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TEAM -

II NUJS HERBERT SMITH NATIONAL CORPORATE LAW MOOT COURT


COMPETITION, 2010
___________________________________________________________________________

BEFORE THE HON’BLE HIGH COURT


AT
KOLKATA

___________________________________________________________________________

COMMITTEE OF DINERGY CREDITORS & OTHERS

APPELLANTS

V.

DINERGY SUGHOSKAR POWER PVT. LTD., BRETLEY BANK & OTHERS

RESPONDENT

___________________________________________________________________________

C.A. No.: ______/2010

__________________________________________________________________

MEMORANDUM FOR THE RESPONDENTS


Table of Contents____________________________________________________________________

TABLE OF CONTENTS

__________________________________________________________
List of Abbreviations…………………………………………………….………………………..v

Index of Authorities………………………………………………………………………...........vii

Statement of Facts………………………………………………………………………….........xiv

Questions Presented……………………………………………………………………………xviii

Summary of Pleading...…………………………………………………………………….........xix

_____________________________________________________________________________

Pleadings..…..…………………………………………………………………………………..

…1

_____________________________________________________________________________

[I] JV COMPANY AND DINERGY ARE NOT THE ONE AND SAME BY

VIRTUE OF APPLICATION OF THE DOCTRINE OF CORPORATE

DISREGARD............................1

[I.A] THE ‘ENTITY LAW’ STATES THAT HOLDING AND SUBSIDIARY DO HAVE SEPARATE LEGAL

EXISTENCE………………………….…………………………………………………………...…1

[I.B] THE ‘SINGLE ECONOMIC UNIT’ TEST IS NOT SATISFIED………………………………………..1

[I.C] JV COMPANY IS NOT AN INSTRUMENTALITY OF DINERGY……………………………………3

[I.D] JV COMPANY IS NEITHER AN ALTER EGO NOR AN AGENT OF DINERGY………………..……...4

[I.D.1] JV is not an alter

ego……………………………………………………………………...4

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[I.D.2] JV Company is not an agent of Dinergy…………………………………………………..5

_____________________________________________________________________________

[II] THE CORPORATE FRAUD HAS BEEN COMMITTED BY THE

DIRECTORS OF JV

COMPANY…………………………………………………………………………………...6

[II.A] THE NOMINEE DIRECTORS HAVE THE SAME DUTIES LIKE OTHER DIRECTORS………………...6

[II.B] THEY OWE A PRINCIPAL DUTY TOWARDS THE COMPANY RATHER THAN THE

APPOINTER…………………………………………………………………………………………6

[II.C] THE DIRECTORS OWE A DUTY TOWARDS THE CREDITORS……………………………………7

[II.D] THE DIRECTORS CANNOT MISAPPROPRIATE THE FUNDS OR CONDUCT NEGLIGENTLY………..7

[II.D.1] The directors of JV Company are liable for misappropriation of funds………………….8

[II.D.2] The directors have been negligent in the conduct of the JV Company…………………..8

[II.D.3] The directors have violated the statutory duty to maintain proper accounts……………..9

[II.E] THE DIRECTORS ARE LIABLE FOR FRAUD COMMITTED AND NOT JV COMPANY………………9

[II.F] THE DIRECTORS CAN BE HELD LIABLE FOR THE COMPANY’S DEBTS………………………...11

_____________________________________________________________________________

[III] THE FOREIGN DECREE CANNOT BE EXECUTED IN INDIA…….

……………..11

[III.A] DIRECT EXECUTION OF FOREIGN DECREE IS NOT POSSIBLE FOR A NON-RECIPROCATING

TERRITORY………………………………………………………………………………………..11

[III.B] ASSUMING ARGUENDO, THE COC FILED CIVIL SUIT FOR ENFORCEMENT OF FOREIGN DECREE, IT IS NOT

CONCLUSIVE…………………………………………………………………………….12

[III.B.1] The Delaware Court is not a competent court………………………………………….13

[III.B.2] The foreign judgment is opposed to public policy……………………………………..13

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[IV] THAT SCHEME SATISFIES ALL THE REQUIREMENTS OF A VALID SCHEME

UNDER SECTION 391……………………………………………………………………..….14

[IV.A] THAT THE SCHEME HAS FULFILLED ALL THE REQUISITE STATUTORY

REQUIREMENTS…………………………………………………………………………………...14

[IV.B] THAT THE CLASSES HAVE BEEN FAIRLY REPRESENTED………………………..…………..15

[IV.B.1] Assuming arguendo, the foreign creditors constitute a different class………………. 15

[IV.C] THAT THE ARRANGEMENT IS SUCH THAT A MAN OF BUSINESS WOULD REASONABLY

APPROVE………………………………………………………………………………….………16

[IV.D] THAT THE SCHEME IS BEEN FAIR AND REASONABLE……………………………..………..16

[IV.E] THE SCHEME IS IN THE PUBLIC INTEREST………………………………………………….17

[IV.F] WINDING –UP IS THE LAST RESORT AND EVERY ATTEMPT HAS TO BE MADE TO SALVAGE THE

COMPANY…………………………………………………………………………………............18

[IV.G] THAT THE SCHEME IS COMPLETE AND WORKABLE……………………………..…………19

[IV.H] THE INDIAN CREDITORS WOULD HAVE A HIGHER PARI PASU CHARGER AS PER THE

SCHEME…………………………………………………………………………………………...19

[IV.H.1]The Indian Creditors would continue to have a higher pari pasu charge as per the Indian

Scheme…………………………………………………………………………………………...19

[IV.H.2] Creation of Higher pari pasu charge does not amount to fraudulent preference………20

_____________________________________________________________________________

PRAYER FOR
RELIEF…………………………………………………………………………….21

APPENDIX………………………………………………………………………………………...2
2

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LIST OF ABBREVIATION

ABBREVIATION EXPLANATION
& And
¶/¶¶ Paragraph/Paragraphs
§/§§ Section/Sections
2d Cir Second Circuit
AD Apex Decisions
AIR All India Reports
All ER Rep All England Reports Reprints
Aust. Australia
BCC British Company Cases
BCLC Butterworth’s Company Law Cases
Bom Bombay
CA Court of Appeals
Cal Calcutta

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Ch D Chancery Division
CLC Common Law Chambers
CLR Commonwealth Law Reports
CMLR Commonwealth Law Reports
Co. Company/Corporation
Com. Company
Com cases Company Cases
Conn.L.Rev. Connecticut Law Review
Del Delhi
Etc. Etcetera
Guj. Gujarat
Harv. L. Rev. Harvard Law Review
HL House of Lords
ILR Indian Law Reports
in liq In Liquidation
Inc Incorporated/Incorporation
Ir Ireland
JV Joint Venture
KB King’s Bench
LJ Lord Justice of Appeal
LQR Law Quarterly Review
LT Law Times
Ltd Limited
Mad Madras
no. Number
NS WLR New South Wales Law Reports
NY New York
NZ LR New Zealand Law Reports
Ori Orissa
P&H Punjab & Haryana
p. Page
PC Privy Council
PNB Punjab National Bank
QB Queen’s Bench
QBD Queen’s Bench Division
Raj Rajasthan
Rly Railway
SC Supreme Court
SCC Supreme Court Cases
SCL SEBI & Corporate Law
SDNY Superior Division of New York
SEBI Securities Exchange Board of India
SLT Scots Law Times
WLR Weekly Law Reports

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INDEX OF AUTHORITIES
A. STATUTES

1. Companies Act, 1956.

2. Civil Procedure Code, 1908.

3. Foreign Exchange and Management Act, 1999.

B. CASE LAWS

B.1 Indian Cases

Name of Case Cited at

1. Aapka Bazar Ltd. (In Liquidation) In Re [2007] 76 SCL 128 (Raj)


……………………..........9
2. Albert Judah v. Ramapada Gupta (1960) 30 Com Cases
582………………………………...8
3. Andhra Pradesh State Road Transport Corporation v. Income Tax Officer AIR 1964 SC
1486……………………………………………………………………………………….…...1
4. BDA Breweries v. Cruickshonk & Co.Ltd. (1996) 85 Comp Cas 325 (Bom)

……………........1
5. Chevalier I.I. Iyyyerappan v. Dharmodayan Co., Trichur AIR 1966 SC 1017…………..
…...8
6. Chinappa Chettiar v. Official Liquidator Oriental Investment Trust Ltd. (1944) 14 Com
Cases 207………………………………………………………………………………….…..8
7. D.A. Swamy v. India Meters Ltd., (1994) 79 Com Cases

27………………………………...15
8. Dhulia-Amalner Motor Transport Ltd. v. R.R. Dharamsi AIR 1952 Bom
337…………….....2
9. Gujarat Ambuja Exports Ltd. Re (2004) 118 Com Cases
265…………………………….....17
10. Gurdayal v. Raja of FaridKot, 22 Cal 222

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PC…………………………………....................12
11. Hackbridge Hewittic and Easun Ltd. v. GEC Distribution Transformers Ltd., (1992) 74

Com Cases 543 (Mad)


………………………………………………................................................4
12. Hindustan Lever Ltd., Re, (1994) 81 Com Cases

754………………………….....................18
13. In Re: Maneckchowk and Ahmedabad Manufacturing Co. Ltd. (1970) 40 Comp. Cas. 819
(Guj.)…………………………………………………………..........................................15, 21
14. Indequip Ltd. v. Maneckchowk & Ahmedabad Mfg. Co. Ltd. [1970] 2 CLJ,

300……….......16
15. Industrial Development Corporation, Orissa v. Regional Provident Fund Commr. (2002)

112 Com Cases 527 (Ori)


………………………………………………………………………….2
16. Joseph v. Paily, (1958) 28 Com Cas
146………………………………………………….....20
17. Katni Cement & Industrial Co. Ltd., (1937) 7 Com Cases
348…………………...................15
18. Kondoli Tea Co. Ltd, Re, ILR (1886) 13 Cal
43………………………………………………1
19. Kundan Singh v. Moga Transport Co.P.Ltd. (1987) 62 Com Cases
600…………………....12
20. Kurakose v. P.K.V Group Industries (2000) 111 Com Cases
826…………………………...12
21. Lakshmi Commercial Bank Ltd., Re, (1948) 18 Com Cases

265………………………….....15
22. Lalit Surajmal Kanodia v. Office Tiger Database Systems India (P) Ltd. (2006) 129
Comp Cas 192
Mad…………………………………………………………………………………..6
23. Legal Remembrancer v. Akhil Bandhu (1936) 6 Com Cases 464 (Cal)
……………………....9
24. LIC v. Escorts Ltd. (1986) 1 SCC
264………………………………………………………...6
25. LIC v. Hari Das Mundhra (1966) 36 Com Cases
371………………………………………...2
26. Mehra (UK) v. Union of India (1997) 88 Comp Cas 213

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Del………………………………...2
27. Miheer H. Mafatlal v. Mafatlal Industries Ltd. (1996) 87 Com Cases

792………………....17
28. Moloji Nar Singh Rao Shitole v Shankar Saran AIR 1962 SC
1737………………………...13
29. Navjivan Mills Co. Ltd., Re, [1978] 48 Comp cas

402…………………………....................19
30. New Horizons Ltd. v. Union of India. (1997) 89 Com Cases 785 (Del)

………………………3
31. New Swadeshi Mills of Ahmedabad Ltd. V. Dye-Chem Corporation
[1986]59CompCas183(Guj)…………………………………………………………............19
32. P.K.Nedungadi v. Malayalee Bank Ltd. AIR 1971 SC
829…………………………………...9
33. PNB v. Bareja Knipping Fasteners Ltd. (2001) 103 Comp Cas 958
P&H……………………2
34. Praga Tools Corpn v. Imanual (1969) 1 SCC 585……………...
……………….....................2
35. Re, Katna Cement & Industrial Co. Ltd., (1937) 7 Com Cases

348……………....................17
36. Renusagar Power Co Ltd v. General Electric Co, AIR 1994 SC
860…………………….....13
37. River Steam Navigation Co. Ltd., (1967) 2 Comp LJ 106 (Cal)
…………………………......18
38. Shankaranarayana Hotels P. Ltd. v. Official Liquidator, Government of Karnataka,
(1992) 74 Com Cases
290…………………………………………………………………………...15
39. Sidana (H.S.) v. Rajesh Enterprises (1993) 77 Com Cases
251……………………………..11
40. Somesh Chandra Manilal Nanavati v. Jivanlal C. Chinai (1956) 26 Com Cases
148………..6
41. Stock and Co. (In Liquidation) v. Dilip Kumar Chakrovarthy (1996) 87 Com Cases 139

(Cal)…………………………………………………………………………………………...7
42. T.R.Pratt (Bombay) Ltd. v. E.D. Sasoon & Co. Ltd. AIR 1936 Bom
62……………………...2
43. Tata Engineering and Locomotive Co. Ltd. v State of Bihar (1964) 34 Com cases

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458……...2
44. Tikam Chand Jain v. State Government of Haryana (1987) 62 Com Cases
601………........11
45. Union of India v. Ambalal Sarabhai Enterprises, (1984) 55 Com Cases 623………….
……18
46. Union of India v. Shivalik Cellulose P. Ltd., (1991) 72 Com Cases 545 (Del)……..

……….18
47. Veeraraghava (SA) Ayyar v JD Muga Sait (1912) ILR 39 Mad 24……………………..
…...13

B.2 Foreign Cases

Name of the Case


1. Adams v. Cape Industries Plc. (1990) 2 WLR 657…………………………………..
………3
2. Alabama, etc., Rly Co., Re, (1891) 1 Ch 213……………………………………..
………...15
3. Anglo American Insurance Co. Ltd. Re, (2001) 1 BCLC 755 (Ch D.)

…………………......16
4. Anglo Continental Supply Co. Ltd., Re, (1922) 2 Ch
723…………………………………..15
5. Apple Computer Inc v. Mackintosh Computers Inc, (1987) LRC (Com) 658………..
…….11
6. Bank of Tokyo v. Karoom (1986) 3 All ER 468…………………………………..

………….3
7. Barings Plc (No.5), Re (1999) 1 BCLC 433………………………………..
………………..9
8. Belvedere Fish Guano Co. v. Rainham Chemical Works (1921) AC 465………………...
…8
9. Berkey v. Third Avenue Railway Co. 244 NY
84…………………………………………...4,5
10. Berlei Hestia (NZ) Ltd. v. Fernyhough (1980) 2 NZ LR
150………………………………....7
11. Boulting v. A.C.T.T. (1963) 2 QB 606……………………………………………………..

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…7
12. Brazilian Rubber Plantations & Estates Ltd. Re (1911) 1 Ch 425 (CA)
……………………...9
13. British Murac Syndicate Ltd. v. Alperton Rubber Co. Ltd. (1915) 2 Ch.

186………………...6
14. D.H.N Food Distributors Ltd. v. Tower Hamlets LBC (1976) 1 WLR 852 (CA)………..
…...2
15. Daniels v. Anderson (1995) 16 ASCR 607 (Australia)…………………………………..
……9
16. DEG-Deutschc Investitions-und Entwicklungsgesellschaft mbH v. Koshy (2002) 1 BCLC
478 (Ch D)………………………………………………………………………………….
…….10
17. Dimbleby & Sons Ltd. v. National Union of Journalists (1984) 1 All ER 751 (HL)

………...3
18. Elkington & Co. v. Hurter (1892) 2 Ch 452………………………………………………..
…8
19. F.G.(Films) Ltd.,Re. [1953] 1 WLR
483……………………………………………………...6
20. Ferguson v. Wilson (1866) 36 LJ CH
67……………………………………………………...8
21. Forest of Dean Coal Mining Co Re (1878) 10 Ch D
450……………………………………..8
22. Grupo Torras SA v. Al Sabah. [1999] CLC 1469 (QBD) (Comm Ct.)
…………………….....9
23. Hannibal (E) & Co. v. Frost (1988) 4 BCC 3 (CA)
………………………………………...11
24. I.C.I. v. E.C. Commission (1972) 11 CMLR
557……………………………………………...3
25. I.R.C v. Samson (1921) 2 KB 492 (CA)
……………………………………………………....6
26. In Re Broad Casting Station 2GB Pvt. Ltd. (1964-65) NSWR
1648……………………….....7
27. Interntaional Customs Assocs. v. 893 F Ford Motor Co. Supp 1251 (SDNY 1995)

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…………6
28. Jeffree v. National Companies and Securities Commission (1989) 137 CLR 1 (Aust)
…….....8
29. Kinsela v. Russel Kinsela Pty. Ltd. (in liq.) (1986) 4 NS WLR
722…………………………..8
30. Kodak Ltd. v. Clark (1903) 1 KB
505…………………………………………………………6
31. Kuwait Airways Corporation v. Iraqi Airways [2002] 2 AC
883……………………………14
32. Kuwait Asia Bank EC v. National Mutual Life Nominees Ltd. (1990) 3 All ER 404 (PC)
………………………………………………………………………………………..…..7
33. Lagunas Nitrate Co. v. Lagunas Syndicate (1899) 2 Ch
392…………………………………8
34. Levin v. Clark (19620 NSWR 686 (Aust.) ………………………………………….……..

…7
35. Littlewoods Mail Order Stores Ltd. v. IRC [1969] 3 All ER 855
CA………………………....2
36. Lonhro Ltd. v. Shell Petroleum Co. Ltd. (1980) QB
358……………………………………...5
37. Loucks v. Standard Oil Con. 224 NY
99………………………………………………….....14
38. Louis Steen v. Charles Allen Law (1963) 3 All ER 770……………………………………
11
39. Lowendahl v. Baltimore & Ohio RR, 247 AD
144…………………………………………..4
40. Lyannaise Bank Netherland NV v. Pathe Communications Corp (1991) Del Ch Lexis
215……………………………………………………………………………………………8
41. Minfie v. Rowley 202 P. 673, 676 (Cal. 1921)
……………………………………………….5
42. Nicholson v. Permakraft (NZ) Ltd. (1985) 1 NZLR
242…………………………………….8
43. Palette Shoes Pty. Ltd.v. Krohn (1937) 58 CLR
1…………………………………………...3

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44. Polly Peck International Plc. (In Administration) (No.3), Re, (1996) 1 BCLC 428 (Ch D)
…………………………………………………………………………………………….3
45. Prudential Assurance Co. Ltd. v. Newman Industries Ltd. (No.2) (1982) 1 All ER
354……………………………………………………………………………………………3
46. Re, British & Common wealth Holding Plc. (No. 3) BCLC
322…………………………...16
47. Revlon Inc. v. Cripps and
Lee………………………………………………………………..2
48. Salomon v. Salomon & Co. [1895-99] All ER Rep 33: 66 LJ Ch
35………………………...1
49. Scottish Cooperative Wholesale Society Ltd. v. Meyer (1958) 3 All ER
66…………………7
50. Selangor United Rubber Estates Ltd. v. Cradock (no.3) (1968) 1 WLR
1555……………...6
51. Smith v. Hull Glass Co. (1852) 11C B
897…………………………………………………..7
52. Smith, Stone & Knight Ltd. v. Brimingham Corpn [1939] 4 All ER 116
KB……………..1, 5
53. Solar Int’l Shipping Agency, Inc. v. Eastern Proteins Export, Inc. 778 F.2d 922 (2d Cir.

1985)…………………………………………………………………………………………5
54. Sovereign Life Assurance Co. v. Dodd, (1892) 2 QB 573 (CA)……………………………

15
55. Standard Chartered Bank v. Pakistan National Shipping Corporation (2003) 1 All ER
173 (HP)
…………………………………………………………………………………………..9
56. Sussex Brick Co. Ltd., Re, (1960) 1 All ER 772……………………………………………
17
57. Vervaeke v. Smith [1983] 1 AC
145………………………………………………………...13
58. Walker v. Wimbore (1976) 137 CLR 1 : (1976) 3 ACLR
529……………………………….7
59. Welsh Development Agency v. Export Finance Co. Ltd., (1992) BCLC
148………………..2

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60. Winkworth v. Edward Baron Development Co. Ltd. (1987) 1 All ER


114…………………..7
61. Woolfson v. Strathclyde Regional Council (1978) SLT
159………………………………...2

62. Zaist v. Olson 154 Onn.563, 227 A.2d 552 (1962)


…………………………………………..4

C. LAW REVIEW ARTICLES

1. Warner Fuller, “The Incorporated Individual: A study of One-man Company”, (1938) 51


Harv. L. Rev. 1373 at p 1377………………………………………………………………….2

2. F.Powell, Parent and Subsidiary Corporations, (Chicago, Callaghan), 1931……………..


…4

3. S. Griffin, “Holding companies and Subsidiaries- The Corporate Veil” (1991) 12(1)
Comp Lawyer 17………………………………………………………………………………..
……4

4. K.A. Strasser, “Piercing the Veil in Corporate Groups” (2004-2005) 37 Conn.L.Revv


640...4

5. Ph. I. Blumberg, The law of Corporate Groups: Tort, Contract and Other Common Law
Problems in the Substantive Law of Parent and Subsidiary Corporations (Gaithersburg/New
York, aspen Law and Business) 1987…………………………………………………………4

6. Michael C. Wolfson, Socio-Economic Statistics and Public Policy: A New Role for
Microsimulation Modeling, Government of Canada - Analytical Studies Branch, Statistics
Canada Working Paper No. 81, July 1995…………………………………………………...13

D. LIST OF BOOKS AND TREATISES


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1. PALMER’S COMPANY LAW, VOL. 2, 25th Edn., Sweet & Maxwell, London,
2008………………………………………………………………………………………15

2. Ramaiya A, A GUIDE TO THE COMPANIES ACT, PART 1, 16th Edn., Lexis Nexis
Butterworths Wadhwa Pvt. Ltd., Nagpur, 2008…………………………………….Passim

3. Ramaiya, A., GUIDE TO THE COMPANIES ACT, Wadhwa, Nagpur, Sixteenth Edn.
(Rep.), 2006, Part 2……..……………………..……………………………………Passim

4. Seth Dua & Associates, JOINT VENTURES & MERGERS AND ACQUISITIONS IN
INDIA – LEGAL AND TAX ASPECTS, 1st Edn., Lexis Nexis Butterworhts Pvt. Ltd.,
New Delhi, 2006. ……..……………………..
……………………………………...Passim

5. Atul M Setalvad, Conflict of Law, first edn., LexisNexis Butterworths, New Delhi, India,
2007………………………………………………………………………………………13

6. Karen Vaderkerchkove, Piercing the Corporate Veil, Kluwer Law International


European Company Law Series, Wolters Kluwer Law & Business , Volume 2 (2007)
……………………………………………………………………………………...4

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STATEMENT OF FACTS

DESCRIPTION OF PARTIES

APPELLANTS Committee of Dinergy Creditors & Others [Hereinafter referred as


“CoC”], are the committee of major secured creditors of Dinergy.
RESPONDENTS Dinergy Sughoskar Power Pvt. Ltd. [Hereinafter referred as the “JV
Company”], is a joint venture company incorporated in India and
registered with registrar of companies at Kolkata, Bretley Bank & Others
[hereinafter referred as “Syndicate” ] is a consortium of Banks who are
the secured creditors of the JV Company.
OTHER PLAYERS

DINERGY Dinergy Power and Infrastructure Inc. [Hereinafter referred as


“Dinergy”], is a company incorporated in the State of Delaware, United
States of America. It is one of the joint venture partners in the JV
Company which has contributed 88% in paid up equity share capital of
the JV Company.
SUGHOSKAR Sughoskar Holding Limited [Hereinafter referred as “Sughoskar”], is a
company incorporated in India. It is the other joint venture partner which
has contributed 12% in paid up equity share capital of the JV Company.

LIST OF EVENTS LEADING TO THE DISPUTE.

May 2006: Dinergy and Sughoskar entered into a project specific joint venture in
India and accordingly they set up a company in India called the JV
Company. In regard to debt finance of the JV Company, Dinergy assisted
in leveraging Rs. 4500 Crore from foreign banks for which JV Company
stood as guarantor in the form of Unsecured Shareholder loan. This was
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in addition to Rs. 5300 Crores which was arranged by the Syndicate.


January 2007: The JV Company won a bid to develop a hydel power project in
Chandigram, in West Bengal. This bid was won largely due to good
political ties which Sughoskar had with the rule party in West Bengal.
The project is supposed to solve the Eastern India terrible power crisis.
June 2008: Dinergy defaulted in the payment of its insurance premium of USD 300
million for its workers. Because of which the Employees’ Union with
active lobbying convinced the local government to investigate into the
financial affairs of Dinergy.
24 Sept. 2008: The Delaware government published its report which revealed clear
proof of a lot of unaccounted payouts in the JV Company which was
considered to be a potential commercial fraud. Subsequently the matter
was referred to Indian authorities for greater investigation.
29 Sept. 2008: Following the Delaware government report, the Security and Exchange
Commission (hereinafter referred as SEC) initiated and investigation into
Dinergy.
October 2008: In India the CBI started investigations on the directors of JV Company
who were alleged to have made these payouts.
4th Dec. 2008: The SEC published its report and concluded the same as was in the
Delaware government report. The report also revealed the Dinergy with
all it group entities had a glut of common directors and all its
independent directors were industrialist in whose companies, Robin
Schmidt, Chairman of Dinergy was actively involved in the process.
22nd Dec 2008: Dinergy filed a bankruptcy petition in Delaware.
24th Dec 2008: Robin Schmidt along with his family members resigned from the boards
of several entities of the group including parent company, Dinergy.
5th Aug 2009: Here in India the CBI completed its investigations and it revealed that
large proportion of debt finance was spent by JV Company in
unaccounted payouts and it also revealed that a former minister of state
and several bureaucrats received large payouts from JV Company. These
payouts were equivalent to unaccounted payouts by Dinergy.
23 Aug 2009: The Bretley Bank notified the JV Company about its two successive
defaults in repayment.
27 Aug 2009: On response from the management, Bretley Bank and Syndicate gave a
further notice stating that the JV Company is unable to meet its demand

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so there is a possibility of winding up.


30 Aug 2009: Because of the report of the investigation done by CBI and falling of
Dinergy in US, work on Chandigram Project came to a standstill and
2000 workers were laid off. There was a possibility of breakdown in
state’s power related infrastructure and hence under immense pressure to
resolve the situation the Ministry of Power in the state government stated
in the media that as a stakeholder in the matter all possible steps will be
taken to resolve the problem.
2 Sept 2009: The management and the creditors of the JV Company agreed to meet
and work out an arrangement under Section 391 of the Companies Act,
1956 (the “Indian Scheme”). This was done because of the powerful
intervention of the ruling party.
18 Sept 2009: In the meantime, several creditors of Dinergy made their claims before
the Court at Delaware. The court ensured that every subsidiary of
Dinergy, including JV Company was represented and was a party to this
matter. The court took into cognizance the Delaware government report
and SEC report and concluded scope of possible corporate fraud. The
court applied the corporate disregard doctrine and asset consolidation
principle and ordered payouts for the secured creditors from the
consolidated assets of Dinergy (Foreign Decree). The court constituted
CoC and gave them the power and responsibility to execute the order in
every jurisdiction across the globe.
22 Sept 2009: In India, the Indian Scheme was agreed between the parties and as per the
scheme the Indian creditors would have a higher pari pasu charge than
foreign creditors.
29 Sept 2009: The Indian Scheme was submitted before the CLB for approval after all
required compliances.
5 Oct 2009: The CoC appointed their own directors to the board of JV Company and
Dinergy Representative Director’s were changed.
14 Oct 2009: The Creditors from US approached the Civil Court in Kolkata for the
enforcement of foreign decree. The Civil Court on the request of the
government stayed the enforcement of decree. Thereupon which an
appeal was preferred by the CoC to the High Court. There on the request

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of the government and Syndicate the court has decided to club matter of
restructuring scheme and hear both the matters together.

QUESTIONS PRESENTED

[I] WHETHER JV COMPANY AND DINERGY CONSTITUTE SINGLE ENTITY?

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[II] WHETHER CORPORATE FRAUD HAS BEEN COMMITTED BY THE

DIRECTORS OF JV COMPANY?

[III] WHETHER FOREIGN DECREE IS CAPABLE OF EXECUTION IN INDIA?

[IV] WHETHER SCHEME SATISFIES ALL THE REQUIREMENTS OF A VALID

SCHEME UNDER SECTION 391?

SUMMARY OF PLEADINGS
[I] JV COMPANY AND DINERGY ARE NOT ONE AND THE SAME BY APPLICATION OF THE DOCTRINE

OF CORPORATE DISREGARD

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The idea behind entity law is that the holding and subsidiary stand as distinct corporate entities
and cannot be held liable for each others actions and conduct. The single economic test whereby
in a group situation the veil is pierced is not justified in the instant case as the fundamental tests
involved in it like interference in day-to-day business, intermingling of accounts are not fulfilled.
Further the Powell test which establishes the factum of instrumentality is not satisfied. The fraud
alleged has not been committed by JV Company. JV Company is neither an alter ego nor and
agent of the parent.

[II] THE CORPORATE FRAUD HAS BEEN COMMITTED BY THE DIRECTORS

It is humbly submitted that the position of nominee directors is the same as others and they owe a
principal duty towards the company and not the nominator. They also owe a duty towards the
creditors in the interest of the company. The directors have conducted negligently and have
misapplied the funds of the company resulting in the crisis. The directors have also violated the
statutory mandate of maintenance of proper books and accounts. It is thus humbly submitted that
the directors are liable for the company’s debts.

[III] THAT THE FOREIGN DECREE CANNOT BE EXECUTED IN INDIA

Although it is not disputed that as a matter of public policy foreign judgements are to be
respected and enforced in India, S. 13 carves out certain exceptions for giving effect to the same.
It is argued by the respondents that technically the CoC act of direct enforcement of foreign
decree before the Civil Courts is not possible as US being a non- reciprocating territory entails a
separate institution of suit. As the representation of JV Company was under the compulsion of
saving the assets from seizure, the competency of the Delaware Court to bind the respondent is
being questioned. Lastly, giving effect to the foreign decree would unduly force upon the step of
Winding up of the JV Company which it is submitted that would infringe the existing policy of
resorting to winding up as a last method.

[IV] THAT THE SCHEME SATISFIES ALL THE REQUIREMENTS OF A VALID SCHEME

An attempt is being made to objectively evaluate the scheme and establish that it fulfils all the
requirements under the law. Elementary conditions like compliance with the statutory
requirements, fair representation of classes and reasonable from the businessman’s perspective

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have all been complied with in the instant case. Further it is also argued that the Scheme agreed
between the parties was fair, prudent and the commercial wisdom of the company is not to be
replaced by the subjective discretion of the court. The scheme is not just complete but also
workable. There is an inherent bias within the law to prefer mechanisms for restructuring the
company against winding-up method which unless the circumstance warrants needs to be
respected. By the operation of the scheme the Indian creditors would continue to have a higher
pari pasu charge. The scheme has subordinated the claim of foreign creditors against the Indian
creditors as a mechanism to resurrect the company. Thus like in every other case where the
creditors in face of winding-up application acquiescence to lose some of their interest, similarly a
lower priority is another such mode to survive the complete loss.

[I] JV COMPANY AND DINERGY ARE NOT THE ONE AND SAME BY VIRTUE OF
APPLICATION OF THE DOCTRINE OF CORPORATE DISREGARD.

[I.A] THE ‘ENTITY LAW’ STATES THAT HOLDING AND SUBSIDIARY DO HAVE SEPARATE LEGAL EXISTENCE

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Separate legal entity is the fundamental and cardinal rule.1 The corporation is equal to a natural
person and has a legal entity of its own2 Lord Atkinson J. in Smith, Stone & Knight Ltd. v.
Brimingham Corpn3 noted that the mere fact that a man holds all the shares in a company does
not make the business of the company his business. Plethora of cases suggests that the holding
and subsidiary do possess separate legal existence and are not to be treated one entity.4 The
holding company is not an employer nor the subsidiary is an agent and they do have separate
legal existence.5

[I.B] THE ‘SINGLE ECONOMIC UNIT’ TEST IS NOT SATISFIED

The corporate insulation has been pierced but it is impossible to ascertain the factors which
6
operate for it and the matter depends upon the social, economic and moral factors as they
operate.7 There are cases in which the distinction has been ignored of which D.H.N Food

1
See Salomon v. Salomon & Co. [1895-99] All ER Rep 33: 66 LJ Ch 35: 75 LT 426; See also
Kondoli Tea Co. Ltd, Re, ILR (1886) 13 Cal 43; Ram Kanai Singh v. Mathewson AIR 1915 PC
27; T.R.Pratt (Bombay) Ltd. v. E.D. Sasoon & Co. Ltd. AIR 1936 Bom 62; Praga Tools Corpn
v. Imanual (1969) 1 SCC 585; Dhulia-Amalner Motor Transport Ltd. v. R.R. Dharamsi AIR
1952 Bom 337.

2
See Tata Engineering and Locomotive Co. Ltd. v State of Bihar (1964) 34 Com cases 458; See
also Andhra Pradesh State Road Transport Corporation v. Income Tax Officer AIR 1964 SC
1486, LIC v. Hari Das Mundhra (1966) 36 Com Cases 371.

3
[1939] 4 All ER 116 KB. See also Littlewoods Mail Order Stores Ltd. v. IRC [1969] 3 All ER
855 CA.

4
See BDA Breweries v. Cruickshonk & Co.Ltd. (19960 85 Comp Cas 325 (Bom); See also PNB
v. Bareja Knipping Fasteners Ltd. (2001) 103 Comp Cas 958 P&H; Mehra (UK) v. Union of
India (1997) 88 Comp Cas 213 Del.

5
See Industrial Development Corporation, Orissa v. Regional Provident Fund Commr. (2002)
112 Com Cases 527 (Ori).

6
See Warner Fuller, “The Incorporated Individual: A study of One-man Company”, (1938) 51
Harv. L. Rev. 1373 at p 1377.

7
Id. at p 1379.

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Distributors Ltd. v. Tower Hamlets LBC8 and Revlon Inc. v. Cripps and Lee9 is noteworthy.
However, the decision in such cases has been distinguished in Woolfson v. Strathclyde Regional
Council10 and the separate entity has been upheld in a group situation. In Adams v. Cape
Industries Plc.11 the court regarded that the distinction has been ignored as turning on the
wording of statutes or contracts and it was denied that there was a general principle that all
companies in a group should be regarded as one. It was held that the a high degree of overall
supervision does not necessitate the lifting and the subsidiary even though subject to the business
policies of the parent would not be one entity until and unless the day-to-day affairs of subsidiary
are retained by parent company.12 In situations where there are interwined business affairs,
transactions, property, bank and other accounts, employees, management etc. are intermingled or
where subsidiary is inadequately financed as a separate business for its normal obligations or
where enterprises of both the companies are not held out to public as separate, the veil may be
lifted.13 The veil is disregarded on the economic context but Court is not concerned with
economics but with law and the distinction is fundamental in law and cannot be bridged.14 The
subsidiary if enjoys real autonomy cannot be regarded as a single economic unit.15 If the
subsidiary and the holding in the same line of business have separate manufacturing and

8
(1976) 1 WLR 852 (CA).

9
(1985) 1 NZ LR 34

10
(1978) SLT 159.

11
(1990) 2 WLR 657.

12
Id.

13
See New Horizons Ltd. v. Union of India. (1997) 89 Com Cases 785 (Del).

14
See Bank of Tokyo v. Karoom (1986) 3 All ER 468; See also Polly Peck International Plc. (In
Administration) (No.3), Re, (1996) 1 BCLC 428 (Ch D); Welsh Development Agency v. Export
Finance Co. Ltd., (1992) BCLC 148; Palette Shoes Pty. Ltd.v. Krohn (1937) 58 CLR 1;
Prudential Assurance Co. Ltd. v. Newman Industries Ltd. (No.2) (1982) 1 All ER 354

15
See I.C.I. v. E.C. Commission (1972) 11 CMLR 557.

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production units and are not merely marketing units then the courts should not lift the corporate
veil.16 The courts have refused to lift the corporate veil and disregard the separate personality
even if they are wholly owned subsidiaries and had same directors and the same management. 17
JV Company has been registered as a project specific joint venture in India.18 It is not merely a
marketing unit but has its own autonomy in terms of the day-to-day management and business
affairs. Further it is not a wholly-owned subsidiary.19 It has its separate employees, and financial
accounts are not intermingled with Dinergy. It is humbly submitted that the single economic unit
test is not fulfilled.

[I.C] JV COMPANY IS NOT AN INSTRUMENTALITY OF DINERGY

The instrumentality doctrine is used to in U.S.A which relies on the Powell test.20 Excessive
control alone does not suffice and the essential term is ‘operation’ which does not depend upon
partial or complete stock ownership and there must be a de facto intrusion into the day-to-day
decision-making process.21 Powell test indicates the following riders: a) the subsidiary has
grossly inadequate capital b) it has substantially no business except with the parent c) the later
uses the assets of the subsidiary as its own d) the formal legal requirements of it are not followed
e) the inter-corporate loans benefit the parent f) the two file joint income-tax returns and

See Hackbridge Hewittic and Easun Ltd. v. GEC Distribution Transformers Ltd., (1992) 74
16

Com Cases 543 (Mad).

17
See Dimbleby & Sons Ltd. v. National Union of Journalists (1984) 1 All ER 751 (HL).

18
Refer ¶ 3 of the 2nd NUJS Herbert Smith National Corporate Law Moot Court Competition
2010 (Hereinafter referred as Problem.)

19
Refer ¶ 4 & 7, Problem.

20
See Lowendahl v. Baltimore & Ohio RR, 247 AD 144.

21
See Berkey v. Third Avenue Railway. 244 NY 84.

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consolidated financial statement.22 In the instant case such nexus and the conditions of the
instrumentality theory are not satisfied.

[I.D] JV COMPANY IS NEITHER AN ALTER EGO NOR AN AGENT OF DINERGY.

[I.D.1] JV is not an alter ego

The doctrine finds its genesis in Californian courts23 where piercing should be done when such a
unity of ownership and interest exists that the two affiliated corporations have ceased to be
separate and the subsidiary has been relegated to the status of the alter ego of the parent.24
Further this unity has to be such so as to indicate that the corporation had never begun or had
ceased.25 The facts have to reveal a high degree of control to suggest that the subsidiary is a mere
alter ego of the parent and a high degree of overall supervision does not justify and the
subsidiary even though subject to the broad business policies of the parent would not be alter ego
until the day-to-day affairs are also retained by the parent.26 The mere fact that Dinergy holds
88% of the paid-up share capital and has nominee directors on the board of JV Company27 does
not suffice to the test for this does not prove that JV Company never came into existence.

22
See F.Powell, Parent and Subsidiary Corporations, (Chicago, Callaghan), 1931. See also S.
Griffin, “Holding companies and Subsidiaries- The Corporate Veil” (1991) 12(1) Comp Lawyer
17; K.A. Strasser, “Piercing the Veil in Corporate Groups” (2004-2005) 37 Conn.L.Revv 640;
Ph. I. Blumberg, The law of Corporate Groups: Tort, Contract and Other Common Law
Problems in the Substantive Law of Parent and Subsidiary Corporations( Gaithersburg/New
York, aspen Law and Business) 1987.

23
See Minfie v. Rowley 202 P. 673, 676 (Cal. 1921).

See Karen Vaderkerchkove, Piercing the Corporate Veil, Kluwer Law International European
24

Company Law Series, Wolters Kluwer Law & Business , Volume 2 (2007) at p. 83.

25
See Zaist v. Olson 154 Onn.563, 227 A.2d 552 (1962).

26
Supra note at 13; See also Lonhro Ltd. v. Shell Petroleum Co. Ltd. (1980) QB 358.

27
Refer ¶3, Problem.

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[I.D.2] JV Company is not an agent of Dinergy.

The parent and subsidiary if fulfill the agency requirements then they can be merged to each
others liability28 for which not only a high degree of control but also a consensual understanding
between the two is required which will often not be the case in corporate groups.29 The judicial
conception will be sacrificed only when the sacrifice is intended to uphold a public policy. 30
Proof of alter ego is also required to prove that the subsidiary is the agent of the parent.31 A
subsidiary cannot always be forced to stand as the agent of the holdings nor held liable because
of the acts of the parent.32 In Smith, Stone & Knight Ltd. v. Brimingham Corpn33 the test laid
down was: 1) were the profits treated as the profits of the holding? 2) were the persons
conducting the business were appointed by it? 3) was it the head and brain of the subsidiary? 4)
was the capital decided by it 5) did the company make profits because of the skill and expertise
of it? 6) was the company in constant and effectual control? It is humbly submitted that none of
these circumstances are present and in such situation it would be unjust to disregard the entity
law.

28
Supra n. 24 at p 84

29
See Solar Int’l Shipping Agency, Inc. v. Eastern Proteins Export, Inc. 778 F.2d 922 (2d Cir.
1985)

30
See Berkey v. Third Avenue Railway Co. 244 NY 84

31
See Interntaional Customs Assocs. v. 893 F Ford Motor Co. Supp 1251 (SDNY 1995)

32
See Kodak Ltd. v. Clark (1903) 1 KB 505; See also I.R.C v. Samson (1921) 2 KB 492 (CA)

33
[1939] 4 All ER 116 KB. See also F.G.(Films) Ltd.,Re. [1953] 1 WLR 483; See Also LIC v.
Escorts Ltd. (1986) 1 SCC 264; Lalit Surajmal Kanodia v. Office Tiger Database Systems India
(P) Ltd. (2006) 129 Comp Cas 192 Mad.
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[II] THE CORPORATE FRAUD HAS BEEN COMMITTED BY THE DIRECTORS OF


JV COMPANY.

[II.A] THE NOMINEE DIRECTORS HAVE THE SAME DUTIES LIKE OTHER DIRECTORS.

If the articles specify nominee directors may be appointed.34 Nominee directors are subject to the
usual procedure for trial on merits for finding out whether as directors they have performed their
statutory duties in good faith.35 The nominee directors are in the same position and owe same
duties to the company as any other director and the law expects them to devote their loyalty as a
whole and they must not represent only their appointer. 36 The appointment of nominee directors
on JV’s Board is permitted under law.

[II.B] THEY OWE A PRINCIPAL DUTY TOWARDS THE COMPANY RATHER THAN THE APPOINTER.

The nominees can follow the wishes of the nominator provided that he bona fide believes that the
interests of the nominator are identical with the interest of the company as a whole. 37 In Boulting
v. A.C.T.T.38, Lord Denning M.R. rightly observed; “There is nothing wrong in it….as long as
the director is left free to exercise his best judgment in the interests of the company which he
serves.” Where the nominee directors pleaded the interest of the nominator and ignored that of
the host company, it was held that they were guilty of oppressing the shareholders of the latter
34
See British Murac Syndicate Ltd. v. Alperton Rubber Co. Ltd. (1915) 2 Ch. 186; See also
Somesh Chandra Manilal Nanavati v. Jivanlal C. Chinai (1956) 26 Com Cases 148.

35
See A. Stock and Co. (In Liquidation) v. Dilip Kumar Chakrovarthy (1996) 87 Com Cases 139
(Cal).

36
See Kuwait Asia Bank EC v. National Mutual Life Nominees Ltd. (1990) 3 All ER 404 (PC);
See also Selangor United Rubber Estates Ltd. v. Cradock (no.3) (1968) 1 WLR 1555.

37
See In Re Broad Casting Station 2GB Pvt. Ltd. (1964-65) NSWR 1648; See also Levin v.
Clark (19620 NSWR 686 (Aust.); Berlei Hestia (NZ) Ltd. v. Fernyhough (1980) 2 NZ LR 150;
See also Kumarmanagalam Committee on Corporate Governance, 7-5-1999, accepted by SEBI
on 25th January 2000.

38
(1963) 2 QB 606, 626.
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company.39 It is humbly submitted that the board of JV Company has been marred by turf fights
between the two partners40. The nominee directors and the independent directors of Dinergy in its
subsidiaries were a common glut41 who did not defend the interest of the company but their
appointer parent Dinergy and should be held liable for the crisis.

[II.C] THE DIRECTORS OWE A DUTY TOWARDS THE CREDITORS.

Directors in discharging their duties to their companies must take into account of the interest of
creditors for it is encompassed in the interests of their companies.42 They owe a duty to the
creditors to ensure that the company’s affairs are properly conducted, that its property is not
exploited for the benefit of themselves and to the prejudice of the creditors.43 The creditors look
up to the company for payment of debts and would be threatened by the future insolvency and
there is a need for continuing obligation on part of directors to consider the interest of the
creditors irrespective of the financial health of the company. 44 It is humbly submitted that the
directors owe a duty of care towards the Syndicate which they have failed to discharge.

[II.D] THE DIRECTORS CANNOT MISAPPROPRIATE THE FUNDS OR CONDUCT NEGLIGENTLY.

The general principles of the law of agency will govern the relations between directors and
company.45 Directors are subjected to intense scrutiny and are subject to various statutory and

39
See Scottish Cooperative Wholesale Society Ltd. v. Meyer (1958) 3 All ER 66.

40
Refer ¶ 3, Problem.

41
Refer ¶ 18, Problem.

42
See Walker v. Wimbore (1976) 137 CLR 1 : (1976) 3 ACLR 529.

43
See Winkworth v. Edward Baron Development Co. Ltd. (1987) 1 All ER 114.

44
See Jeffree v. National Companies and Securities Commission (1989) 137 CLR 1 (Aust); See
also Nicholson v. Permakraft (NZ) Ltd. (1985) 1NZLR 242; Lyannaise Bank Netherland NV v.
Pathe Communications Corp (1991) Del Ch Lexis 215; Kinsela v. Russel Kinsela Pty. Ltd. (in
liq.) (1986) 4 NS WLR 722
45
See Ferguson v. Wilson (1866) 36 LJ CH 67; See also Elkington & Co. v. Hurter (1892) 2 Ch
452; Belvedere Fish Guano Co. v. Rainham Chemical Works (1921) AC 465; Smith v. Hull
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common law duties.46 Directors are trustees of the company’s property and funds in their hands.47
He is liable for the breach of trust when he misapplies the fund and misappropriates any asset.48

[II.D.1] The directors of JV Company are liable for misappropriation of funds.


49
The locus classicus can be found in Grupo Torras SA v. Al Sabah. The court said that
payments were made by misappropriation of funds and that purpose of such payments was not
shown in the accounts and the action for breach of fiduciary duty would succeed for the director
had knowledge and the dishonest intention.50 Where a director misapplies the property of the
company or has been guilty of breach of trust, the Court may order him to repay the money or
restore the property or to pay compensation.51 It is humbly submitted that the nominee directors
have acted in conjunct with the unaccounted payouts done by Dinergy and have misused the debt
finance52 and hence are liable.

[II.D.2] The directors have been negligent in the conduct of the JV Company.

Glass Co. (1852) 11C B 897.

46
See Sarah Worthington, “Corporate Governance: Remedying and Ratifying Directors’
Breaches” (2000) 116 LQR 638.

47
See Chevalier I.I. Iyyyerappan v. Dharmodayan Co., Trichur AIR 1966 SC 1017; See also
Chinappa Chettiar v. Official Liquidator Oriental Investment Trust Ltd. (1944) 14 Com Cases
207; Legal Remembrancer v. Akhil Bandhu (1936) 6 Com Cases 464 (Cal)

See Albert Judah v. Ramapada Gupta (1960) 30 Com Cases 582; See also Forest of Dean
48

Coal Mining Co Re (1878) 10 Ch D 450.

49
[1999] CLC 1469 (QBD) (Comm Ct.).

50
Id.

51
See P.K.Nedungadi v. Malayalee Bank Ltd. AIR 1971 SC 829.

52
Refer ¶¶13, 14 & 15.

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The directors are not liable for negligence if they act honestly for the benefit of the company
with such care as is reasonably expected of them. 53 A director of a company is not bound to take
any definite part in the conduct of the company’s business but so far as he does undertake it he
must take reasonable care in its dispatch.54 It is humbly submitted that the directors have
conducted negligently taking the facts into account.

[II.D.3] The directors have violated the statutory duty to maintain proper accounts.

Section 173, 210 and 217 impose a duty upon the director to prepare balance sheet and profit and
loss account.55 Section 211 states that failure to comply with form of balance sheets and matters
to be stated therein and the content and disclosures to be made in the profit and loss account
would make the director liable.56 Section 215 mandates the director to authenticate and approve
financial statement.57 Section 201 states that a provision in the company’s articles/any agreement
that excludes the liability of the directors for negligence, default, and misfeasance, breach of
duty or breach of trust is void and the company cannot indemnify directors against such
liability.58 Directors can be held liable for failure to supply information to auditors59 and non-
compliance with the requirements of maintaining proper accounts.60 It is humbly submitted that
the directors are liable for the breach committed with respect to the statutory mandate.

53
See Lagunas Nitrate Co. v. Lagunas Syndicate (1899) 2 Ch 392; See also Brazilian Rubber
Plantations & Estates Ltd. Re (1911) 1 Ch 425 (CA).

54
See Daniels v. Anderson (1995) 16 ASCR 607 (Australia); See also Barings Plc (No.5), Re
(1999) 1 BCLC 433.

55
Refer §§ 173, 217 and 210 of Companies Act, 1956 (hereinafter referred as Act.)

56
Refer § 211(8) of Act.

57
Refer § 215 of Act.

58
See Aapka Bazar Ltd. (In Liquidation) In Re [2007] 76 SCL 128 (Raj).

59
Refer § 221(4) of Act.

60
Refer § 209(5) of Act.

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[II.E] THE DIRECTORS ARE LIABLE FOR FRAUD COMMITTED AND NOT JV COMPANY.

In Standard Chartered Bank v. Pakistan National Shipping Corporation61, Lord Hoffman held:

“A director could not escape liability for deceit on the ground that his act was committed on
behalf of the company…. the contention that he had made the relevant fraudulent
misrepresentation on behalf of the company was true but irrelevant…Although an agent might
assume responsibility without incurring personal that reasoning could not apply to fraud … and
cannot escape personal liability by claiming that he was committing the fraud on behalf of
another.”

It is no defense to the claim for deceit that the claimants could have discovered the falsity but
failed to do so.62 Where directors have parted with moneys of their company in an illegal
manner, ignorance of law is no defense.63 In Hannibal (E) & Co. v. Frost 64
the MD of a
company withdrew sum of money from the company’ account and bribed a contract awarding
authority, and when sued by the company, contended that the company had benefited by having
substantial contracts awarded to it. The court said that a director of the company he had no
authority to use the company’s money to pay bribes the benefit to company was no defense. 65
Directors are liable for fraud involving the company’s property if they have knowledge of the
fraud or have personally participated in any misrepresentation.66 It is humbly submitted that the
directors of JV Company have bribed the way for the project by making payouts to minister and

61
(2003) 1 All ER 173 (HP).

62
See DEG-Deutschc Investitions-und Entwicklungsgesellschaft mbH v. Koshy (2002) 1 BCLC
478 (Ch D).

63
See Louis Steen v. Charles Allen Law (1963) 3 All ER 770.

64
(1988) 4 BCC 3 (CA).

65
Id.

66
See Apple Computer Inc v. Mackintosh Computers Inc, (1987) LRC (Com) 658.

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bureaucrats67 and have thus committed fraud upon the company and its stakeholders and should
be held liable instead of the company.

[II.F] THE DIRECTORS CAN BE HELD LIABLE FOR THE COMPANY’S DEBTS.

The director can be held liable for the debts of a company if there is proof that the director is
personally liable under the circumstances relating to the debt.68 It is submitted that the directors
have breached their fiduciary and statutory duty and can be held liable for the company’s debts.

[III] THE FOREIGN DECREE CAN NOT BE EXECUTED IN INDIA

[III.A] DIRECT EXECUTION OF FOREIGN DECREE IS NOT POSSIBLE FOR A NON-RECIPROCATING

TERRITORY

The CPC 1908, deals with the execution of the Foreign Decree and enforcement of the foreign
judgment. S. 44 A69 deals with the execution of the foreign decree in India. The foreign decree
passed by a court of a reciprocating country will be executed in a manner as if it has been passed
by the District Court of the Country.70 However, when it comes to the non-reciprocating as in
the instant matter US is a non reciprocating territory, the foreign decree cannot be executed
under S. 44 A of the code.

67
Refer ¶¶14 & 15.

See Kundan Singh v. Moga Transport Co.P.Ltd. (1987) 62 Com Cases 600; See also Tikam
68

Chand Jain v. state Government of Haryana (1987) 62 Com Cases 601; Sidana (H.S.) v. Rajesh
Enterprises (1993) 77 Com Cases 251; Kurakose v. P.K.V Group Industries (2000) 111 Com
Cases 826.

69
Refer § 44 A of Civil Procedure Code, 1908 (Hereinafter referred as Code).
70
Supra n.71.

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In order to enforce the foreign decree, the decree holder will have to institute a civil suit in the
court which will treat the foreign judgment conclusive. 71 In the instant matter the Appellants
approached the Civil Court at Kolkata for the enforcement of the Foreign Decree without
instituting a separate civil suit and hence cannot be enforced.72

[III.B] ASSUMING ARGUENDO, THE DECREE PASSED ITSELF IS NOT CONCLUSIVE

It is submitted that even if the CoC had filed a civil suit in the Civil Court of Kolkata for the
enforcement of the foreign judgment, the judgment falls under the exceptions laid down in Cl.
(a) to (f) of section 13. S. 1373 of the Code embodies the principle of Private International law
that court will enforce a foreign judgment if that judgment is of a competent court.

[III.B.1] The Delaware Court is not a competent court

The competency as mentioned in cl. (a) of S. 13 refers to the jurisdiction of the foreign court to
try the matter. Broadly, the foreign court would have jurisdiction if the defendant was a citizen of
the state whose court pronounced the judgment, or a resident of that state, or had voluntary
submitted to the jurisdiction of that court, or had himself selected the forum. 74 It is submitted
that none of the pre requisite are fulfilled in the instant case. The JV Company is a company
incorporated in India75 and has no connections with US except for the fact that Dinergy is one of
the Joint Venture Partner.

Although the JV Company was represented during the proceedings before the Delaware court, it
is contend that the submission was not voluntary. To constitute submission to the jurisdiction it
must be a voluntary submission and must not have been a submission to save property from

71
See Gurdayal v. Raja of FaridKot, 22 Cal 222 PC.
72
Refer ¶ 26, Problem.
73
Refer § 13 of the Code.
74
See Moloji Nar Singh Rao Shitole v Shankar Saran AIR 1962 SC 1737.
75
Refer ¶ 3, Problem.

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seizure.76 Dinergy filed a bankruptcy petition in Delaware and several creditors made their
claims before the Court at Delaware.77 The JV Company submitted before the Court in order to
protect its assets from the foreign decree and thus annuls the competency of the Court.

[III.B.2] The foreign judgment is opposed to public policy

Even in cases where, according to the appropriate conflict of laws rules of the court, a foreign
law is to be applied to the dispute a court is considering, the court may not apply those rules in
all cases.78 The present case though does not fall under any of the clause mentioned in S. 13 of
CPC. However, through various judicial pronouncements same has been impliedly included in
Cl. (f) of S. 13.79 The concept of public policy is narrower in the field of conflict of laws than in
municipal laws, partially because recognizing and applying foreign judgment is itself a rule of
public policy.80 The apex court in India has adopted the same approach and it was reiterated in
the case of Kuwait Airways Corporation v. Iraqi Airways.81

The ground of public policy is very wide and implied in all the facets of law. The courts would
close their door if the help would violate some fundamental principle of justice, some prevalent
practices in the country and some deep rooted tradition of common weal.82 The public policy of a
country cannot be read in exclusion with the socio – economic policy of a country.83 In India

76
See Veeraraghava (SA) Ayyar v JD Muga Sait (1912) ILR 39 Mad 24.
77
Refer ¶ 21, Problem.
78
See Atul M Setalvad, Conflict of Law, first edn., LexisNexis Butterworths, New Delhi, India,
2007 at p.99.
79
See Renusagar Power Co Ltd v. General Electric Co, AIR 1994 SC 860, at p 885.
80
See Vervaeke v. Smith [1983] 1 AC 145, at p. 164.
81
[2002] 2 AC 883.
82
See Loucks v. Standard Oil Con. 224 NY 99.
83
See Michael C. Wolfson, Socio-Economic Statistics and Public Policy: A New Role for
Microsimulation Modeling, Government of Canada - Analytical Studies Branch, Statistics
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courts as a matter of policy prefer revival of the company rather winding up of the company.
The revival of the JV Company is essential for the Hydel Power Project as it is expected to end
Eastern states power crisis. Hence the respondents submit that the enforcement of the foreign
decree would go against the existing public policy and the same must be dismissed.

[IV] THAT SCHEME SATISFIES ALL THE REQUIREMENTS OF A VALID SCHEME


UNDER SECTION 391

The Indian Scheme that has been worked out by the Bretley Bank and the Syndicate has been
submitted for approval after complying with all the requirements. The scheme which is now
transferred from CLB to High Court must evaluate and sanction the same. Before the court
accords its sanction to the scheme proposed by the Syndicate, three important matters must be
satisfied, namely, (i) whether the statutory provisions have been complied with or not; (ii)
whether the class or classes have been fairly represented; and (iii) whether the arrangement is
such as a man of business would reasonably approve.84

[IV.A] THAT THE SCHEME HAS FULFILLED ALL THE REQUISITE STATUTORY REQUIREMENTS

In determining the compliance of statutory requirements the courts has to satisfy itself that: (a)
the meeting was duly held and conducted; (b) that the compromise was a real compromise; (c)
that it was accepted by a competent majority; (d) that the majority was acting in good faith and
for common advantage of the whole class; (e) that what they did was reasonable, prudent and
proper.85 It is submitted that the scheme which has been submitted for approval has complied
with all the requirements.86 The scheme which was in the nature of a compromise was real as it
Canada Working Paper No. 81, July 1995.
84
See In Re: Maneckchowk and Ahmedabad Manufacturing Co. Ltd. (1970) 40 Comp. Cas. 819
(Guj.); See also Anglo Continental Supply Co. Ltd., Re, (1922) 2 Ch 723 at p. 736; Alabama,
etc., Rly Co., Re, (1891) 1 Ch 213; Shankaranarayana Hotels P. Ltd. v. Official Liquidator,
Government of Karnataka, (1992) 74 Com Cases 290; Katni Cement & Industrial Co. Ltd.,
(1937) 7 Com Cases 348.
85
See Lakshmi Commercial Bank Ltd., Re, (1948) 18 Com Cases 265.
86
Refer ¶ 25, Problem.
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was a devise to fight the problem of indebtedness arising due to the non payment of debt to the
Bretley Bank and the syndicate. The syndicate was apprehensive of a credit risk disaster on the
project and there was a grave possibility of winding up of the JV Company. Thus the entering
into a scheme of compromise was not just a reflection of acting in good faith and for common
good but also reasonable, prudent and proper.

[IV.B] THAT THE CLASSES HAVE BEEN FAIRLY REPRESENTED

Classes of Creditors become necessary to be determined in a scheme of arrangement or


compromise involving restructuring of debts. The JV Company has an independent entity that
that of the Dinergy, the creditors of the Dinergy cannot be expected to consider as part of class of
Creditors in general. The creditors comprising of different classes must have different interest. In
order to constitute a class, members belonging to the class must form a homogeneous group with
commonality of interest. If people with heterogeneous interests are combined in a class, naturally
the majority having common interest may ride rough shod over the minority representing a
distinct interest.87 When one finds a different state of fact existing among different creditors
which may differently affect their minds and their judgement, they must be divided into different
classes.88 Class must be confined to those persons whose rights are not to so dissimilar as to
make it impossible for them to consult together with the view to their common interest.89 Even if
there are different groups within a class or who are to be treated differently for in the scheme,
such groups must be treated as separate classes for the purpose of this scheme.90

[IV.B.1] Assuming arguendo, the foreign creditors constitute a different class

Even if the Dinergy and JV Company constitute a single entity by virtue of holding-subsidiary
relationship, subordinated creditors having an interest in the company which could be affected in
a way which is different from the effect upon other creditors, and then they would constitute a

87
See Indequip Ltd. v. Maneckchowk & Ahmedabad Mfg. Co. Ltd. [1970] 2 CLJ, 300.
88
Buckley on the Companies Act, 13th Edn, 406.
89
See Sovereign Life Assurance Co. v. Dodd, (1892) 2 QB 573 (CA).
90
See D.A. Swamy v. India Meters Ltd., (1994) 79 Com Cases 27.

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separate class.91 Further, it is not for the courts by the Company to decide as to what constitutes
class in accordance with what scheme it purports to achieve.92 Whether or not a particular group
constitutes a separate class must depend on the particular facts of the particular case and on the
nature of the difference said to exist between the two alleged classes and the relevant terms of
the particular scheme. The court has also to consider the possibility of compulsion by the
majority or unfairness in terms of the scheme or procedure at the creditor’s meeting and on any
relevant practical considerations.93 In determining whether creditors fell into separate classes, it
is necessary, first, to determine whether the rights to be released or varied under the scheme were
so distinct that the scheme has to be treated as a compromise or arrangement with more than one
creditor; and secondly, whether the new rights which the scheme gave to those whose rights are
to be released or varied led to such conclusion. Therefore by application of both these test the
exclusion of foreign creditors is justified.

[IV.C] THAT THE ARRANGEMENT IS SUCH THAT A MAN OF BUSINESS WOULD REASONABLY APPROVE

It is submitted that the scheme was agreed between the parties with due compliance of all the
requirements. The Dinergy representatives on the Board also voted in favour of the scheme.
Further no malafide intention can be implicated as the scheme was entered within a month since
the time the Bretley Bank notified the JV Company about its defaults. In absence of a conclusive
proof of any extraneous consideration, the commercial wisdom of the parties cannot be
questioned. It is the commercial wisdom of the parties to the scheme who have taken an
informed decision about the usefulness and propriety of the scheme by supporting it by the
requisite majority vote that be kept in view of by the court. The Court has neither the expertise
nor the jurisdiction to delve deep into the commercial wisdom exercised by the creditors and the
members of the company who have ratified the scheme by the requisite majority.94

91
See Re, British & Common wealth Holding Plc. (No. 3) BCLC 322 per Vinelott J.
92
Palmer’s Company Law, vol.2, 25th Ed., S&M, London, 2008
93
See Anglo American Insurance Co. Ltd. Re, (2001) 1 BCLC 755 (Ch D.).
94
See Gujarat Ambuja Exports Ltd. Re (2004) 118 Com Cases 265; See also Miheer H. Mafatlal
v. Mafatlal Industries Ltd. (1996) 87 Com Cases 792.

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[IV.D] THAT THE SCHEME IS BEEN FAIR AND REASONABLE

It is the consistent view of the courts that no scheme can be said to be fool – proof and is
possible to find faults in a particular scheme but that by itself is not enough warrant a dismissal
of petition for sanction of scheme. So long as the court is satisfied that the scheme is in the
interests of the general body of shareholders, the court will not make any provision for the
dissidents.95 If the scheme has to be rejected it must obviously be unfair, patently unfair, unfair to
the meanest intelligence.96 Thus it is submitted that a scheme that has been agreed upon by all the
concerned parties including Dinergy representative, it is deemed to be final and binding. It takes
care of the interest of all the creditors and there should be no scope for the court to create any
provision for the dissidents.

[IV.E] THE SCHEME IS IN THE PUBLIC INTEREST

In considering any scheme proposed, the Court will also consider its effects on the workers or
employees and see that, as far as possible, it works as little hardship as it can to them.97 The
context in which the expression “public interest” is used should permit the court to find out why
the transferor company came into existence, what object was sought to be achieved through
creation of the transferor- company and why it is not being dissolved by merging it with another
company.98 In the instant case the sole purpose for which JV Company was formed was to
develop hydel power project in Chandigram. Further, due to the investigations initiated in
Delaware against the Dinergy, the work on the project has come to stand still with severe losses
with 2000 of 9000 workers having been already laid off.

In the Hindustan Lever Ltd. Case,99 workers’ petition in respect to providing them some
assurance was pending before the Calcutta high court and the same was made binding upon the
95
See Re, Katna Cement & Industrial Co. Ltd., (1937) 7 Com Cases 348.
96
See Sussex Brick Co. Ltd., Re, (1960) 1 All ER 772.
97
See Re, River Steam Navigation Co. Ltd., (1967) 2 Comp LJ 106 (Cal).
98
See Union of India v. Ambalal Sarabhai Enterprises, (1984) 55 Com Cases 623.
99
See Hindustan Lever Ltd., Re, (1994) 81 Com Cases 754.

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HLL. Where the company had remained closed for five years and there was no evidence whether
there was any existing employee, an objection on the part of some persons who claimed
themselves to be employees was overruled and an attempt by Industrial Reconstruction Bank to
revive the company by taking it out of winding up order was allowed.100 Thus indisputably there
is a great public importance which is integrally connected with the sanctioning of the scheme.

[IV.F] WINDING –UP IS THE LAST RESORT AND EVERY ATTEMPT HAS TO BE MADE TO SALVAGE THE

COMPANY.

As far as practical the court will always be in favour of reviving an industry rather than closing it
down. The role of industrial undertaking in the country’s economic life and in the process of
industrialization and in the form of employment is an aspect for consideration while examining a
scheme which aims at restarting a closed industrial undertaking.101 Winding up is the last thing
that the court would do and not the first thing that the court would do having regard to its impact
and consequences, for winding up of a company would result in, (1) closing down of a unit
which produces some goods or provides some services; (2) it would throw out of employment
numerous persons and resulting grave hardship to the members of families of such employees;
(3) loss of revenue to the State by way of collection that the State could hope to make on account
of customs or excise duties, sales tax, income-tax, etc; (4) scarcity of goods and in diminishing
of employment opportunities.102 It is submitted that similar implications would be had in the
instant case also.

Despite the inability to pay its debts, if a company has still prospects of coming back to life and
if the court is told of any specific proposal, which in the opinion of the court is likely to
materialize, the court will be inclined to give a chance to resurrect the company. It should be the
policy of the court to attempt to revive thought at the moment the company may not be solvent
and may not be able to meet its obligations to its creditors. But this should be only if it is shown
that there is reasonable prospect for resurrection and survival. It is the duty of the court to

100
See Union of India v. Shivalik Cellulose P. Ltd., (1991) 72 Com Cases 545 (Del).
101
See Navjivan Mills Co. Ltd., Re, [1978] 48 Comp Case 402.
102
Id., at 415.

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welcome revival rather than affirm the death of the company and for that purpose the court is
called upon to make a discreet exercise.103

[IV.G] THAT THE SCHEME IS COMPLETE AND WORKABLE

It is submitted that the Indian Scheme agreed between the parties as an attempt to save the JV
Company being wound up. It was to assure the creditors that even in case of possible winding
up, they would have a higher parri passu charge than the foreign creditors over the JV Company
assets. The Court has to see the completeness of the scheme and its workability. Where a scheme
of reconstruction was sanctioned leaving the question of liability of the shareholders after
reconstruction to be decided as and when it arose, it was held that the scheme ought not to have
been sanctioned without taking a positive decision on that point also.104

[IV.H] THE INDIAN CREDITORS WOULD HAVE A HIGHER PARI PASU CHARGER AS PER THE SCHEME

The CoC and others cannot have any claim over the assets of the JV Company because Indian
legal system recognizes security of non-resident creditors only if they have taken the consent and
approval of the Ministry of Finance and the RBI before the creation of security over the assets of
a corporate debtor. The Foreign Exchange Management Act, 1999, S. 3 requires the foreign
creditor to seek approval of the RBI for creation of security in favour of the foreign creditor
without that the ordinary rules of ranking applicable to the domestic creditors would not be
available to the foreign creditors.

[IV.H.1] Principle of Debt Subordination is invoked in the instant case

The insolvency law in India recognizes the principle of Debt Subordination. The original
creditors of the JV Company are the Syndicate. Assuming Arguendo, that the court recognizes
foreign lenders as the creditors of JV Company they will be subject to debt subordination. The
Indian Scheme which subordinated other debts is in consonance with principals of insolvency
law, as it has been held in several cases that the main purpose and effect of debt subordination is

See New Swadeshi Mills of Ahmedabad Ltd. V. Dye-Chem Corporation, [1986] 59 CompCas
103

183 (Guj).
104
See Joseph v. Paily, (1958) 28 Com Cas 146.
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not to enhance the rights of certain creditors but, rather, to reduce the rights of other creditors.105
The contractual subordination in form of a scheme of arrangement and compromise is being
recognized in all the jurisdictions.106

Subordination arrangements applicable to different groups of unsecured creditors of a borrower


are a common feature of corporate finance.107 Typically, what is agreed is that, in the event of
insolvency or liquidation of the borrower, the claims of certain of the creditors will rank junior to
the claims of other creditors. Thus, the junior ranking claims are subordinated.

[IV.H.2] Creation of Higher pari pasu charge does not amount to fraudulent
preference

It is submitted that so long as the transaction was not done to prefer one of the creditor but to
save one’s own skin (in the instant case to save the JV Company), the transfer could not be
treated as fraudulent preference.108 A payment made under pressure e.g. in context of
proceedings, actual or threatened by the creditor concerned or fear of such proceedings actual or
threatened could not be considered as fraudulent preference.

105
See Canada Deposit Insurance Corporation v. Canadian Commercial Bank [1992] 3 S.C.R.
558
106
See Re Air Canada (2004), 2 C.B.R. (5th) 4 (Ont. S.C.J. – Commercial List) (Farley J.).
107
Id.
108
Maneckchowk Case, Supra note 84, at 847
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PRAYER FOR RELIEF

Wherefore in the light of above facts stated, arguments advanced and authorities cited , the court
may be pleased to adjudge and declare:

1. That the JV Company is a separate and distinct entity


2. That Corporate fraud has indeed been committed by the Directors of the JV Company
3. That the foreign decree cannot be enforced in India
4. That the scheme fulfils all the requirements under Law and the same should be preferred over
winding up of the company.

The court may also be pleased to pass any other order in the light of justice, equity and good
conscience.

All of which is respectfully submitted,

At.: Kolkata Counsels for Respondents


Date: 19th February, 2010 X______________________

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APPENDIX

I. Relevant provisions under the Companies Act, 1956


4. Meaning of "holding company" and "subsidiary"
(1.) For the purposes of this Act, a company shall, subject to the provisions of sub-section (3),
be deemed to be a subsidiary of another if, but only if, -
(a) that other controls the composition of its Board of directors; or
#01[(b) that other-
(i) where the first-mentioned company is an existing company in respect of which the
holders of preference shares issued before the commencement of this Act have the same voting
rights in all respects as the holders of equity shares, exercises or controls more than half of the
total voting power of such company;
(ii) where the first-mentioned company is any other company, holds more than half in
nominal value of its equity share capital; or]
(c) the first-mentioned company is a subsidiary of any company which is that other's
subsidiary.
390. Interpretation of sections 391 and 393.-
In sections 391 and 393,-
(a) the expression "company" means any company liable to be wound up under this Act;
(b) the expression "arrangement" includes a reorganisation of the share capital of the
company by the consolidation of shares of different classes, or by the division of shares into
shares of different classes or, by both those methods; and
(c) unsecured creditors who may have filed suits or obtained decrees shall be deemed to be
of the same class as other unsecured creditors.
391. Power to compromise or make arrangements with creditors and members.-
(1) Where a compromise or arrangement is proposed-
(a) between a company and its creditors or any class of them; or
(b) between a company and its members or any class of them;
the #01[Tribunal] may, on the application of the company or of any creditor or member of the
company, or, in the case of a company which is being wound up, of the liquidator, order a
meeting of the creditors or class of creditors, or of the members or class of members, as the case
may be, to be called, held and conducted in such manner as the #01[Tribunal] directs.
(2) If a majority in number representing three-fourths in value of the creditors, or class of
creditors, or members, or class of members, as the case may be, present and voting either in
person or, where proxies are allowed #02[under the rules made under section 643], by proxy, at
the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if
sanctioned by the #01[Tribunal], be binding on all the creditors, all the creditors of the class, all
the members, or all the members of the class as the case may be, and also on the company, or in
the case of a company which is being wound up, on the liquidator and contributories of the
company:

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#03[Provided that no order sanctioning any compromise or arrangement shall be made by the
#01[Tribunal] unless the #01[Tribunal] is satisfied that the company or any other person by
whom an application has been made under sub-section (1) has disclosed to the #01[Tribunal], by
affidavit or otherwise, all material facts relating to the company, such as the latest financial
position of the company, the latest auditor's report on the accounts of the company, the pendency
of any investigation proceedings in relation to the company under sections 235 to 251, and the
like.]
(3) An order made by the #01[Tribunal] under sub-section (2) shall have no effect until a
certified copy of the order has been filed with the Registrar.
392. Power of Tribunal to enforce compromise and arrangement.-
(1) Where the Tribunal makes an order under section 391 sanctioning a compromise or an
arrangement in respect of a company, it-
(a) shall have power to supervise the carrying out of the compromise or an arrangement; and
(b) may, at the time of making such order or at any time thereafter, give such directions in
regard to any matter or make such modifications in the compromise or arrangement as it may
consider necessary for the proper working of the compromise or arrangement.
(2) If the Tribunal aforesaid is satisfied that a compromise or an arrangement sanctioned
under section 391 cannot be worked satisfactorily with or without modifications, it may, either
on its own motion or on the application of any person interested in the affairs of the company,
make an order winding up the company, and such an order shall be deemed to be an order made
under section 433 of this Act.
(3) The provisions of this section shall, so far as may be, also apply to a company in respect
of which an order has been made before the commencement of the Companies (Second
Amendment) Act, 2002 sanctioning a compromise or an arrangement.]
433. Circumstances in which company may be wound up by Tribunal.-
A company may be wound up by the Tribunal,-
(a) if the company has, by special resolution, resolved that the company be wound up by the
Tribunal;
(b) if default is made in delivering the statutory report to the Registrar or in holding the
statutory meeting;
(c) if the company does not commence its business within a year from its incorporation, or
suspends its business for a whole year;
(d) if the number of members is reduced, in the case of a public company, below seven, and
in the case of a private company, below two;
(e) if the company is unable to pay its debts;
(f) if the Tribunal is of the opinion that it is just and equitable that the company should be
wound up;
(g) if the company has made a default in filing with the Registrar its balance sheet and profit
and loss account or annual return for any five consecutive financial years;
(h) if the company has acted against the interests of the sovereignty and integrity of India, the
security of the State, friendly relations with foreign States, public order, decency or morality;
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(i) if the Tribunal is of the opinion that the company should be wound up under the
circumstances specified in section 424G:
Provided that the Tribunal shall make an order for winding up of a company under clause (h) on
application made by the Central Government or a State Government.]
434. 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 #01[one lakh 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;
(b) if execution or other process issued on a decree or order of any Court #02[or Tribunal] in
favour of a creditor of the company is returned unsatisfied in whole or in part; or
(c) if it is proved to the satisfaction of the #03[Tribunal] that the company is unable to pay its
debts, and, in determining whether a company is unable to pay its debts, the #04[Tribunal] shall
take into account the contingent and prospective liabilities of the company.
(2) The demand referred to in clause (a) of sub-section (1) shall be deemed to have been duly
given under the hand of the creditor if it is signed by any agent or legal adviser duly authorised
on his behalf, or in the case of a firm, if it is signed by any such agent or legal adviser or by any
member of the firm.
529. Application of insolvency rules in winding up of insolvent companies.-
(1) In the winding up of an insolvent company, the same rules shall prevail and be observed
with regard to-
(a) debts provable;
(b) the valuation of annuities and future and contingent liabilities; and
(c) the respective rights of secured and unsecured creditors; as are in force for the time being
under the law of insolvency with respect to the estates of persons adjudged insolvent:
#01[Provided that the security of every secured creditor shall be deemed to be subject to a pari
passu charge in favour of the workmen to the extent of the workmen's portion therein, and,
where a secured creditor, instead of relinquishing his security and proving his debts opts to
realise his security,-
(a) the liquidator shall be entitled to represent the workmen and enforce such charge;
(b) any amount realised by the liquidator by way of enforcement of such charge shall be
applied ratably for the discharge of workmen's dues; and
(c) so much of the debts due to such secured creditor as could not be realised by him by
virtue of the foregoing provisions of this proviso or the amount of the workmen's portion in his
security, whichever is less, shall rank pari passu with the workmen's dues for the purposes of
section 529A.]

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(2) All persons who in any such case would be entitled to prove for and receive dividends out
of the assets of the company, may come in under the winding up, and make such claims against
the company as they respectively are entitled to make by virtue of this section:
#02[Provided that if a secured creditor instead of relinquishing his security and proving for his
debts proceeds to realise his security, he shall be liable to #03[pay his portion of the expenses]
incurred by the liquidator (including a provisional liquidator, if any) for the preservation of the
security before its realization by the secured creditor.]
#04[Explanation.-For the purposes of this proviso, the portion of expenses incurred by the
liquidator for the preservation of a security which the secured creditor shall be liable to pay shall
be the whole of the expenses less an amount which bears to such expenses the same proportion
as the workmen's portion in relation to the security bears to the value of the security.]
#05[(3) For the purposes of this section, section 529A and section 530.-
(a) "workmen", in relation to a company, means the employees of the company, being
workmen within the meaning of the Industrial Disputes Act, 1947 (14 of 1947);
(b) "workmen's dues", in relation to a company, means the aggregate of the following sums
due from the company to its workmen, namely:-
(i) all wages or salary including wages payable for time or piece work and salary earned
wholly or in part by way of commission of any workman, in respect of services rendered to the
company and any compensation payable to any workman under any of the provisions of the
Industrial Disputes Act, 1947 (14 of 1947);
(ii) all accrued holiday remuneration becoming payable to any workman, or in the case of his
death to any other person in his right, on the termination of his employment before, or by the
effect of, the winding up order or resolution;
(iii) unless the company is being wound-up voluntarily merely for the purposes of
reconstruction or of amalgamation with another company, or unless the company has, at the
commencement of the winding up, under such a contract with insurers as is mentioned in section
14 of the Workmen's Compensation Act, 1923 (8 of 1923), rights capable of being transferred to
and vested in the workman, all amounts due in respect of any compensation or liability for
compensation under the said Act in respect of the death or disablement of any workman of the
company;
(iv) all sums due to any workman from a provident fund, a pension fund, a gratuity fund or
any other fund for the welfare of the workmen, maintained by the company;
(c) "workmen's portion", in relation to the security of any secured creditor of a company,
means the amount which bears to the value of the security the same proportion as the amount of
the workmen's dues bears to the aggregate of-
(i) the amount of workmen's dues; and
(ii) the amounts of the debts due to the secured creditors.
529A. Overriding preferential payments.-
(1) Notwithstanding anything contained in any other provision of this Act or any other law
for the time being in force, in the winding up of a company,-
(a) workmen's dues; and
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(b) debts due to secured creditors to the extent such debts rank under clause (c) of the proviso
to sub-section (1) of section 529 pari passu with such dues, hall be paid in priority to all other
debts.
(2) The debts payable under clause (a) and clause (b) of sub-section (1) shall be paid in full,
unless the assets are insufficient to meet them, in which case they shall abate in equal
proportions.]
530. Preferential payments.-
(1) In a winding up, #01[subject to the provisions of section 529A, there shall be paid] in
priority to all other debts-
(a) all revenues, taxes, cesses and rates due from the company to the Central or a State
Government or to a local authority at the relevant date as defined in clause (c) of sub-section (8),
and having become due and payable within the twelve months next before that date;
(b) all wages or salary (including wages payable for time or piece work and salary earned
wholly or in part by way of commission) of any employee, in respect of services rendered to the
company and due for a period not exceeding four months within the twelve months next before
the relevant date #02[* * *], subject to the limit specified in sub-section (2);
(c) all accrued holiday remuneration becoming payable to any employee, or in the case of his
death to any other person in his right, on the termination of his employment before, or by the
effect of, the winding up order or resolution;
(d) unless the company is being wound-up voluntarily merely for the purposes of
reconstruction or of amalgamation with another company, all amounts due, in respect of
contributions payable during the twelve months next before the relevant date, by the company as
the employer of any persons, under the Employees' State Insurance Act, 1948 (34 of 1948), or
any other law for the time being in force;
(e) unless the company is being wound-up voluntarily merely for the purposes of
reconstruction or of amalgamation with another company, or unless the company has, at the
commencement of the winding up, under such a contract with insurers as is mentioned in section
14 of the Workmen's Compensation Act, 1923 (8 of 1923), rights capable of being transferred to
and vested in the workman, all amounts due in respect of any compensation or liability for
compensation under the said Act in respect of the death or disablement of any employee of the
company;
(f) all sums due to any employee from a provident fund, a pension fund, a gratuity fund or
any other fund for the welfare of the employees, maintained by the company; and
(g) the expenses of any investigation held in pursuance of section 235 or 237, in so far as
they are payable by the company.
(2) The sum to which priority is to be given under clause (b) of sub-section (1), shall not, in
the case of any one claimant, #03[exceed such sum as may be notified by the Central
Government in the Official Gazette#04].
#05[* * *]
(3) Where any compensation under the Workmen's Compensation Act, 1923 (8 of 1923) is a
weekly payment, the amount due in respect thereof shall, for the purposes of clause (e) of sub-
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section (1), be taken to be the amount of the lump sum for which the weekly payment could, if
redeemable, be redeemed if the employer made an application for that purpose under the said
Act.
(4) Where any payment has been made to any employee of a company,-
(i) on account of wages or salary; or
(ii) to him, or in the case of his death, to any other person in his right, on account of accrued
holiday remuneration,
out of money advanced by some person for that purpose, the person by whom the money was
advanced shall, in a winding up, have a right of priority in respect of the money so advanced and
paid, up to the amount by which the sum in respect of which the employee or other person in his
right, would have been entitled to priority in the winding up has been diminished by reason of
the payment having been made.
(5) The foregoing debts shall-
(a) rank equally among themselves and be paid in full, unless the assets are insufficient to
meet them, in which case they shall abate in equal proportions; and
(b) so far as the assets of the company available for payment of general creditors are
insufficient to meet them, have priority over the claims of holders of debentures under any
floating charge created by the company, and be paid accordingly out of any property comprised
in or subject to that charge.
(6) Subject to the retention of such sums as may be necessary for the costs and expenses of
the winding up, the foregoing debts shall be discharged forthwith so far as the assets are
sufficient to meet them, and in the case of the debts to which priority is given by clause (d) of
sub-section (1), formal proof thereof shall not be required except in so far as may be otherwise
prescribed.
(7) In the event of a landlord or other person distraining or having distrained on any goods or
effects of the company within three months next before the date of a winding up order, the debts
to which priority is given by this section shall be a first charge on the goods or effects so
distrained on, or the proceeds of the sale thereof:
Provided that, in respect of any money paid under any such charge, the landlord or other person
shall have the same rights of priority as the person to whom the payment is made.
(8) For the purposes of this section-
(a) any remuneration in respect of a period of holiday or of absence from work through
sickness or other good cause shall be deemed to be wages in respect of services rendered to the
company during that period;
(b) the expression "accrued holiday remuneration" includes, in relation to any person, all
sums which, by virtue either of his contract of employment or of any enactment (including any
order made or direction given under any enactment), are payable on account of the remuneration
which would, in the ordinary course, have become payable to him in respect of a period of
holiday, had his employment with the company continued until he became entitled to be allowed
the holiday; #06[* * *]
#07[(bb) the expression "employee" does not include a workman; and
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(c) the expression "the relevant date" means-


(i) in the case of a company ordered to be wound-up compulsorily, the date of the
appointment (or first appointment) of a provisional liquidator, or if no such appointment was
made, the date of the winding up order, unless in either case the company had commenced to be
wound-up voluntarily before that date; and
(ii) in any case where sub-clause (i) does not apply, the date of the passing of the resolution
for the voluntary winding up of the company.
(9) This section shall not apply in the case of a winding up where the date referred to in sub-
section (5) of section 230 of the Indian Companies Act, 1913 (7 of 1913), occurred before the
commencement of this Act, and in such a case, the provisions relating to preferential payments
which would have applied if this Act had not been passed, shall be deemed to remain in full
force.
210. Annual accounts and balance sheet.-
(1) At every annual general meeting of a company held in pursuance of section 166, the
Board of directors of the company shall lay before the company-
(a) a balance sheet as at the end of the period specified in sub-section (3); and
(b) a profit and loss account for that period.
(2) In the case of a company not carrying on business for profit, an income and expenditure
account shall be laid before the company at its annual general meeting instead of a profit and loss
account, and all references to "profit and loss account", "profit" and "loss" in this section and
elsewhere in this Act, shall be construed, in relation to such a company, as references
respectively to the "income and expenditure account", "the excess of income over expenditure",
and "the excess of expenditure over income".
(3) The profit and loss account shall relate-
(a) in the case of the first annual general meeting of the company, to the period beginning
with the incorporation of the company and ending with a day which shall not precede the day of
the meeting by more than nine months; and
#01[(b) in the case of any subsequent annual general meeting of the company, to the
period beginning with the day immediately after the period for which the account was last
submitted and ending with a day which shall not precede the day of the meeting by more than six
months, or in cases where an extension of time has been granted for holding the meeting under
the second proviso to sub-section (1) of section 166, by more than six months and the extension
so granted.]
(4) The period to which the account aforesaid relates is referred to in this Act as a "financial
year" and it may be less or more than a calendar year, but it shall not exceed fifteen months:
Provided that it may extend to eighteen months where special permission has been granted in
that behalf by the Registrar.#1a
(5) If any person, being a director of a company, fails to take all reasonable steps to comply
with the provisions of this section, he shall, in respect of each offence, be punishable with
imprisonment for a term which may extend to six months, or with fine which may extend to
#02[ten thousand rupees], or with both:
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Provided that in any proceedings against a person in respect of an offence under this section, it
shall be a defence to prove #03[* * *] that a competent and reliable person was charged with the
duty of seeing that the provisions of this section were complied with and was in a position to
discharge that duty:
Provided further that no person shall be sentenced to imprisonment for any such offence unless it
was committed willfully.
(6) If any person, not being a director of the company, having been charged by the Board of
directors with the duty of seeing that the provisions of this section are complied with, makes
default in doing so, he shall, in respect of each offence, be punishable with imprisonment for a
term which may extend to six months, or with fine which may extend to #04[ten thousand
rupees], or with both:
Provided that no person shall be sentenced to imprisonment for any such offence unless it was
committed willfully.
221. Duty of officer to make disclosure of payments, etc.-
(1) Where any particulars or information is required to be given in the balance sheet or profit
and loss account of a company or in any document required to be annexed or attached thereto, it
shall be the duty of the concerned officer of the company to furnish without delay to the
company, and also to the company's auditor, whenever he so requires, those particulars or that
information in as full a manner as possible.
#01[(2) * * *]
(3) The particulars or information referred to in sub-section (1) may relate to payments made
to any director, #02[* * *] or other person by any other company, body corporate, firm or person.
(4) If any person knowingly makes default in performing the duty cast on him by the
foregoing provisions of this section, he shall be punishable with imprisonment which may extend
to six months, or with fine which may extend to #03[fifty thousand rupees], or with both.
209. Books of account to be kept by company.-
(5) If any of the persons referred to in sub-section (6) fails to take all reasonable steps to
secure compliance by the company with the requirements of this section, or has by his own
willful act been the cause of any default by the company thereunder, he shall, in respect of each
offence, be punishable with #13[imprisonment for a term which may extend to six months, or
with fine which may extend to #14[ten thousand rupees], or with both]:
Provided that in any proceedings against a person in respect of an offence under this section
consisting of a failure to take reasonable steps to secure compliance by the company with the
requirements of this section, it shall be a defence to prove #15[* * *] that a competent and
reliable person was charged with the duty of seeing that those requirements were complied with
and was in a position to discharge that duty:
#16[Provided further that no person shall be sentenced to imprisonment for any such offence,
unless it was committed willfully.]
211. Form and contents of balance sheet and profit and loss account.-
(8) If any person, not being a person referred to in sub-section (6) of section 209, having
been charged by the #10[* * *] #11[managing director or manager,] or Board of directors, as the
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case may be, with the duty of seeing that the provisions of this section and the other requirements
aforesaid are complied with, makes default in doing so, he shall, in respect of each offence, be
punishable with imprisonment for a term which may extend to six months or with fine which
may extend to #12[ten thousand rupees], or with both:
Provided that no person shall be sentenced to imprisonment for any such offence, unless it was
committed willfully.
II. Relevant provision under Code of Civil Proceedure
S.13. When foreign judgment not conclusive.- A foreign judgement shall be conclusive as to
any matter thereby directly adjudicated upon between the same parties or between parties under
whom they or any of them claim litigating under the same title except-
(a) where it has not been pronounced by a Court of competent jurisdiction;
(b) where it has not been given on merits of the case;
(c) where it appears on the face of the proceedings to be founded on an incorrect view of
Internationsal law or a refusal to recognize the law of India in cases in which such law is
applicable;
(d) where the proceedings in which judgement was obtained are opposed to natural justice;
(e) where it has been obtained by fraud;
(f) where it sustains a claim founded on a breach of any law in force in India.
S. 44A. Execution of decrees passed by courts in reciprocating territory.-(1) Where a
certified copy of any decree of any superior courts of any reciprocating territory has been filed in
a District Court, the decree may be executed in India as if it had been passed by the District
Court.
(2) Together with the certified copy of the decree shall be filed a certificate from such superior
court stating the extent, if any, to which the decree has been satisfied or adjusted and such
certificate shall, for the purposes of proceedings under this section, be conclusive proof of the
extent of such satisfaction or adjustment.
(3) The provision of section 47 shall as from the filing of the certified copy of the decree apply to
the proceedings of a district court shall refuse execution of any such decree, if it is shown to the
satisfaction of the court that decree falls within any of the exceptions specified in clauses (a) to
(f) of section 13.
Explanation 1- ‘Reciprocating territory’ means any contrary or territory outside India which the
Central Government may, by notification in the Official Gazette, declare to be a reciprocating
territory for the purposes of this section; and ‘Superior Courts’, with reference to any such
territory , means such Courts as may be specified in the said notification.
Explanation 2- ‘Decree’, with reference to a superior Court, means any decree or judgement of
such court under which a sum of money is payable, not being a sum payable in respect of taxes
or other charges of al ike nature or in respect of a fine or other penalty, but shall in no case
include an arbitration award, even if such an award is enforceable as a decree or judgement.

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