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 Respon-
dents are the directors of the company.
2. Counsel further submits that the Respondent directors have deliberately misrepre-
sented 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 up-
dated 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, 1956 1 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 com -
panies 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 com-
pany 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
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
1The Companies Act, (1956) § 209
2The Companies Act, (2013) § 128
3(2013) 12 SCC 152
 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 inter-
est 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 gov-
ernance. 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 Direc-
tor 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 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 in-
terest of the company and its stakeholders as per the companies act. As held in the
Case of Registrar of Companies v. Reebok India Company & Ors 8 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 am-
bit of fraud under Section 4479 of the Companies Act, 2013.

B) ABUSE OF POSITION BY THE DIRECTORS.

4The Companies Act, (2013) § 447

5The Companies Act, (2013) § 448
6 Company Appeal (AT) No. 158 of 2019
7 [(1973) 1 SCC 602]
8 (2019) 154 SCL 514
9 supra note 4
 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
the company.
12. Counsel fur-
ther submits that in this case the directors of shampoline product limited ., particu-
larly 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 & Anr 14, 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 en-
gage in actions for personal gain. The actions of Mr. Lumba, supported by other com-
pany 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 ma-
10The Companies Act, (2013) § 407
11The Companies Act, (2013) § 166(2)
12The Companies Act, (2013) § 166(4)
13 ibid,12
14 (2006) 4 SCC 227
 terials 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 di-
rectors can be held personally liable for fraud. The directors should be held account-
able 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 fur-

ther submits that Mr. Karan lumba who is executive director of the company involved
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 Companies 17, 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 fur-
ther 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 sharehold-
ers 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 posi-
tion, potentially harming their interests.
19. Counsel fur-
ther submits another case which is decided by the supreme court which is Official
15 supra note, 4
16 Company Appeal (AT) No. 187 of 2019
17[2019] 216 CompCas 389 (Cal)
 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 princi-
ple apply to the misrepresentation of financial statements in this present case.
20. Counsel fur-
ther 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 com-
pany, 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 dis-
close 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 prod-
ucts, 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 require-
ment 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 188 20 of the Companies Act, 2013 which governs
with related party transactions and requires proper disclosure and approval for trans-
actions 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 statu-
tory 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.

18 (1973) 1 SCC 602

19he Companies Act, (2013) § 184
20 The Companies Act, (2013) § 188
 23. Counsel fur-
ther submits that In Vijay Puri v. K.K. Modi 21, the court held that directors Action
should be in good faith and in the best interests of the company and not for any col-
lateral 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 ac-
tion was not in the best interest of the company.

B) REPAYMENT OF MISAPPROPRIATED FUNDS

24. Counsel sub-

mits 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 com-
pany. While the directors claim this is done to minimize losses on near-expiry materi-
als, it still results in financial loss to the company and also the directors not ap-
proached any other person for the sell of the raw materials.
25. Counsel
submits that In Pearson Drums and Barrels Ltd. v. Harshadray Patel 22, 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 fur-
ther argues that The difference between the discounted price at which the raw materi-
als 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 dif-
ference to compensate the company for its losses.
27. Counsel fur-
ther 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 state-
ment. 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

21 (2010) 6 SCC 693

22 MANU/MH/3645/2018
23 Supra note 4
 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 Shampo-
line 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, 2013 25. 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 misrep-
resentation 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 & Ors 26 ,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 fi-
nancial 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 fur-
ther 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 di-
rectors with the intent to deceive or gain an undue advantage. The inconsistent updat-
ing of Profit & Loss statements upon product returns, with the directors' implied con-
sent as alleged by the shareholders, falls under this definition of fraud. This manipu-

24 (2014) 121 CLA 31 (CLB)

25 Supra note, 5
26 MANU/NL/0058/2019
 lation 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 importance of truthful disclosures
of facts and information in a corporate documents specially when it is a public com-
pany because it may compromise the shareholders interest and the Hon’ble supreme
court also described and highlighted the severe consequences of making false state-
ments under companies Act. This principle will apply in the present case because al-
leged 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 fur-
ther refers Section 44828 of the companies act, 2013 where the provision of punish-
ment for false statements in financial statement, prospectus, statement, or other docu-
ment mentioned . Counsel further submits that the balance sheets valuing the com-
pany'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 sec-
tion 448 of the companies act, 2013.
34. Counsel sub-
mits that Sec 447 of the companies act which states the provision of fraud under com-
panies 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 punish-
ments 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 .

27(2017) 15 SCC 1
28 Supra Note, 5
29 Supra Note, 4
 35. The directors
of the petitioners company, particularly Mr. Karan Lumba, have breached their fidu-
ciary duties under Section 16630 of the Companies Act, 2013, through misrepresenta-
tion 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 per-
sonal 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 ap-
prove 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 in-
volves 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 Seri-
ous Fraud Investigation Office v. Nittin Johari & Ors (2019) supports criminal prose-
cution 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 com-
pany 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 di-
rectors' 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 be-
yond 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, war-
ranting 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) supports such deterrent mea-

30 The companies Act, 2013 $ 166

sures in cases of corporate fraud.