COURT ROOM EXERCISE, 2024

COMPANY LAW

BEFORE THE HON’BLE

NATIONAL COMPANY LAW TRIBUNAL, MUMBAI BENCH

PURSUANT TO SECTION 441 OF THE COMPANIES ACT, 2013

CP NO. ____/NCLT/MB/MAH/2024

IN THE MATTER OF

Shampoline Products Ltd. ………PETITIONER

V.

Karan Lumba and Ors ………RESPONDENT

MEMORANDUM FOR THE PETITIONER

 TABLE OF CONTENT
INDEX OF AUTHORITIES 3

TABLE OF CASES 3
STATUTES & BILLS 4
BOOKS 4
LIST OF ABBREVIATIONS 4

STATEMENT OF RELEVANT FACTS 6

STATEMENT OF JURISDICTION 7

STATEMENT OF ISSUES 8

SUMMARY OF PLEADINGS 8

ARGUMENTS ADVANCED 10

Issues 1 Whether the directors can be held liable for fraud under Section 447 of the CompaniesAct,
2013, based on the alleged diversion of funds and misrepresentation in financial statements?10

A) DIVERSION OF FUNDS & misrepresentation in financial statements. 10

B) ABUSE OF POSITION BY THE DIRECTORS. 12
ISSUE 2- Whether the petitioners are entitled to relief, including personal liability for the directors,
repayment of misappropriated funds, and criminal penalties under Section 447 and Section 448 of the
Companies Act, 2013? 13

A) PERSONAL LIABILITY OF THE DIRECTOR. 13

B) REPAYMENT OF MISAPPROPRIATED FUNDS 15
C) Criminal Penalties Under Section 447 and 448 16
D) CONCLUDING ARGUMENTS FOR ISSUE 1 AND ISSUE 2 . 18
PRAYER FOR RELIEF 20

BIBLIOGRAPHY 21

MEMORANDUM ON BEHALF OF THE PETITIONER






















 INDEX OF AUTHORITIES

TABLE OF CASES

NO. CASE NAME CITATION PAGE PARA

1 1. N.Narayanan V. SEBI (2013) 12 SCC 152 10 4

1. Serious Fraud Investigation
2 Company Appeal (AT) No.
Office v. Nitin Johri & Ors 158 of 2019 11 6
1. Official Liquidator v. P.A.
3
Tendolkar, [(1973) 1 SCC 602] 11 7
1. Registrar of Companies v.
4
Reebok India Company & Ors (2019) 154 SCL 514 12 8
1. Percept D'Mark (India) Pvt.
5
Ltd. v. Zaheer Khan & Anr (2006) 4 SCC 227 13 13
1. Official Liquidator v. Dilip
6 Kumar Shivprakash Agarwal &
Company Appeal (AT) No.
Ors 187 of 2019 13 15
1. Rabindra Chamaria v. The
7 [2019] 216 CompCas 389
Registrar of Companies (Cal) 14 17
1. Official Liquidator v. P.A.
8
Tendolkar (1973) 1 SCC 602 14 19

9 1. Vijay Puri v. K.K. Modi (2010) 6 SCC 693 15 23

1. earson Drums and Barrels Ltd.
10
v. Harshadray Patel MANU/MH/3645/2018 16 25
1. re Satyam Computer Services
11
Ltd. (2014) 121 CLA 31 (CLB) 16 28
1. Serious Fraud Investigation
12
Office v. Nittin Johari & Ors MANU/NL/0058/2019 17 30
1. Securities and Exchange Board
13 o f I n d i a v. K a n a i y a l a l
Baldevbhai Pate (2017) 15 SCC 1 17 32

MEMORANDUM ON BEHALF OF THE PETITIONER


 STATUTES & BILLS

CIATATION

Companies Act, 2013

National Company Law Tribunal Rules, 2016.

BOOKS

LIST OF ABBREVIATIONS
4

MEMORANDUM ON BEHALF OF THE PETITIONER


 ABBREVIATION(s) TERM(s)

NCLT National Company Law Tribunal

§ & Sec Section

NCLAT National Company Law Appellate Tribunal

SC Supreme Court
Art
Article
Ltd. Limited

Companies Act, 2013

Act
IBC Insolvency And Bankruptcy Code

SFIO Serious Fraud Investigation Officer

BoD Board Of Directors

AGM Annual General Meeting

SEBI Security And Exchange Board Of India

PARA PARAGRAPH

P&L PROFIT AND LOSE

MEMORANDUM ON BEHALF OF THE PETITIONER


 STATEMENT OF RELEVANT FACTS

MEMORANDUM ON BEHALF OF THE PETITIONER


 STATEMENT OF JURISDICTION

MEMORANDUM ON BEHALF OF THE PETITIONER


 STATEMENT OF ISSUES

ISSUE 1

1. Whether the directors can be held liable for fraud under Section 447 of the CompaniesAct,
2013, based on the alleged diversion of funds and misrepresentation in financial statements?

ISSUE 2

2. Whether the petitioners are entitled to relief, including personal liability for the directors,
repayment of misappropriated funds, and criminal penalties under Section 447 and Section
448 of the Companies Act, 2013?

SUMMARY OF PLEADINGS

MEMORANDUM ON BEHALF OF THE PETITIONER


 ISSUE 1

ISSUE 2

MEMORANDUM ON BEHALF OF THE PETITIONER


 ARGUMENTS ADVANCED

ISSUES 1 WHETHER THE DIRECTORS CAN BE HELD LIABLE FOR FRAUD UNDER

SECTION 447 OF THE COMPANIESACT, 2013, BASED ON THE ALLEGED DIVERSION OF

FUNDS AND MISREPRESENTATION IN FINANCIAL STATEMENTS?

A) DIVERSION OF FUNDS & MISREPRESENTATION IN FINANCIAL STATEMENTS.

1. Counsel For the Petitioner Most Humbly submits before the Hon’ble Tribunal that my client is a
Public Ltd Company Registered under Companies Act and the Respondents are the directors of the
company.

2. Counsel further submits that the Respondent directors have deliberately misrepresented the
companies financial position by adding sales in its P&L statement when the order is placed online.
Respondent Directors took the fact immaterial that whether the product are kept or returned by the
consumers and many of the times it is not updated in P&L statements, which results in the practice
of gaining undue advantage and misrepresentation of the companies position.

3. Counsel Submits That Section 209 of the Companies Act, 19561 corresponding sec 128 of the
companies Act, 20132 states that every company has to keep the book of accounts and it should be
kept as to give to true and fair view of the state of the companies affair and transactions. The true
and fair view of the profit and lose of the company can only be given if the company maintains all
the records of order placed, sealed and how many products has returned by the consumer and how
much the company refunded to the consumers but the respondent directors took this fact immaterial
that whether the product are kept or returned and intentionally not updated this many times, it clearly
violated the provisions of company law.

4. Counsel further Submits that it is held in the Case of N.Narayanan V. SEBI3 that the preparing of

1The Companies Act, (1956) § 209

2The Companies Act, (2013) § 128
3(2013) 12 SCC 152
10

MEMORANDUM ON BEHALF OF THE PETITIONER


 the annual records responsibility is casted on the directors and it is the responsibility of the directors
that annual records and reports and those accounts should reflect a true and fair view. Also it is the
directors obligation to approve the accounts only if they are satisfied that they give a true and fair
view of the profits or loss for the relevant period and the correct financial position of the company.

5. Counsel further submits that the respondent directors by failing to update the profit and lose
statement upon product returns, the directors are concealing material facts about the company's true
financial status. This concealment is explicitly mentioned in Section 447'4s definition of fraud which
reads as fraud includes any act, omission, concealment of any fact or abuse of position committed
with intent to injure the interest of the company or its shareholders, whether or not there is any
wrongful gain or wrongful loss; and according to the sec 448 (b)5 of the companies act, 2013 which
omits any material fact, knowing it to be material, he shall be liable under section 447.

6. Counsel further submits the case of Serious Fraud Investigation Office v. Nitin Johri & Ors6, In
this case the management of the companies was accused of inflating turnover through fictitious sales
and manipulating books of accounts to show a false financial position. The NCLAT ruled that
inflating the company's turnover through fictitious sales and manipulating books of accounts
amounts to fraud under Section 447 of the Companies Act, 2013. The NCLAT further emphasized in
this case that such actions deceive stakeholders intrest and violate the principles of corporate
governance. It reasoned that intentional misrepresentation of financial data undermines the integrity
of the financial system and erodes investor confidence, thus falling squarely within the ambit of
fraud as defined in Section 447 of the Companies Act.

7. Counsel further submits that the directors failed to adhere the duties and in the case of Official
Liquidator v. P.A. Tendolkar7, the court while describing the duty of the directors of the company
observed and held that A Director may be shown to be so placed and to have been so closely and so
long associated personally with the management of the Company that he will be deemed to be not

4The Companies Act, (2013) § 447

5The Companies Act, (2013) § 448
6 Company Appeal (AT) No. 158 of 2019
7 [(1973) 1 SCC 602]
11

MEMORANDUM ON BEHALF OF THE PETITIONER


 merely cognizant of but liable for fraud in the conduct of the business of a Company even though no
specific act of dishonesty is proved against him personally. He cannot shut his eyes to what must be
obvious to everyone who examines the affairs of the Company even superficially.

8. Counsel further submits that there is a fiduciary duty of directors to act in the best interest of the
company and its stakeholders as per the companies act. As held in the Case of Registrar of
Companies v. Reebok India Company & Ors8 by the NCLT that intentional misstatement and fund
diversion breach this duty and undermine the trust placed in corporate leadership and The NCLT
ruled that intentional misstatement of accounts and diversion of funds for personal benefit of
directors falls within the ambit of fraud under Section 4479 of the Companies Act, 2013.

B) ABUSE OF POSITION BY THE DIRECTORS.

9. Counsel For The petitioner most humbly submits before the Hon’ble Tribunal that Mr. Karan Lumba
who is the Executive director of the company with other directors resold some of the raw materials
to his wife, who is involved in the business of a range of resin décor products, at a low price.

10. Counsel submits that Sec 40710 of the companies act talks about the punishment for criminal breach
of trust, Here the Directors were trusted with the affairs of the company and sell of raw material to
the wife of Karan lumba at lower price results into criminal breach of trust.

11. Counsel refers to Sec 166(2)11 and 166(4)12 of the companies Act, which states that a director of the
company shall act in good faith and with a view to promote the objective of the company for the
benefit of all the members of the company including the shareholders and further Sec 166(2)13 states
that directors should not involve in a situation in which he may have a direct or indirect interest that
conflicts, or possibly may conflict, with the interest of the company.

8 (2019) 154 SCL 514

9 supra note 4
10The Companies Act, (2013) § 407
11The Companies Act, (2013) § 166(2)
12The Companies Act, (2013) § 166(4)
13 ibid,12
12

MEMORANDUM ON BEHALF OF THE PETITIONER


 12.Counsel further submits that in this case the directors of shampoline product limited ., particularly
Mr. Karan Lumba, have violated their duties under Section 166 by engaging in transactions that
benefit related parties at the expense of the company. The sale of raw materials at discounted prices
to Mr. Lumba's wife's company directly conflicts with the interests of Shampoline Products Ltd.

13. Counsel refers the Case of Percept D'Mark (India) Pvt. Ltd. v. Zaheer Khan & Anr14, in this case
Hon’ble Supreme Court held that the directors of a company have a fiduciary duty to act in a good
faith and for the best interest of the company and directors should not involve in their personal gain.
Mr. Lumba’s Action with the support of other directors of the company constitutes a breach of
fiduciary duty.

14. Counsel Submits that The actions of the directors, particularly Mr. Lumba, in selling raw materials
at discounted prices to a related party, constitute an abuse of position under Section 44715. This
abuse was committed with the intent to gain undue advantage and has injured the interests of the
company and its shareholders.

15. Counsel for the petitioner for issue 1, lastly submits that as held in the case of Official Liquidator v.
Dilip Kumar Shivprakash Agarwal & Ors16 that directors can be personally liable for fraud
committed in this case also the directors should be held liable for fraud under Section 447 of the
Companies Act, 2013, based on the alleged diversion of funds and misrepresentation in financial
statements.

ISSUE 2- Whether the petitioners are entitled to relief, including personal liability for the directors,
repayment of misappropriated funds, and criminal penalties under Section 447 and Section
448 of the Companies Act, 2013?

A) PERSONAL LIABILITY OF THE DIRECTOR.

16. Counsel further submits that Mr. Karan lumba who is executive director of the company involved

14 (2006) 4 SCC 227

15 supra note, 4
16 Company Appeal (AT) No. 187 of 2019
13

MEMORANDUM ON BEHALF OF THE PETITIONER


 in misrepresentation of financial statements by not including the return items data in profit and lose,
and also engaging with his wife in the sale of raw material at a low price against the interest of the
company and its shareholders, makes the directors personally liable.

17. The counsel further refers the case of Rabindra Chamaria v. The Registrar of Companies17, In this
case the court held that in breach of fiduciary duty by the directors or a director, can be held
personally or as a whole liable. The court further observed in this case that the directors duty are of
fiduciary nature and and any breach of these duties can result in personal liability, especially when
the breach leads to loss for the company.

18.Counsel further submits that The practice of prematurely recording sales in the P&L statement and
not consistently updating them upon product returns as alleged by the shareholders could be seen as
a violation of the directors' duty to maintain accurate financial records. This practice misleads
shareholders about the company's true financial position, potentially harming their interests.

19.Counsel further submits another case which is decided by the supreme court which is Official
Liquidator v. P.A. Tendolkar18, in this case the Supreme Court held that directors who
misappropriates company funds or property can be held personally liable to make good the loss, and
emphasising their role as trustees of company assets. This principle apply to the misrepresentation of
financial statements in this present case.

20.Counsel further submits that every company is established for making profit or for the public good
and The sale of raw materials at discounted prices to Mr. Lumba's wife's company, even if claimed to
be for minimising losses on near-expiry materials, may still be viewed as a breach of fiduciary duty.
This transaction benefits a related party who is wife of one of the executive director of the company,
at the potential expense of the company, raising questions about conflict of interest and proper
disclosure under Sections 184 and 188 of the Companies Act, 2013.

21. Counsel refers the Section 18419 of the Companies Act, 2013 which requires directors to disclose

17[2019] 216 CompCas 389 (Cal)

18 (1973) 1 SCC 602
19he Companies Act, (2013) § 184
14

MEMORANDUM ON BEHALF OF THE PETITIONER


 their interest in other entities, including interests of relatives. Mr. Karan Lumba violated this
provision by failing to disclose his wife's business of resin décor products, which was directly
involved in transactions with Shampoline Products Ltd. This non-disclosure is particularly
significant as the company was selling raw materials to his wife's business at low prices,
potentially affecting company profits. The director's claim that this was done only for near-
expiry materials does not negate the requirement for disclosure, as the relationship and
potential conflicts of interest should have been transparently communicated to the board and
shareholders.

22.Counsel for the petitioner further refers Section 18820 of the Companies Act, 2013 which
governs with related party transactions and requires proper disclosure and approval for
transactions between the company and related parties, including relatives of directors. The sale
of raw materials at low prices to Mr. Karan Lumba's wife's business constitutes a related party
transaction. By conducting these transactions without proper disclosure and approval
mechanisms as required under Section 188, the company violated statutory provisions
designed to prevent misuse of company resources. While the directors argue this was done to
minimize losses from expiring materials, the lack of proper procedure and transparency in
these transactions suggests a violation of corporate governance norms and mismanagement of
company assets for personal benefit.

23.Counsel further submits that In Vijay Puri v. K.K. Modi21, the court held that directors Action
should be in good faith and in the best interests of the company and not for any collateral purpose.
Failure to do so can result in personal liability. This case applies to Mr. Lumba's actions regarding
the related-party transactions which shows that his action was not in the best interest of the company.

B) REPAYMENT OF MISAPPROPRIATED FUNDS

24.Counsel submits that The shareholders holding should get the repayment of any funds potentially
misappropriated funds through the sale of raw materials to Mr. Lumba's wife's company. While the

20 The Companies Act, (2013) § 188

21 (2010) 6 SCC 693
15

MEMORANDUM ON BEHALF OF THE PETITIONER


 directors claim this is done to minimize losses on near-expiry materials, it still results in financial
loss to the company and also the directors not approached any other person for the sell of the raw
materials.

25. Counsel submits that In Pearson Drums and Barrels Ltd. v. Harshadray Patel22, the court held that
directors of the company can be ordered to repay misappropriated funds to the company if it is found
that the directors were involved in misappropriation. The court further held that directors who had
misappropriated company funds for personal gain were liable to repay the amount with interest.

26. Counsel further argues that The difference between the discounted price at which the raw materials
were sold to the related party and their fair market value should be considered as misappropriated
funds in this present case. And Under Section 447 of the Companies Act, 201323, which deals with
fraud, the directors should be ordered to repay this difference to compensate the company for its
losses.

27.Counsel further submits that the directors where involved in inconsistent updating of Profit and
Lose statements when the product returns that leads to incorrect and false profit statement. This type
of practice inflates the company's financial position, what can benefit the company in many ways
like increase in the share prices and value of the company in the market, which could be seen as a
form of misappropriation because it lead to undue benefits to the directors and the company.

28. Counsel submits one more case which is re Satyam Computer Services Ltd.24,It was held in this
case by the Company Law Board that the directors have to repayment or return the misappropriated
funds involved in frauds. Court further held that directors should also be personally liable to
compensate. This case is similar to the present case talks about the financial misrepresentations.

C) CRIMINAL PENALTIES UNDER SECTION 447 AND 448

29.Counsel on behalf of the petitioner further submits that The actions of the directors of Shampoline

22 MANU/MH/3645/2018
23 Supra note 4
24 (2014) 121 CLA 31 (CLB)
16

MEMORANDUM ON BEHALF OF THE PETITIONER


 Products Ltd. is against the provisions of company law.so, it attracts criminal penalties as laid down
in Sections 447 and 448 of the Companies Act, 201325. The practice of recording sales in the Profit
and lose statement as searlier as orders are placed online, and making the situation immaterial that
whether products are kept by the consumers or returned by the consumers, to be be regarded as a
deliberate misrepresentation of the company's financial position in the market.

30.Counsel for referring the nature of the crime funder sec 447 of the companies act, further refers the
case of Serious Fraud Investigation Office v. Nittin Johari & Ors26 ,in this case the NCLAT upheld
the criminal prosecution of directors under Section 447 of the companies act as decided by the
National Company Law Tribunal. The issue was directors where found in the involvement in
manipulating the company's accounts and financial statements, emphasizing the serious nature of
corporate fraud. This case is similar to the present case in which the directors of the Shampoline's
company are indulged in the similar practises.

31.Counsel Further submits Section 447 of the company Act, 2013 which defines fraud that includes
any action, omission from any act , concealment of any material fact, or abuse of position holding
by the directors of the company committed with intent to deceive or gain undue advantage. The
inconsistent updating of P&L statements upon product returns with the directors implied consent, as
alleged by the shareholders, make the case fall under this definition and it will lead to presenting a
more favorable financial picture of the company that can lead to increase the value of the company
in market also the share prices of the company.

32.Counsel on behalf of the petitioner further submits an important judgment of Hon’ble supreme
court, case named Securities and Exchange Board of India v. Kanaiyalal Baldevbhai Patel27, the
Supreme Court observed and stated the importance of truthful disclosures of facts and information
in a corporate documents specially when it is a public company because it may compromise the
shareholders interest and the Hon’ble supreme court also described and highlighted the severe
consequences of making false statements under companies Act. This principle will apply in the

25 Supra note, 5
26 MANU/NL/0058/2019
27(2017) 15 SCC 1
17

MEMORANDUM ON BEHALF OF THE PETITIONER


 present case because alleged misrepresentation by the directors of the company in financial
statements of profit and lose makes the directors of the company personally liable for the act or
omission committed towards the company and its shareholders.

33.Counsel further refers Section 44828 of the companies act, 2013 where the provision of punishment
for false statements in financial statement, prospectus, statement, or other document mentioned .
Counsel further submits that the balance sheets valuing the company's intellectual property at Rs.
200 crores, which are found to be significantly overvalued because the companies was not
mentioning the records of returned item in their financial statements of profit and lose, as suspected
by shareholders holding 1/3rd voting rights. this is attracting penalties under this section 447 read
with section 448 of the companies act, 2013.

34.Counsel submits that Sec 447 of the companies act which states the provision of fraud under
companies act, in a case Delhi High Court upheld the constitutional validity of Section 44729, and
accepted that the legislature has the power to prescribe stringent punishments for corporate fraud.
The court emphasized the need for deterrent punishment in cases of corporate fraud, given its severe
impact on the economy and public interest. This ruling underscores the seriousness with which
courts view corporate fraud and could be applicable to the alleged misconduct in the Shampoline
case. So, the counsel most humbly request the Hon’ble tribunal to take a strict action in the present
case.

D) CONCLUDING ARGUMENTS FOR ISSUE 1 AND ISSUE 2 .

35.The directors of the petitioners company, particularly Mr. Karan Lumba, have breached their
fiduciary duties under Section 16630 of the Companies Act, 2013, through misrepresentation in
financial statements and engaging in questionable related-party transactions with his wife for the sale
of raw materials at a lower price. As decided by the SC in Rabindra Chamaria v. The Registrar of

28 Supra Note, 5
29 Supra Note, 4
30 The companies Act, 2013 $ 166
18

MEMORANDUM ON BEHALF OF THE PETITIONER


 Companies31, such breaches can result in personal liability if the charges are proved . The practices
followed by the company by their directors of premature recording of sales at the time of placement
of order and inconsistent updating of Profit and Lose statements of the financial statements of the
company demonstrate a clear violation of the duty of the directors to maintain and approve accurate
financial records in the statements of the company, and which results in misleading shareholders
about the company's true financial position in the market.

36. Counsel most humbly submits before the Hon’ble tribunal that The inconsistent updating of P&L
statements upon product returns, as alleged by the shareholders, falls under the definition and
provision of fraud under Section 447 of the companies act, as it involves concealment of relevant
facts that may result to deceive the interest of the company and its shareholders. Courts decision in
many cases supported and upheld the validity of the companies act sec 447 and further The NCLAT's
decision in Serious Fraud Investigation Office v. Nittin Johari & Ors (2019)32 supports criminal
prosecution for such manipulation of financial statements. Furthermore, as stated by the company
the intellectual property valuation of Rs. 200 crores is significantly inflated as alleged by the
shareholders, it attracts the penalties for the directors of the company under Section 448 for
maintaining false statements in financial documents.

37.Counsel at last but not least submits before the Hon’ble tribunal that The Overall effect of the
directors' actions - misrepresentation in financial statements with reference to the P & L statements,
questionable related-party transactions with the wife of Karan lumba, and potential overvaluation of
assets - demonstrates a pattern of misconduct that goes beyond mere mismanagement and imposes
the personal liability for the directors under sec 447 of the companies act read with sec 448. fraud as
defined in Section 447, warranting punishments for the wrongdoer directors to protect public interest
special the shareholders interest and deter future corporate malpractices. The Delhi High Court's
ruling in Pradeep Kumar Jain v. Union of India (2019)33 supports such deterrent measures in cases of
corporate fraud.

31

32

33

19

MEMORANDUM ON BEHALF OF THE PETITIONER


 PRAYER FOR RELIEF

IN LIGHT OF THE FACTS STATED, ISSUE RAISED AND ARGUMENT ADVANCED, IT IS

MOST RESPECTFULLY PRAYED THAT THIS HON'BLE TRIBUNAL MAY BE PLEASED TO

DECLARE:

1)

Respectfully Submitted,

Counsel for Petitioner

20

MEMORANDUM ON BEHALF OF THE PETITIONER


 BIBLIOGRAPHY

21

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