ARGUMENTS ADVANCED

ISSUES 1

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 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

1The Companies Act, (1956) § 209

2The Companies Act, (2013) § 128
3(2013) 12 SCC 152
 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 established
under companies act, 2013 and in a case of Official Liquidator v. P.A. Tendolkar7, A
Director who has been deeply involved in the management of a company for an
extended period may be held accountable for fraud in the company's business, even if
no direct act of dishonesty can be attributed to him personally. He cannot ignore what

4The Companies Act, (2013) § 447

5The Companies Act, (2013) § 448
6 Company Appeal (AT) No. 158 of 2019
7 [(1973) 1 SCC 602]
 should be clear to anyone who takes even a cursory look at the company's affairs.

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 have the duty established under the companies to act in good
faith and with a view to promote the objective of the company for the benefit of all
the members, shareholders 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

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
 the company.

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, the Hon'ble Supreme Court ruled that company directors have a
fiduciary duty to act in good faith and in the best interests of the company. Directors
must not engage in actions for personal gain. The actions of Mr. Lumba, supported by
other company directors, were found to constitute a breach of the fiduciary duty
outlined in the Companies Act, 2013.

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 In this case, it was
established that directors can be held personally liable for fraud. The directors should
be held accountable under Section 447 of the Companies Act, 2013, due to the
alleged diversion of funds and misrepresentation in the financial statements..

ISSUE 2-

A) PERSONAL LIABILITY OF THE DIRECTOR.

16. Counsel further submits that Mr. Karan lumba who is executive director of the
company involved in misrepresentation of financial statements by not including the

14 (2006) 4 SCC 227

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

17[2019] 216 CompCas 389 (Cal)

18 (1973) 1 SCC 602
 21. Counsel refers the Section 18419 of the Companies Act, 2013 which requires
directors to disclose 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

19he Companies Act, (2013) § 184

20 The Companies Act, (2013) § 188
21 (2010) 6 SCC 693
 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 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.

22 MANU/MH/3645/2018
23 Supra note 4
24 (2014) 121 CLA 31 (CLB)
 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 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 determined by the National Company Law
Tribunal (NCLT). The directors were found to be involved in manipulating the
company's accounts and financial statements, highlighting the gravity of corporate
fraud. This case is analogous to the current situation, where the directors of
Shampoline's company are engaged in similar practices..

31.Counsel further submits that Section 447 of the Companies Act, 2013 defines fraud
to include any act, omission, concealment of material facts, or abuse of position by
company directors with the intent to deceive or gain an undue advantage. The
inconsistent updating of Profit & Loss statements upon product returns, with the
directors' implied consent as alleged by the shareholders, falls under this definition of
fraud. This manipulation presents a more favorable financial picture of the company,
potentially leading to an artificial increase in the company's market value and share
prices.

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

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

28 Supra Note, 5
29 Supra Note, 4
 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 Companies, 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) 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

30 The companies Act, 2013 $ 166

malpractices. The Delhi High Court's ruling in Pradeep Kumar Jain v. Union of India
(2019) supports such deterrent measures in cases of corporate fraud.