L-03

BRIHAN MAHARASHTRA COLLEGE OF COMMERCE, TROIKA MOOT

COURT,2018–2019

IN THE HON’BLE HIGH COURT OF WREN

IN THE MATTER OF ARTICLE 226 OF THE CONSTITUTION

In the matter of s.433 (e) r.w. s.434(1)(a) and s.394 of the Companies Act, 1956

Company Petition No.: 125 of 2015

Delo Ratis & Co. (MS)……….......…v.……………………………Alfa Motors Limited

BEFORE THE HON’BLE CHIEF JUSTICE AND HIS COMPANION JUSTICE OF THE HON’BLE HIGH
COURT

MEMORIAL ON BEHALF OF THE PETITIONERS

 TROIKA MOOT COURT, BRIHAN MAHARASHTRA COLLEGE OF COMMERCE,
PUNE, 2018-2019

TABLE OF CONTENTS

TABLE OF CONTENTS .................................................................................................... 2

LIST OF ABBREVIATIONS ............................................................................................. 3

INDEX OF AUTHORITIES ............................................................................................... 4

STATEMENT OF JURISDICTION .................................................................................. 5

STATEMENT OF FACTS .................................................................................................. 6

ISSUES PRESENTED ........................................................................................................ 7

SUMMARY OF ARGUMENTS ......................................................................................... 8

ARGUMENTS ADVANCED .............................................................................................. 9

ISSUE I: WHETHER ALFA MOTORS LIMITED IS LIABLE TO PAY THE

COMPENSATION DEMANDED BY DELO RATIS & CO.(MS). ................................... 9

1.[a] Whether Alfa Motors was a party to the contract on the basis of which MS demand
compensation. ............................................................................................................... 9

1.[b] Whether the Doctrine of Indoor Management applies. ......................................... 10

1.[c] Whether the contract between the petitioner and respondent is determinable........ 11

ISSUE II: WHETHER THE CLAIM BY MS IS VALID. ............................................... 13

PRAYER ............................................................................................................................ 16

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LIST OF ABBREVIATIONS

ABBREVIATIONS FULL FORM

MS Delo Ratis & Co. (MS)

& And

Co. Company

Sec. Section

r.w. Read With

A.I.R. All India Reporter

Anr. Another

Ed. Edition

HC High Court

No. Number

Ors. Others

pg. Page

S.C. Supreme Court

S.C.C. Supreme Court Cases

W.P. Writ Petition

v. Versus

Sd/- Signed

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INDEX OF AUTHORITIES

Cases

Babu Ram and Anr. Vs. Krishna Bharadwaj Cold Stores and General Mills Co. (Pvt) Ltd.
and Ors ________________________________________________________________ 15

Devendra Kumar Jain vs. Polar Forgings and Tools Ltd ___________________________ 15

G. Siva Ramakrishna and Anr. vs. Rusni Distilleries P. Ltd _________________________ 16

Kurshed Sharfudeen vs IBP Company Limited ____________________________________ 12

R.N. Agrawala vs Commissioner of Income-Tax __________________________________ 12

Rashtriya Mill Mazdoor Sangh vs National Textile Corporation ______________________ 13

Royal British Bank V. Turquand _______________________________________________ 11

Salomon v. Salomon & Co. Ltd, _______________________________________________ 10

Skandinaviska Enskilda Banken Ab (publ), Singapore Branch vs. Asia Pacific Breweries
(singapore) Pvt Ltd and Another and Another __________________________________ 11

Turnaround Logistics Limited v. Jet Airways Limited ______________________________ 12

Statutes

COMPANIES ACT, 1956 : Section 10 - Jurisdiction of courts ________________________ 5

The Companies Act, 1956 ____________________________________________________ 13

Books

Guide to the Companies Act __________________________________________________ 14

Halsbury’s Laws of England, Damages,_________________________________________ 12

Indian Contract and Specific Relief Acts ________________________________________ 12

Palmer's Company Precedents ________________________________________________ 15

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STATEMENT OF JURISDICTION

The Hon’ble Court has the jurisdiction to hear the matter under Section 10 of the Companies

Act, 1956 which states that:

Section 10 - Jurisdiction of courts1

(1) The court having jurisdiction under this Act shall be—

(a) the High Court having jurisdiction in relation to the place at which the registered office of
the company concerned is situate, except to the extent to which jurisdiction has been
conferred on any District Court or District Courts subordinate to that High Court in
pursuance of sub-section (2); and

(b) where jurisdiction has been so conferred, the District Court in regard to matters falling
within the scope of the jurisdiction conferred, in respect of companies having their registered
offices in the district.

(2) The Central Government may, by notification in the Official Gazette and subject to such
restrictions, limitations and conditions as it thinks fit, empower any District Court to exercise
all or any of the jurisdiction conferred by this Act upon the court, not being the jurisdiction
conferred —

(a) in respect of companies generally, by sections 237, 391, 394, 395 and 397 to 407, both
inclusive;

(b) in respect of companies with a paid-up share capital of not less than one lakh of rupees,
by Part VII (sections 425 to 560) and the other provisions of this Act relating to the winding
up of companies.

(3) For the purposes of jurisdiction to wind up companies, the expression "registered office"
means the place which has longest been the registered office of the company during the six
months immediately preceding the presentation of the petition for winding up.

1
COMPANIES ACT, 1956 : Section 10 - Jurisdiction of courts

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STATEMENT OF FACTS

Alfa motors limited was incorporated in the year 1991 with an object of carrying on the
business of manufacturing motorized bicycles.The company initially made a foray into
manufacturing motorized bicycle and later into the two-wheeler sports bike segment.

One of the biggest problems faced by the company was the rate of attrition amongst
employees. The difficulty in retaining employees was more pronounced in the bicycle
business and this led the Nidhu group to moot the proposal of engaging human resource
consultants to address the problem of attrition in the company.Accordingly, a consultancy
contract was entered into in December 2012 with a renowned Italian company Delo Ratis Co.
(MS) which specialized in recruitment consultancy and employee retention program.

In the beginning of the year 2013, it was finally decided to hive off the bicycle business into a
separate company under the Nidhu group and a demerger proposal was according drafted. In
FY 2013-2014 the company reported huge loss. On September 12, 2014, Alfa Motors
terminated the Consultancy Agreement with Delo Ratis & Co.

In December 2014, MS sent a legal notice to Alfa Motors Limited demanding the settlement
of outstanding consultancy dues. By reply dated March 21, 2015, Alfa Motors Ltd. merely
responded to the demand for damages and stated that the same was not payable.

Subsequently, in April 2015, MS sent a demand notice under Section 434(1) (a) of the
Companies Act, 1956 for its outstanding dues. To this, Alfa Motors Ltd. sent a response
stating that all liabilities/obligations pertaining to the contract had been taken over by Trint
Co. Ltd.

On July 5, 2015, MS filed a company petition before the High Court of Wren for winding up
of Alfa Motors Ltd. under Section 433(e) read with Section 434(1)(a) of the Companies Act,
1956 on the ground that the Company was unable to pay its debts. The petitioners also filed
an application for Modification of the Scheme for winding up and fixation of exact amount of
liabilities of the respective companies towards the petitioners, by virtue of its powers under
Section 394 of the Companies act 1956.

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ISSUES PRESENTED

ISSUE I: WHETHER ALFA MOTORS LIMITED IS LIABLE TO PAY THE

COMPENSATION DEMANDED BY DELO RATIS & CO.(MS).

ISSUEII: WHETHER THE CLAIM MADE BY MS IS

VALID.

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SUMMARY OF ARGUMENTS

ISSUE I : WHETHER ALFA MOTORS LIMITED IS LIABLE TO PAY THE

COMPENSATION DEMANDED BY DELO RATIS & CO.(MS).

It is humbly submitted before the High Court of Wren that according to the contractual
agreement between the petitioner and the respondent, due to the premature termination of the
given contract by Alfa Motors Ltd., it is liable to pay the petitioner the outstanding
consultancy fees amounting to Rs. 150.26 million as well as damages amounting 75 million
for the premature termination of the agreement.

ISSUE II : WHETHER THE CLAIM MADE BY MS IS VALID.

It is humbly submitted before the High Court of Wren that Delo Ratis & Co.’s petition for
winding up of Alfa Motors Ltd. under Section 433(e) read with Section 434(1)(a) of the
Companies Act, 1956 stands valid and maintainable on the ground that the Company is
unable to pay its debtsfor more than three weeks without any bona fide dispute.

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ARGUMENTS ADVANCED

ISSUE I: WHETHER ALFA MOTORS LIMITED IS LIABLE TO PAY THE

COMPENSATION DEMANDED BY DELO RATIS & CO.(MS).

1.[a] Whether Alfa Motors was a party to the contract on the basis of which MS
demand compensation.

In December 2012, Delo Ratis & Co. and Alfa Motors Ltd. entered into a contract pertaining
to consultancy services. Alfa Motors Ltd. and Delo Ratis & Co. were the only two parties to
the contract and no third party was involved at that time. Moreover, the facts establish that
Alfa Motors had decided to terminate the contract. Since, only parties to the contract can
terminate the said contract it can safely be assumed that Alfa Motors Ltd. was a subsisting
party to the contract and therefore the claim made by Alfa Motors Ltd. stands invalid.

Since, they have executed their right as the party to the agreement, they shall be liable for the
damages and liabilities caused and compensation owed to the petitioners.

According to MS, Mr. N. Nidhu, a member of the Nidhu Group had engaged the Consultant to
conduct market research in the Sports Bike and Bicycles segments. MS produced written
acknowledgements of Mr. Nidhu, which evidenced the commissioning of the said services as
well as an undertaking on behalf of the company to pay for the same.2

This statement proves that Mr. Nidhu was acting on behalf of the company and had entered
into a contract in the name of the company with MS. It does not matter whether he was
heading the Sports Bike Division or the Bicycle one. Further, the end of Mr. Nidhu’s
association with Alfa Motors Ltd. is immaterial. With the demerger taking effect, he had
resigned from his directorship from Alfa Motors Ltd. and had taken over as a director on the
Board of Trint Co. Ltd.

2
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One of the basic principles of companies is that it has a separate legal existence than its
members, directors, owners. The company’s money and property belong to the company and
not to its shareholders (employees) 3. The principle of differentiating legal entity from its
shareholders may be referred to as ‘veil of corporation’. The courts in general consider
themselves bound by this principle. Since the contract was signed in the name of Alfa Motors
Ltd. and not Mr. Nidhu, it continued to be the liability of Alfa Motors Ltd. And thus, this suit
is maintainable and the petitioners shall be compensated.

1.[b] Whether the Doctrine of Indoor Management applies.

In the case of Skandinaviska Enskilda Banken Ab (publ), Singapore Branch vs. Asia Pacific
Breweries (singapore) Pvt Ltd and Another and Another Suit (31.08.2009 – SGHC)4 the
following was said:

“However, other courts have expressed the view that the question is whether the seal and
signatures were affixed or signed by persons held out by the company to have authority to do
so. If so, the indoor management rule would apply together with the rules on apparent
authority.”

Another important thing to note is that MS is not concerned with the inner functioning of the
management. According to the doctrine of Indoor Management, any dispute arising between
Alfa Motors Ltd. and Trint Co. Ltd. regarding the payment of the consultancy fees should not
be of material importance to an outsider like MS.

In the case of Royal British Bank V. Turquand5, the directors of the company borrowed some
money from the plaintiff. The article of company provides for the borrowing of money on
bonds but there was a necessary condition that a resolution should be passed in general
meeting. Now in this case shareholders claims that as there was no such resolution passed in
general meeting so company is not bound to pay the money. It was held that the company is

3
Salomon v. Salomon & Co. Ltd,1897 AC 22
4
[2009]SGHC197
5
(1856) 119 E.R 886

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bound to pay back the loan. As directors could borrow but subjected to the resolution, so the
plaintiff had the right to infer that the necessary resolution must have been passed.

It was held that Turquand can sue the company on the strength of the bond. As he was
entitled to assume that the necessary resolution had been passed. Lord Hatherly observed-
“Outsiders are bound to know the external position of the company, but are not bound to
know its indoor management.”

Therefore, it becomes imperative for Alfa Motors Ltd. to pay compensation to the petitioners
as they are the rightful party to the contract and have terminated the contract prematurely.
Being a third party to the demerger, Delo Ratis (MS) is not concerned with the indoor
management of the two companies.

1.[c] Whether the contract between the petitioner and respondent is determinable.

In December 2012, Alfa Motors Ltd. entered into a consultancy contract with Delo Ratis &
Co. It was decided that the Consultants would be engaged for the entire company (not just
the bicycles business) on an experimental basis for a period of 2 years initially, with an
option for renewals every two years. 6However, on September 12, 2014, Alfa Motors
prematurely terminated the Consultancy Agreement with MS. The experimental two years
period that was supposed to last till 2015 was cut short.

The termination of contract, before the expiry of renewed period without any reason or fault
on the appellants [petitioners], would amount to denial of principles of natural justice.7

In its 2006 decision of Turnaround Logistics Limited v. Jet Airways Limited 8, the Delhi high
court held an agency contract to be determinable, stating that the term ‘determinable contract’
means a contract that can be put to an end and, thus, all revocable deeds and voidable
contracts would fall within this term. The fact that the consultancy agreement provides for an

6
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7
Kurshed Sharfudeen vs IBP Company Limited, (2009)5MLJ1315
8
Turnaround Logistics Limited v. Jet Airways Limited, MANU/8/DE/8474

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experimental two-year period clearly implies that the contract cannot be considered
determinable before the expiry of the given period. A question of default does not arise on the
part of MS since the termination was not the result of non-performance or substandard
performance of the petitioner.

Compensation is a broader concept which encompasses payments made to a person in respect

of some kind of loss or damage suffered due to reasons like acquisition of property by
another party, or statutory violations, termination of employments, requiring the aggrieved
party to be compensated9. It is clearly understood that a non-defaulting party will be entitled
to claim damages whether or not a right to terminate has arisen at common law or a
contractual term.

In the case of R.N. Agrawala vs Commissioner of Income-Tax10the Court held the following
opinion of the assessee to be right:

“…they expressed the opinion that the assessee had received from the employer a certain sum
of money which ‘went to fill the hole created in his 'salary' income by reason
of premature termination of service contract, such premature termination of contract with
consequent damages payable on account of it being provided by the agreement of service
itself.’ "

Subsequently, in the case of Rashtriya Mill Mazdoor Sangh vs National Textile

Corporation11the apex court held that:

“Notwithstanding anything contained in any other law for the time being in force no person
in respect of whom any contract of management or other arrangement is terminated by
reason of the provisions contained in sub-section (3), or who ceases to hold any office by
reason of the provisions contained in sub-section (4), shall be entitled to claim any
compensation for the premature termination of the contract of management or other
arrangement or for the loss of office, as the case may be.”

It can thus be concluded that it is in fact and law that Alfa Ltd. is liable to pay compensation
to the petitioners.

9
Halsbury’s Laws of England, Damages, vol 12 (4th ed) para 815 as cited in R.G Padia (ed.), Pollock and Mulla
Indian Contract and Specific Relief Acts, vol 2 (13th ed, LexisNexis Butterworths Wadhwa 2006) 1498
10
R.N. Agrawala vs Commissioner of Income-Tax, 1960 38 ITR 67 Bom
11
Rashtriya Mill Mazdoor Sangh vs National Textile Corporation, 1996 AIR 710

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ISSUE II: WHETHER THE CLAIM BY MS IS

VALID.

Delo Ratis & Co.’s petition for winding up of Alfa Motors Ltd. under Section 433(e) read
with Section 434(1)(a) of the Companies Act, 1956 stands valid and maintainable on the
ground that the Company is unable to pay its debts.

Section 43312. Circumstances in which company may be wound up by Court:

A company may be wound up by the Court,-

(e) if the company is unable to pay its debts;

The facts state:

While there were positive effects on shareholder value as a whole, the flip side of the
demerger was that the Sports Bike business initially took a hit due to the sudden absence of
senior personnel in the management of the company (Alfa Motors Ltd.). This situation
worsened with the loss of a few critical contracts for supply of bikes. For the first time since
inception, the company reported huge losses for the FY 2013-14.13

MS has reason to believe that Alfa Motors Ltd. due to major losses had become incapable of
paying back their debts. MS sent a demand notice to Alfa Motors Limited demanding the
settlement of outstandingconsultancy dues to the tune of Rs.150.26 million, being fees
payable forthe years, 2012-2013 and 2013-14 along with damages to the extent of75 million
for premature termination of contract. Worried that they may not be able to receive their
compensation for three weeks, on July 5, 2015, MS filed a company petition before the
HighCourt of Wren for winding up of Alfa Motors Ltd.

Every person who gives money to the company cannot be treated as creditor unless such
person is treated as “creditor to whom the company owes debt under contract.”14 By virtue of

12
Section 433, The Companies Act, 1956
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TROIKA MOOT COURT LAW PROBLEM 2019
14
A. Ramaiya, Guide to the Companies Act, ( Sixteenth edition, 1998 )

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the consultancy agreement between the two parties, it can be said that MS is a creditor of
Alfa Motors Ltd.

Section 43415. Company when deemed unable to pay its debts.

(1) A company shall be deemed to be unable to pay its debts-

(a) if a creditor, by assignment or otherwise, to whom the company is indebted in a sum

exceeding five hundred rupees then due, has served on the company, by causing it to be
delivered at its registered office, by registered post or otherwise, a demand under his hand
requiring the company to pay the sum so due and the company has for three weeks thereafter
neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the
creditor.

The aforesaid provision does not require the creditor to state in the notice as to what would be
the consequences if the sum due is not paid by the company to the creditor.

The judges in Devendra Kumar Jain vs. Polar Forgings and Tools Ltd.16held that:

“Under Section 434(i)(a) presumption about insolvency of the company is liable to be drawn
where the creditor serves on the company a demand requiring it to pay the sum due and in
case the 'company for three weeks after service of demand neglects to pay the sum or to
secure or compound for it to the reasonable satisfaction of the creditor. Neither the Act nor
the Rules provide for any particular form of demand. It is also well settled that in the demand
served on the company under Section 434(i)(a) the non-specification of the period of three
weeks does not result in invalidating the demand.”.

The demand need not be in a special form. It need not use the word "demand". A pre-emptor
request or "call" for payment would no doubt suffice. A demand in excess of what is due can
still be a valid statutory demand. 17

In December 2014, MS sent a legal notice to Alfa Motors Limited demanding the settlement
of outstandingconsultancy dues to the tune of Rs.150.26 million, being fees payable for the

15
Section 434,The Companies Act, 1956
16
Devendra Kumar Jain vs. Polar Forgings and Tools Ltd, [1995]84CompCas766(Delhi)
17
Palmer's Company Precedents (Part II) 17th '" Edition (Page 26)

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years, 2012-2013 and 2013-14 along with damages to the extent of75 million for premature
termination of contract. However, Alfa Motors replied in March, 2015 exceeding the period
of three weeks and also refused to pay the compensation.In Babu Ram and Anr. v. Krishna

Bharadwaj Cold Stores and General Mills Co. (Pvt) Ltd. and Ors18, it is inter alia held by the
Allahabad High Court that the provisions of law give the company three weeks’ time to pay
up its debt which is thus, a statutory period fixed for the company.It can thus be said that
invocation of section 434 of the Companies Act, 1956 was a valid action on behalf of the
petitioners.

According to section 434(1)(a), the respondent is indebted to the petitioner for a sum which is
exceeding 500 rupees, the petitioner has served the company and has also intimated the
respondent about the remaining payment. Since the respondent has failed to establish a
satisfactory 'secure compound' for the petitioners, the winding up petition should hold
maintainable.

Only such of those persons who have jural relationship with the company, either by reason of
a concluded contract or quasi contract alone can present a petition for winding up.19

In G. Siva Ramakrishna and Anr. vs. Rusni Distilleries P. Ltd20. the following clarity was
provided by the court:

"Section 433 of the Companies Act, 1956, enumerates circumstances in which company may
be wound up by courtand Section 434 of the Companies Act, 1956, creates fiction as to when
a company is deemed unable to pay its debts. A reading of these two would show that unless
it is shown that the company is unable to pay "its debts" to a creditor, mere compliance with
Section 434(1)(a) of the Companies Act, 1956, would not enable winding up of the company."

As per the facts of the case, Alfa motors is unable to pay its creditor i.e. MS and thus the
petition under s.433 r.w. 434(1)(a) should be maintainable.

18
Babu Ram and Anr. v. Krishna Bharadwaj Cold Stores and General Mills Co. (Pvt) Ltd. and Ors,(1965)11
Com. L.J. 215
19
G. Siva Ramakrishna and Anr. vs. Rusni Distilleries P. Ltd,[2008]143CompCas289(AP)
20
[2008]143CompCas289(AP)

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PRAYER

Wherefore, in light of the issues raised, arguments advanced and authorities cited, may this
Hon’ble Court be pleased to: declare/adjudge/hold that:

1. DECLARE, the company petition for winding up under Section 434 of the
Companies Act, 1956 maintainable.
2. HOLD, the Alfa Motors Ltd. liable and enforce the payment of compensation
and damages to Delo Ratis (MS).
3. MODIFY, the Scheme for winding up and fixation of exact amount of
liabilities of the respective companies towards the petitioners

AND/OR

Pass any other order, direction, relief that it may deem fit in the best interests of Justice,

Fairness and Good Conscience.

For this act of kindness, the Appellant shall duty bound forever pray.

ALL OF WHICH IS MOST RESPECTFULLY SUBMITTED

Sd/-

(Counsel for the Petitioner)

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