Ltd. & Ors., (1977) 47 Com Cases 279 (Delhi).
22 Sporting Pastime (India) Ltd. v. Kasthuri & Sons Ltd., (2007) 81 CLA 208 (Mad).
23 Das Lagerway Wind Turbines Ltd. v. Cynosure Investments Pvt. Limited, (2009) 147 Com
Cases 149 (Mad).
6

20. It is therefore humbly submitted that since the power of the arbitrator under section 45 of
the Arbitration and Conciliation Act, 1996 would be limited and is not as wide as that of the
CLB/Court, the instant case cannot be subjected to arbitration.
(iv) There is no commonality of parties
21. It is submitted that the Investment Agreement had been signed between the founders,
investors Flume and Nurture and the Company. The majority of shareholders against whom
the petition for oppression and mismanagement has been filed were not originally the parties
to the Investment Agreement, while in an arbitration agreement, only the parties to the
agreement can apply24 and be referred to the arbitration.25
22. Arbitration and Conciliation Act, 1996 clearly states that a party means a party to the
arbitration agreement.26
23. The pre-condition of the commonality of parties has been widely recognized 27 and
therefore in absence of commonality of parties in the instant matter, the matter under any
circumstances cannot be referred to arbitration and only CLB/Court has the authority to
decide the instant matter.

24 C.G. Therbor v. Union of India, AIR 1968 Del 292.

25 Smt. Sudershan Chopra v. CLB, (2004) 60 CLA 214 (P&H).
26 The Arbitration and Conciliation Act, 1996, 2(1)(h).
27 Bhadresh Kantilal Shah v. Magotteaux International, (2002) 36 CLA 76 (CLB).
7

C. THE

ACTS OF MAJORITY OF SHAREHOLDERS CONSTITUTE OPPRESSION AND

MISMANAGEMENT

24. Oppression is defined under S.397 of the Companies Act. 28 The judicial pronouncement
of the Honorable Supreme Court of India in V.S. Krishnan29 while referring to the landmark
cases of Needle Industries,30 Dale and Carrington Investment,31 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.

28 Companies Act, 1956, 397.

29 Shri V.S. Krishnan & Ors. v. Westfort Hi-tech Hospital Ltd. & Ors., (2008) 142 Com
Cases 235 (SC).
30 Needle Industries (India) Ltd. and Ors. v. Needle Industries Newey (India) Holding Ltd. and Ors., (1981) 3
SCR 698.

31 Dale and Carrington Investment (P) Ltd. and Anr. v. P.K. Prathapan and Ors., (2005) 1 SCC 212.
8

25. Further, mismanagement is defined under S.398 of the Companies Act. 32 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.33
26. Appellants submit that the acts of the majority of shareholders constitute oppression and
mismanagement under Sections 397/398 of the Companies Act, 1956 and are illegal. The acts
comprise of [I] the termination of the investment agreement; [II] the amendments to the
articles of association; [III] the removal of the Appellants from the Board of Directors; [IV]
the appointment of Mr. Arjun Iyer as the CEO and the loan from Arcot, Smith and Brown and
[V] hampering the doctrine of legitimate expectation conclusively proving oppression.
[I] THE

TERMINATION OF THE INVESTMENT AGREEMENT

27. It is humbly submitted before this Honorable Supreme Court that the way the termination
of the investment agreement took place constitutes oppression and mismanagement under
Sections 397/398 of the Companies Act, 1956 as (i) transfer of debt is in clear violation with
the terms of constitution of Flume and Nurture, (ii) transfer of debt required permission of
Reserve Bank of India which was not obtained by the investors, (iii) transfer of debt was not
in accordance with the articles of association of Flyabhi.com and (iv) the conversion of debt
into shares was not valid.
(i) Transfer of debt is in clear contravention with the terms of
constitution of Flume and Nurture
28. In Mell,34 it has been held that when a third party is dealing with the company on matters
dealt with in the articles of the company, he will be taken to have contracted with the
company on the terms of the memorandum and articles and the articles will in a proper case
be incorporated into a contract with third party.
29. Appellants submit that the transfer of debt is in clear contravention with the terms of
constitution of Flume and Nurture. According to the terms of their constitution, Flume and
32 Companies Act, 1956, 398.
33 Richardson & Cruddas Ltd. v. Haridas Mundra, AIR 1959 Cal 695.
34 Mell v. Atlanta, (1894) 11 TLR 407; Read v. Astoria Garage (Streatham) Ltd., (1952) 2 All
ER 292.
9

Nurture were required to liquidate and distribute all their assets to their investors. 35 Instead,
they transferred the debt without liquidation, which is violative of the terms of their terms of
constitution. Hence, the transfer of debt is invalid, oppressive and against the affairs of the
company.
(ii) Transfer of debt required permission of RBI which was not
obtained by investors
30. It is humbly submitted before the Honorable Supreme Court that even if the transfer of
debt is held valid, the said transfer required permission from RBI under S.3 of Foreign
Exchange Management (Transfer or issue of security by a person resident outside India)
Regulations, 2000 which was not obtained by the investors which makes the transfer illegal.
BESTCO provided legal opinion to the company that transfer of shares should be registered, 36
but mere registration without obtaining permission of RBI renders the transfer invalid and the
subsequent events constitutes oppression and mismanagement by the investors.
(iii) Transfer of debt was not in accordance with the AoA of
Flyabhi.com
31. It is enshrined under clause 6.1.8 that however, each of the parties was bound to offer
companys securities to the others before selling it to any person who was not a
shareholder.37 Further at the time of end of investment term, Flume and Nurture were to
liquidate and distribute all their assets to their investors and shares were then transferred to
over 20 of their affiliates.38 It becomes clear upon the perusal of both the given situations that
the shares were not being already held by the affiliates of Flume and Nurture.
32. Appellants submit that the given facts and circumstances reflect that the intention of the
parties was to restrict the transfer of shares to the existing shareholders. As Leach V-C put it
in Hume,39 the duty of the court is to collect the intention from the whole instrument taken
together. While it is quite clear from the Investment Agreement that primarily the control was
35 20, Moot Proposition.
36 Id.
37 6, Moot Proposition.
38 supra note 35.
10

to rest with the founders and the investors, and therefore construing the Investment
Agreement as a whole, it was never intended that the control of Flyabhi.com is transferred.
Moreover, in the same sense, Clause 6.1.8 has also to be read as a whole.
33. The Honble Supreme Court of India in Vimal Chand,40 has observed that while dealing
with the construction of a commercial contract as under: A document, as is well known, must
be construed in its entirety. Further, every contract is to be construed with reference to its
object and the whole of its terms, and accordingly, the whole context must be considered in
endeavoring to collect the intention of the parties, even though the immediate object of
inquiry is the meaning of an isolated word or clause.41
34. Further, the Apex Court in Sanghram Singh, stated that it has to be further borne in mind
that a pre-emptive right is granted in favour of a member of a private company so that his
right to control is not taken away.42 Hence, Appellants submit that the transfer of shares was
not valid and the right to control was completely vanished constituting oppression.
(iv) The conversion of debt into shares was not valid
35. Appellants submit that the conversion of debt into shares constituted oppression and
mismanagement. When shares are issued without need and justification, 43 but only to make
sure that in the next meeting majority is ensured, constitutes oppression.44
36. In the instant case the conversion was done solely to make sure that in the subsequent
EGM, majority is attained and all the resolution could be passed, which constitutes
oppression. Further, the shares were issued without any need and justification which
constitutes mismanagement.

39 Hume v. Rundell, (1824) 2 S & S 174, 177; 57 ER 311.

40 Vimal Chand Ghevarchand Jain and Ors. v. Ramakant Eknath Jajoo, 2009 (5) SCALE 59.
41 H.G BEALE, CHITTY ON CONTRACTS (21st ed., 1994).
42 Sanghram Singh P. Gaekwad & Ors. v. Shantadevi P. Gaekwad, AIR 2005 SC 809.
43 Pearson Education Inc. v. Prentice-Hall of India P. Ltd., (2004) 56 SCL 365 (CLB).
44 Punt v. Symons, (1903) 2 Ch. 506; Fraser v. Whalley, 71 E.R. 361; Piercy v. S. Mills &
Co., (1920) 1 Ch 77.
11

[II] THE

AMENDMENTS TO THE ARTICLES OF ASSOCIATION

37. The amendments to the articles of association constitute oppression and mismanagement
as (i) amendment breaches an obligation with a separate class of shareholders and (ii)
amendment is done solely to oppress minority and to violate the agreement.
(i) Amendment breaches an obligation with the founders
38. Firstly, Appellants submit that by alteration of articles, a company cannot justify a breach
of contractual obligation.45 It is evident from the facts of the case that the founders constituted
a separate class of shareholders as they held Class A equity shares of the company.46
39. Also, the investment agreement in itself is suggestive of the fact that the founders, being a
separate party and signatory, have rights in the agreement. 47 Hence, the majority of
shareholders, being the acting mind of the company, cannot oppress the minority of
shareholders by alteration of the articles in an illegal and oppressive manner.
40. Secondly, in Cumbrian Newspapers Group Ltd.,48 it was held that if articles can be altered
by consent of a specific person, then the consent of such a person is mandatory. Respondents
submit that alteration of the articles was a key decision of the company whereby the consent
of the founders was necessary,49 which the founders did not give,50 and hence the alteration is
invalid constituting oppression and mismanagement.

45 Baily v. British Equitable Assurance Co. Ltd., (1901) 1 Ch 374.

46 12, Moot Proposition.
47 supra note 37.
48 Cumbrian Newspapers Group Ltd. v. Cumberland & Westmorland Herald Newspaper &
Printing Co. Ltd., (1987) Ch 1.
49 supra note 37.
50 21, Moot Proposition.
12

(ii) Amendment is done solely to oppress minority and to violate

the agreement
41. Appellants submit that the alteration of articles is done solely as to oppress the minority
of shareholders. In Matrubhumi,51 it was held that alteration of articles should not be done to
oppress the minority. The court may restrain the alteration in cases where compensation is not
enough.52 Further, in cases of oppression, gaining power by oppressive means also constitute
oppression.53 In the instant case, the alteration took place solely to remove the founders from
any power in the company and hence is oppression within the ambit of S.397 of the
Companies Act, 1956.
42. As a result of the alteration of articles, the new articles allowed all the decisions to be
taken by a majority vote of shareholders, 54 which is in contravention with the Investment
Agreement entered into by both the parties, as the Agreement provided for all the key
decisions to be taken with the consent of the founders and the investors directors, 55 including
appointment of key managerial personnel.56
43. The alteration must be bona fide in the interest of the company and for the benefit of the
company as a whole; it should not constitute a fraud on minority.57 In the instant matter,
through the power to amend the articles, the majority of shareholders have sought to take
away the substantial rights of the founders, thereby vitiating the object and purpose of the
Agreement, hence constituting a fraud on the minority.

51 Matrubhumi Printing & Publishing Co. Ltd. v. Vardhaman Publishers Ltd., (1992) 73 Com
Cases 80 (Ker).
52 British Murrac Syndicate Ltd. v. Alperton Rubber Co. Ltd., (1915) 2 Ch 186.
53 In re H.R Harmer, (1958) 3 All ER 689.
54 supra note 50.
55 supra note 37.
56 Id.
57 Shuttle Worth v. Cox Brothers & Co., (1897) 2 KB 9.
13

44. In Southern Foundries Ltd,58 it was held that a company cannot be precluded from
altering its articles thereby giving itself power to act under the provisions of the altered
articles, but so to act may nonetheless be a breach of contract if it is contrary to a stipulation
in the contract validly made before the alteration.
45. Furthermore, a company cannot break its contracts by altering the articles and a member
of a company may acquire by contract or otherwise special rights against the company, which
exclude him from the operation of a subsequently altered article. 59 Appellants submit that the
alteration breaches a contract with a separate class of shareholders and is done solely to
oppress the minority, also resulting in mismanagement of the company.
[III] THE

REMOVAL OF THE

APPELLANTS

FROM THE

BOARD

OF

DIRECTORS

46. The removal of the founders from the board constitutes oppression and mismanagement
under Sections 397/398 of the Companies Act as (i) removal of founders is violative of
investment agreement and AoA; (ii) the EGM in which the removal took place was invalid
and (iii) there was no special notice served to the founders before removal.
(i) Removal of founders is violative of investment agreement and
AoA
47. In Donahue,60 the court held that because of the fundamental resemblance of close
corporation to the partnership, the trust and confidence which are essential to this scale and
manner of enterprise, and the inherent danger to minority interests in the close corporation,
stockholders in the close corporation owe one another substantially the same fiduciary duty in
the operation of the enterprise.
48. In Atmaram Modi,61 it was held that in the case of removal of a director of a private
company, the removal might be declared as oppressive act if the shareholders instrumental in
proposing a resolution for the removal are found to have acted in a mala fide manner.

58 Southern Foundries Ltd v. Shirlaw, (1940) AC 701.

59 Allen v. Gold Reefs, (1900) 1 Ch 656.
60 Donahue v. Rodd Electrotype Co., 328 N E 2d 505, 515.
61 Atmaram Modi v. ECL Agrotech Ltd., (1994) 4 Comp LJ 379 (CLB).
14

49. Appellants submit that mala fide intention of the majority of shareholders is reflected in
the blatant illegality involved in the acts of the majority. The removal of founders is in
violation of the nature of the investment agreement itself and it purports to change the nature
of partnership in its entirety constituting a breach of fiduciary duty.
(ii) The EGM in which the removal took place was invalid
50. Appellants submit that the notice of the EGM was not clear as it mentioned the words
reconstitution of board62 and failed to specifically mention reconstitution by way of
removal. In Kaye,63 it was held that the notice must be free from trickiness. This omission by
the board stresses on the existence of mala fide intention of the majority of shareholders.
51. Further, the EGM was called on a shorter notice which would have been valid if atleast
95% of people holding the paid-up share capital would have recorded their consent for the
same,64 which is not the case here as the founders consent, who held 12% shareholding, was
not recorded. The duration of notice is mandatory 65 in the present case given the fact that
Flyabhi.com is a closed corporation. Hence, the EGM in which the removal took place is
invalid.
52. In Naginder Singh Shiena,66 it was viewed that in the case of a closely held company, the
removal of any shareholder who was long associated with the company from BOD could be
considered as oppression. In the above mentioned case it was also noticed that the EGM was
held solely to oust the director. By applying the dicta in the present case it can be said that the
founders too were long associated with the company, even before the investment, and hence it
was oppressive of the majority to act in such manner.

62 supra note 50.

63 Kaye v. Croydon Tramways Co., (1898) 1 Ch 358 (CA); Biswanath v. New Central Jute
Mills Co. Ltd., (1961) 31 Com Cases 125 (Cal).
64 Companies Act, 1956, 171.
65 Shailesh v. Matushree Textiles Ltd., AIR 1994 Bom 20.
66 Naginder Singh Shiena v. R.S. Infrastructures Pvt. Ltd., (2007) 139 Com Cases 246
(CLB).
15

(iii) There was no special notice served to the founders before

removal
53. Appellants submit that there was no special notice served to the founders before their
removal as directors from the board. Queens Kuries and Loans Pvt. Ltd.,67 and Tarlok Chand
Khanna,68 stress on the importance of notice and in the absence of a notice to the director, the
proceeding of the meeting stands invalid. Hence, Appellants submit that the directors were
never given a chance to represent their case; and the statutory right of the directors is taken
away,69 by not serving the notice, constituting oppression and mismanagement.
[IV] THE

APPOINTMENT OF

MR. ARJUN IYER

ARCOT, SMITH

AS THE

AND

CEO

AND THE LOAN FROM

BROWN

54. The appointment of Mr. Arjun Iyer as the CEO and the loan from Arcot, Smith and Brown
constitutes oppression and mismanagement under Sections 397/398 of the Companies Act,
1956 as (i) the appointment and the loan is violative of the investment agreement and AoA
and (ii) Arjun Iyer could not have been given Class A equity stake without the consent of the
founders.
(i) The appointment and the loan is violative of the investment
agreement and AoA
55. According to Clause 6.1.4 of the investment agreement, the founders and investors
director had to approve the appointment of all key management personnel. 70 Further,
according to Clause 6.1.6 of the investment agreement, the founders and investor directors
consent was required for all key decisions involving the company.71

67 Queens Kuries and Loans Pvt. Ltd v. Sheena Jose, (1993) 76 Com Cases 821 (Ker.).
68 Tarlok Chand Khanna v. Raj Kapoor, (1983) 54 Com Cases 12, 28 (Del.).
69 Miss Varsha Ben S. Trivedi v. Sadguru Switch Gears P. Ltd., (2013) 116 CLA 153 (CLB).
70 supra note 37.
71 Id.
16

56. Appellants submit that in accordance with these two clauses, the founders consent was
mandatory for both the appointment and the loan. The founders dissented to both the
appointment72 and the loan73 and also offered better alternatives which were not accepted by
the majority of the board of directors. Hence, both the appointment and the loan are violative
of the investment agreement and AoA and constitute oppression and mismanagement.
(ii) Arjun Iyer could not have been given Class A equity stake
without the consent of the founders
57. According to Section 106 of the Companies Act, 74 it was mandatory for the company to
take the consent of holders of 3/4th of the issued shares of that class, or a special resolution
passed at a separate meeting of the shareholders of that class.
58. In the instant case, the consent of the founders was not taken by the company, and they
alone had the same class of shares that were issued to Arjun Iyer,75 and hence the issuance of
shares and stock options to Arjun Iyer is not valid, which affects the stake of the founders
later on.
[V] HAMPERING

THE DOCTRINE OF LEGITIMATE EXPECTATION CONCLUSIVELY

PROVING OPPRESSION

59. It is humbly submitted before this Honble Court that the acts of majority constitute
oppression and mismanagement against the minority shareholders. The Apex Court in Shanti
Prasad Jain,76 while referring to a number of English cases 77 extracted the view that it would
constitute oppression if the affairs of the company are being treated in a manner as if it were

72 supra note 46.

73 18, Moot Proposition.
74 Companies Act, 1956, 106.
75 supra note 46.
76 Shanti Prasad Jain v. Kalinga Tubes Ltd., AIR 1965 SC 1535.
77 Elder v. Eider and Watson, (1952) SC 49; George Meyer v. Scottish Co-operative Wholesale Society Ltd.,
(1954) SC 381; Scottish Co-operative Wholesale Society Ltd. v. Meyer, (1958) 3 All ER 56.

17

their own property to the prejudice of minority of shareholders and that such conduct could
be a result of predominant voting power.
60. In the instant matter, though Abhijit and Piyush had conceived the idea of the company
and even after the investors had been guaranteed a number of preferential rights, yet it is
quite clear from the facts and circumstances that they were being treated in a prejudicial
manner while considering every decision in the company.
61. In furtherance of the same it is most humbly submitted that the same also affects the
legitimate expectation of the founders from the business, which was originally their
brainchild. It was stated in In re. Saul D. Harrison & Sons 78 that the doctrine of legitimate
expectation often arises out of a fundamental understanding between the shareholders which
formed the basis of their association but was not put into contractual form, such as an
assumption that each of the parties who has ventured his capital will also participate in the
management of the company. The acts of majority therefore adversely affect the legitimate
expectation of founders from the business.
62. Further in Tarlok Chand Khanna,79 it has been held that unanimous consent requirement
is necessarily to be followed. In the instant case, the investment agreement and AoA speaks
out the fact that any decision of the company should be passed by unanimous consent 80 which
points out towards the valid claim of legitimate expectation in the present case.
63. In the light of abovementioned authorities and looking into the circumstances, it is most
humbly submitted that the conduct of majority of shareholders towards the founders and the
company could be termed as harsh, burdensome and wrongful81 in the instant matter and the
same constitutes oppression and mismanagement.

78 In re. Saul D. Harrison & Sons, (1994) BCC 475.

79 supra note 68.
80 supra note 37.
81 supra note 53.
18

D. THE SCHEME

OF

ARRANGEMENT

AND THE

NOTICE

ARE NOT VALID

64. It is humbly submitted before the Honble Supreme Court of India that the scheme of
arrangement proposing demerger of the aircraft business of Flyabhi.com Pvt. Ltd. amd
merger into Arcot, Smith and Brown Limited, a listed NBFC is not valid in law. The
petitioners primarily submit under three main heads, namely [I] prior written approval of RBI
was not obtained, [II] procedural compliance under S.232 r/w S.230 of the act has not been
met with and [III] scheme and notice are not fair and reasonable. In furtherance of this the
appellants humbly submit that the notice sent to founders under S.235 (1) shall not take
effect.
[I] PRIOR WRITTEN APPROVAL

OF

RBI

WAS

NOT OBTAINED

65. In the present case the scheme of arrangement proposes the merger of aircraft business of
Flyabhi Pvt. Ltd. into ASB Ltd. which is a NBFC. As per RBI circular, 82 dated May 26, 2014,
prior written approval of the Reserve Bank would also be required before approaching the
Court or Tribunal under S. 230-233 of Companies Act, 2013 seeking order for mergers or
amalgamations with NBFCs. However, looking into the facts of the present case no such
approval has been obtained by the Board of Flyabhi.com.
66. Therefore, it is humbly submitted before the Honble Supreme Court that the scheme of
arrangement cannot be sanctioned by a court of law as no prior approval of RBI was
obtained.
[II] PROCEDURAL COMPLIANCE U/S. 232 R/W 230

OF THE

ACT

HAS NOT

BEEN MET WITH

67. Appellants humbly submit before the Honble Supreme Court that the procedural
compliance required for a scheme of arrangement under S.232 r/w 230 of the companies act
has not been met with as (i) Courts directions were not obtained for conducting the meeting
of members, (ii) holding of meeting cannot be dispensed with, (iii) consent letter cannot
substitute class meeting and (iv) Class A has not been fairly represented.

82 RBI/2013-14/606.
19

(i) Courts directions were not obtained for conducting the

meeting of members
68. S.232 of the act when read with S.230 gives an insight into the procedure to be followed
for the approval of a scheme of arrangement involving merger or amalgamation of two or
more companies. Under this provision the members and creditors approval to the scheme of
arrangement is a sine qua non for the Courts sanction.83 This approval is to be obtained at
specially convened class meetings held in pursuance of the company or its members making
an application to the Court for the proposed scheme of arrangement under S.230 of the act.
69. The general rule is that the consent of the shareholders whether it is unanimous or by a
three-fourth majority, must be obtained in a meeting summoned on the orders of the court on
under S.391.84 In order to obtain the directions of the Court an application should be made by
an authorised representative of the company. However, in the present case, the Board of
Flyabhi.com made recommendation of the said scheme of arrangement to the shareholders
and recorded the receipt of letters of consent of different classes of shareholders and creditors
later the same day.85 Thus there is a clear cut deviation from the general rule as no application
was made to court by the Board so as to obtain the directions of the Court for convening the
class meetings.
(ii) Holding of meeting cannot be dispensed with
70. Ordinarily, the convening of meetings of members and creditors is a must. Discretion to
waive must only be exercised under exceptional circumstances.86 Also it was observed in the
case of S.M. Holding Finance P. Ltd. v. Mysore Machinery Manufacturers Ltd. 87 that only if
all the shareholders acquiesce in a certain arrangement, the question of a meeting having been
83 ICSI, HANDBOOK

ON MERGERS, AMALGAMATIONS AND TAKEOVERS LAW AND PRACTICE

19 (3rd ed., 2010).

84 Mazda Theatres P. Ltd. v. New Bank of India Ltd., ILR (1975) 1 Delhi.
85 25, Moot proposition.
86 B V Gupta v. Bangalore Plastics, CA No. 1676/1981 decided on 19-08-1981.
87 S.M. Holding Finance P. Ltd. v. Mysore Machinery Manufacturers Ltd., (1993) 78 Com
Cases 432 (Kar).
20

called does not arise at all. In another case the company court issued directions for holding a
meeting of minority shareholders while dispensing with the meeting of the majority group
who consented to the scheme.88 Thus in the present case too it was necessary to have a
meeting of the founders (being class A shareholders) who were in a minority and dissented to
the scheme.
71. Members or creditors meetings may be dispensed with if all members or creditors
individual consent is obtained. However, it is a discretionary power of the court for which a
separate application must be made for courts order.89 Looking into the facts of the present
case it can be safely concluded that neither the individual consent of all the shareholders was
obtained nor a separate application was made by the Board to dispense off the meetings.
(iii) Consent letter cannot substitute class meeting
72. In the case of Ansys Software P. Ltd., Re,90 the High Court of Karnataka discussed in
length about the necessity of holding a meeting. It said that a consent letter cannot act as a
substitute for holding of the meetings of members and creditors as contemplated in law. It
further said that the holding of class meetings is crucial for the purpose of having discussions,
deliberations and exchange of ideas amongst the members which is not the case with consent
letter.
73. In the present case too, the consent letters recorded by the Board cannot not act as a
substitute for the meetings. Moreover, it is clear from the facts of the case that the consent of
the founders was necessary for the scheme to be statutorily approved by Class A
shareholders. Therefore, the Appellants submit that the scheme of arrangement cannot be
sanctioned as it did not comply with the procedural requirements given under S.232 r/w
S.230 of the act.
(iv) Class A has not been fairly represented
74. It is observed that the Court must be satisfied that those who attended the meeting are fair
representatives of the class and that the statutory majority did not coerce the minority in order
88 G.E Capital Transportation Financial Services Ltd. Re, (2009) 149 Com Cases 52.
89 ICSI, HANDBOOK

ON MERGERS, AMALGAMATIONS AND TAKEOVERS LAW AND PRACTICE

20 (3rd ed., 2010).

90 Ansys Software P. Ltd., Re, (2004) 122 Com Cases 526.
21

to promote interests adverse to those of the class whom they purport to represent. 91 The role
of the court is inquisitional and supervisory.92 The Court can pierce the corporate veil and if
the scheme is found to be fraudulent and intended for a purpose other than the purpose stated,
it may be rejected even at the outset.93
75. Appellants submit that the investors who approved the scheme do not truly represent
Class A shareholders, as their interests are completely different.
[III] SCHEME

AND

NOTICE

ARE NOT FAIR AND REASONABLE

76. The Court sanctioning the scheme of arrangement is obligated to be satisfied that the
scheme of amalgamation or merger is not prejudicial to the interest of its members or to
public interest.94 Further it has been held in the case of Miheer H. Mafatlal v. Mafatlal
Industries Ltd.95 that the sanctioning Court has not merely to go by the ipse dixit of the
majority of shareholders who might have voted in the favour of the scheme but has to
consider the pros and cons of the scheme with a view to finding out whether the scheme is
fair and reasonable.
77. Similarly when the transferee company sends notice to the dissenting shareholders under
S.235 (1) of the Act so as to compulsorily acquire their shares when the rest ninety per cent of
majority has approved the scheme the Court has a significant role to play. The Court will see
that the scheme is not a mere device to enable the majority shareholders to expropriate the
minority. The Court will not make an order in favour of the transferee company where the
transaction appears unjust, unfair or unconscionable.96

91 TAXMANN, COMPANY LAW 802 (3rd ed., 2014).

92 Bihari Mills Ltd., In re, (1985) 58 Com Cases 6 (Guj).
93 Bedrock Ltd., In re, (1998) 17 SCL 385 (Bom).
94 A. RAMAIYYA, GUIDE TO THE COMPANIES ACT 3723 (Arvind P. Datar ed., 2015).
95 Miheer H. Mafatlal v. Mafatlal Industries Ltd., (1996) 87 Com Cases 792 (SC).
96 Viswanathan (S.) v. East India Distilleries and Sugar Factories Ltd., (1957) 27 Com Cases
175.
22

78. The acts of the appointment of Arjun Iyer as CEO,97 bridge loan from ASB Ltd.,98
termination of the investment agreement99 and alteration to AoA100 subsequently reduced the
stake of the founders in the company, thereby further leading to their removal from the
Board. Therefore, the facts clearly demonstrate that the entire scheme of arrangement was
unfair and not bona fide as it was primarily meant to squeeze out founders from the entire
business and take the control of Flyabhi.com, which was the novel idea of founders
themselves.
79. In furtherance of the aforesaid arguments the Appellants submit that the scheme of
arrangement as well as the notice under Section 235(1) of the Act is prejudicial to the
interests of the dissenting shareholders i.e., the founders and hence should not take effect.

97 supra note 46.

98 supra note 73.
99 supra note 35.
100 supra note 50.
23

PRAYER FOR RELIEF

Wherefore, in 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 investment is invalid.

The matter cannot be referred to arbitration.

The acts of the majority of shareholders constitute oppression and mismanagement

and hence the securities owned by the investors be transferred to the Appellants at fair
market value.

The scheme of arrangement and the notice are not valid.

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 Appellants

20