04 P

CODE:
04
IN THE HONOURABLE SUPREME COURT OF INDIA

_______________________________________________________________________ _
IN THE MATTER OF-
PETITIONERS
RESPONDENTS
GROUP OF TELCEL PUBLIC SHAREHOLDERS versus TELCEL (INDIA) LTD. AND THE PROMOTERS THE INDEPENDENT DIRECTORS
versus TELCEL (INDIA) LIMITED
THE SECURITIES EXCHANGE BOARD OF INDI versus MADOFF & RAJU COMPANY
ON SUBMISSION TO THE HONOURABLE SUPREME COURT OF INDIA WRITTEN SUBMISSION ON BEHALF OF THE PETITIONER MOST RESPECTFULLY SUBMITTED
INTRA KLS MOOT COURT COMPETITION, 2011
COUNSEL FOR
PETITIONERS
TABLE OF CONTENTS
TABLE OF CONTENTS.....................................................................................II LIST OF ABBREVIATIONS.............................................................................IV INDEX
OF
AUTHORITIES...........................................................................................V
REFERRED...............................................................................................V
BOOKS TABLE
OF
CASES.................................................................................................VII
OF OF OF
STATEMENT STATEMENT STATEMENT SUMMARY [1]
JURISDICTION...................................................................................IX FACTS.............................................................................................X ISSUES..........................................................................................XII
OF
ARGUMENTS.....................................................................................XIII THE SUIT FILED BY THE GROUP OF TELCEL PUBLIC
ARGUMENTS ADVANCED...........................................................................................1 THAT SHAREHOLDERS IS MAINTAINABLE..............................................................1 [A] THAT THE SUPREME COURT HAS JURISDICTION TO MAINTAIN THE PETITION 1 [B] THAT THE SHAREHOLDER CAN CLAIM REPRESENTATIVE ACTION AS LEAVE HAS ALREADY GRANT BY SUPREME COURT.....................................................2 [2] THAT THE ADJUDICATION ON THE INDEMNITY CLAIM OF THE
INDEPENDENT DIRECTORS IS PERMISSIBLE................................................4 [A] THAT THE INDEPENDENT DIRECTORS DO NOT COME WITHIN THE PURVIEW OF OFFICER IN DEFAULT.............................................................................4 [B] THAT THE INDEPENDENT DIRECTOR CAN CLAIM INDEMNITY UNDER SECTION 201 OF THE COMPANIES ACT, 1956...............................................................6 [C] THAT THE INDEPENDENT DIRECTORS HAVE NOT ACTED BONA FIDE.............7 [D] THAT THE PETITIONER CAN BE EXCUSED UNDER SUB-SECTION(1)& (2) OF SECTION 633 OF THE COMPANIES ACT, 1956 .................................................9 [E] THAT THE INDEPENDENT DIRECTOR CAN BE RELIED UPON CONTRACT ACT TO ENFORCE THEIR CLAIM OF INDEMNITY.........................................................11
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ii

[3] THAT THE SEBI HAS JURISDICTION TO ISSUE SHOW CAUSE NOTICE AGAINST M&R.............................................................................................12 [A] THAT THE AUDITOR OF COMPANY OWES DUTY TO THE INVESTORS UNDER SECTION 227 OF THE COMPANIES ACT, 1956................................................13 [B] THAT THE SEBI HAS JURISDICTION TO ISSUE SHOW CAUSE NOTICE OVER M&F AUDIT FIRM WHICH IS REGISTERED WITH ICAI......................................15 [C] THAT THE SEBI BEING A SPECIFIC LAW WILL PREVAIL OVER ICAI WHICH IS A GENERAL LAW...........................................................................................18 PRAYER..........................................................................................................19
iii
LIST OF ABBREVIATIONS & AIR Art. Del. e.g. ed. edn. HC Honble ibid. J. Mad. s. SC SCC Suppt. v. And Paragraph All India Reporter Article Delhi For Example Editor Edition High Court Honorable Ibidem Justice Madras Section Supreme Court Supreme Court Cases Superintendent Versus iv
Vol. Comp. Cas.
Volume Company cases.
INDEX
OF
AUTHORITIES
BOOKS REFERRED D. D. Basu, Chandrachud, YV and Manohar, VR and Bannerjee, BP (eds.) Shorter Constitution of India, 18th ed. 2001, II rep. 2003, Wadhwa & Co., Nagpur. M.P. Jain, Indian Constitutional Law, Vol. 2, 5th ed. 2003, Wadhwa and Company, Nagpur. Mahendra P. Jain (Rev.), V N Shuklas Constitution of India, Singh, 10th ed. 2001, V rep. 2006, Eastern Book Company, Lucknow. Vinay Kr. Gupta, Mulla on Code of Civil Procedure, 19th Edn. 2005, LexisNexis Butterworths, New Delhi. Sudipto Sarkar, V. R. Manohar, Code of Civil Procedure, vol.1, 11th Edn. 2009, LexisNexis Butterworths, Nagpur. C.K Takwani, Civil Procedure, 6th Edn, 2009, Eastern Book Company, Lucknow. C.K. Thakker, Code of Civil Procedure, vol.1, 2005, Eastern Book Publication, Lucknow. Y.V. Chandrachud, et al., (Revs.), Durga Das Basu: Shorter Constitution of India, , 13th Edition, 2001, Wadhwa and Company, Nagpur. Penningtons Company Law, 8th Edn., Oxford University Press, London. Geoffrey Morse, Paul Davies, Sarah Worthington and Richard Morris Palmers Company Law, vol2, 2006, Thompson Sweet & Maxwell, London. ____________________________________________________________________ _ WRITTEN SUBMISSION ON BEHALF OF THE PETITIONER v
Halsbury's Laws of England, 2nd Ed., Vol. 5. L.C.B. Gower and Paul L. Davies, The Principles of Modern Company Law., 3rd Edn. 8th Edn., 2008, Thompson Sweet and Maxwell Publication. Company Law Digest, vol3, 3rd Edn. 2009, Taxmans Publication, New Delhi. Dr. R G Padia and Nilima Bhadbhade, Pollock & Mulla on Indian Contract Act and Specific Relief Acts, 13th Edn. 2007, LexisNexis Butterworths, New Delhi. Lawrence Robert Dicksee, Auditing: A Practical Manual for Auditors, 17th Edn, 2009, Bibliolife, London. Seally and Worthington, Cases and Materials on company Law, 8th Edn., 2007, Oxford University Press. A.R Ramaiya, Guide to the Companies Act, Part 1, 2010, Wadhwa, Nagpur.
vi
TABLE

OF
CASES
Abdul Majeed v Abdul Rashid ..AIR 1036 All 598 Amara pictures (p) Ltd, In re.. (1970)40 Comp Cas 130 Ashok Nagar Welfare Association v. R.K Sharma.. AIR 2002 SC 335 Burland v. Earle. (1902) A.C. 83 Cede & Co. v. Technicolor, Inc....634 A.2d 345, 361 (Del. 1993) Chunibhai Patel v Natha Bhai PatelAIR 1944 Pat 185 Esso Standard Inc. v. Udharam Bhagwandas Japanwalla1975 45 Comp Cas 16 Bom. G.D Bhargava v. Registrar of Companies (1970)40 Comp Cas 664 Gajanan Moreswar Parelkar v Moreswar Madan Mantri... AIR 1942 BOM 302 H. Nanjudiah v. Govindan ,Registrar of Companies, Maharashtra and another.(1986) 39 Comp Cas 35 Hasnali v. Mansoorali AIR 1948 PC 66 In re London and General Bank. (1895)2 Ch 673 Institute of Chartered Accountants Of India v. K. Bhagavatheeswaran... AIR 1968 SC 1104 Jamshed Hormusji Wadia v. Board of Trustees, Port of Mumbai (2004) 3SCC 214 Kamal Kumar Dutta & anr. v. Ruby General Hospital Ltd. & Ors. 2006 (7)SCC 613 Kesha Appliances v. Royal Holdings Services Ltd... 2006 130 Comp Cas 227 Bom
Lagunas Nitrate Co v Lagunas Nitrate Syndicate. (1899) 2 Ch 392 ____________________________________________________________________ vii _ WRITTEN SUBMISSION ON BEHALF OF THE PETITIONER
Lingam Ramaseshayya v Myneni Ramayya. AIR 1957 AP 964 M.R. Goyal v. Usha International... 1998 93 Comp Cas 634 Del. Mohansingh Gurucharansingh v. State Of Gujarat and anr.AIR 1996 Guj 80 Moran Mar Basselios v.Thukalan Paulo Avira. AIR 1959 SC 31 MZ Khan v. SEBI. AIR 1999 Delhi 164 Narpat Singh v. Jaipur Development Authority.. (2002) 4 SCC 666 O.P Khaitan v Shree Keshariya investment ltd.. (1978) 48 Comp Cas 85 (Del) Official Liquidator v P.A. Tendolkar.. (1973) 43 Comp .Cas 382 Plimbing Union v Times Newspaper Ltd. (1980) Q.B.585 Price Waterhouse & Co v SEBI.. 2010 160 Comp. Cas. 324(BOM) Profulla Kumar Basu v Gopee Bullabh Sen,AIR 1946 Cal 159 Prudential Assurance Co. Ltd. v Newman Industries ..(1979) 3 ALL E.R. 507 Ramalingathudayan v Unnamalai Achi. AIR 1914 Mad 655 Ramkissendas Dhanuka vs Satya Charan.. (1950) 52 BOMLR 501 Ramrakh R. Bohra v. SEBI.. [1999] 33 CLA 243 Re: Bhavnagar Vegetable Products Ltd. (1977) 18 GLR889 S.P Punj v. Registrar of companies, Delhi. (1991) 1 Comp. LJ 167 (Del) Sangramsinh P. Gaekwad & Ors. vs Shantadevi P. Gaekwad (Dead) by .Lrs. & Ors. ...AIR 2005 SC 809 Singh v. Union Territory, Chandigarh. AIR 1982 P&H 169 Sitaram Jaipuria and Ors. vs Banwarilal Jaipuria AIR 1972 Cal 105 Sivandhi Adityan v. Addl. Registrar of companies ...(1995) 83 Comp. Cas. 616(Mad) State Bank of Bikaner & Jaipur v. Deputy Commissioner Of Income Tax.. (1999) 65 TTJ JP 480 T.N Housing Board v. T.N Ganapathy 2004) 6 SCC 85
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Taff Vale Railway Company v Amalgamated Society of Railway Servent (1901) A.C. 426 Temperton v Russell. (1893) 1 Q.B. 715 V.R. Nagappa Chettiar And Anr. vs The Madras Race Club by its Secretary, Mr. H.L. Raja Urs And Ors (1949) 1 MLJ 662 Vijay kumar Gupta v. Registrar of Companies (2004) 118 Comp.cas. 604
STATEMENT
OF
JURISDICTION
The Parties have the honor of submitting the case to the jurisdiction of this Honble court under Article 136 of Constitution of India which allows appeals from High Courts in the Supreme Court of India and thus grants the power of Appellate Jurisdiction.
ix
STATEMENT
OF
FACTS
Government of India (GOI) took measurable steps in order to launch International Mobile Telecommunication-2000 services or third generation telecom services (3G) in India, for recognizing its potential benefits including High speed data transfer, faster mobile internet access and entertainment for mobile users. GOI went a step ahead by taking the recommendation of Telecom Regulatory Authority of India (TRAI). Consequently, in August 2008, the Department of Telecommunications (DOT) under the Ministry of Communication and IT of GOI commenced the auction process, after going through a number of discussions and consultations with the industry association/market players. The DOT issued Auction Documents, subsisting of some condition to be fulfilled by the interested companies in order to participate in the auction process. In the Auction Document one of the condition was that, the entity should hold a Unified Access Services License (UAS License) and the key requirement to get the License were as follows: (i) the applicant company should be an Indian company; and (ii) the applicant should have a prescribed minimum net worth of INR 1,380 Crore to apply in all the 22 service areas. Telcel (India) Limited, a company registered under the provisions of the Companies Act,1956 and which had a net worth of INR 1,400 crores, made it place among the eligible bidders for the 3G-Spectrum Auction, in the list published by DOT . ____________________________________________________________________ _ WRITTEN SUBMISSION ON BEHALF OF THE PETITIONER x
After several rounds of competitive bidding, Telcel managed to bag 3G-Spectrum in 11 service areas, including Delhi-NCR, Mumbai , Andhra Pradesh, Karnataka, Tami Nadu (including Chennai service area), UP. Telcels Board of Directors consisted of 7 independent Directors, who complying with the requirement of Clause 49 of listing agreement, constituted a majority of Board of Directors of Telcel and two executive directors, Luke Naik and Ms Lia Naik who are holding 9% equity share of Telcel and they have been arrested for fraud, forgery and conspiracy under Indian Penal Code, 1860 and under the Prevention of Money Laundering Act, 2002. Telcel provided deed of indemnification to each its Directors and upon this deed, Telcel agreed to pay legal costs incurred by the directors and officers, including for costs incurred in defending themselves in any legal proceedings initiated against them in connect ion with their role in Telcel. The accounts and balance sheets of Telcel have been maintained by M&R which is a partnership firm registered with Institute of Chartered Accountants. In anticipation of possible investigation by SEBI/MCA on November 7, 2010 the promoters of Telcel wrote a confession letter to the Board of Directors admitting that the accounts of Telcel have been constantly manipulated. On the basis of Confession Letter and making necessary investigation, on 9th December 2010, SEBI issued a show cause notice against M&R under sections 11,11B and 11(4) of the SEBI Act and regulation 11 of the (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulation, 2003. M&R filed a writ petition at Bombay High Court challenging the jurisdiction of the SEBI to issue show cause notice to a firm which is registered with ICAI and Bombay High Court allowed the petition. Aggrieved by the same, SEBI filed this Special Leave Petition before the Supreme Court. As soon as details of account manipulation and possibility of license revocation came into the market, the share prices of Telcel crashed. Within less than 2 weeks from November 7, 2010, the share price fell from INR 850-900 to as low as INR 158. So, the Public shareholders suffered significant monetary losses. Some of the public shareholders (collectively held 7.5% of Telcel share capital) formed a group named GTPS and filed a recovery suit but the suit was dismissed by the civil court as ____________________________________________________________________ _ WRITTEN SUBMISSION ON BEHALF OF THE PETITIONER xi
well as by the Karnataka High Court on the ground that civil court is barred in terms of the applicable SEBI laws as SEBI, which was seized of the matter, was competent to award the relief claimed by GTPS. Hence, they filed special leave petition filed before this Honble Supreme Court. Accordingly, Independent Director filed a letter with the company requesting it to indemnify them under the deeds of indemnity for costs incurred by them or expected to be incurred by them in defending themselves against the investigations of SEBI, MCA, SFIO but it was declined by the company. Aggrieved by the decision of the company they filed a suit at Civil Court as well as before Karnataka High court where their petition was dismissed on the ground that such a request for indemnification was prohibited by the Companies Act, 1956. Hence, this Special leave petition filed before this Honble Supreme Court.
STATEMENT
OF
ISSUES
WHETHER THE RECOVERY SUIT FILED BY GROUP OF PUBLIC SHAREHOLDERS AGAINST THE COMPANY AND ITS SHAREHOLDERS CAN BE MAINTAINED? WHETHER THE INDEPENDENT DIRECTOR CAN CLAIM FOR INDEMNITY UNDER THE INDEMNITY DEED? WHETHER SEBI HAS JURISDICTION TO ISSUE SHOW CAUSE NOTICE TO THE AUDIT FIRM NAMED M & F, WHERE IT IS REGISTERED WITH THE ICAI?
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SUMMARY
OF
ARGUMENTS
[1] THAT THE SUIT FILED BY THE GROUP OF TELCEL PUBLIC SHAREHOLDERS IS MAINTAINABLE. [A] THAT THE SUPREME COURT HAS JURISDICTION. [B] THAT THE SHAREHOLDER CAN CLAIM REPRESENTATIVE ACTION AS LEAVE HAS ALREADY GRANTED BY SUPREME COURT. [2] THAT THE ADJUDICATION ON THE INDEMNITY CLAIM OF THE INDEPENDENT DIRECTORS IS PERMISSIBLE [A] THAT THE INDEPENDENT DIRECTORS DO NOT COME WITHIN THE PURVIEW OF OFFICER IN DEFAULT. [B] THAT THE INDEPENDENT DIRECTOR CAN CLAIM INDEMNITY UNDER SECTION 201 OF THE COMPANIES ACT, 1956. ____________________________________________________________________ xiii _ WRITTEN SUBMISSION ON BEHALF OF THE PETITIONER
[C] THAT THE INDEPENDENT DIRECTORS HAVE NOT ACTED BONA FIDE. [D] THAT THE PETITIONER CAN BE EXCUSED UNDER SUB- SECTION (1) & (2) OF SECTION 633 OF THE COMPANIES ACT, 1956. [E] THAT THE INDEPENDENT DIRECTOR CAN BE RELIED UPON CONTRACT ACT TO ENFORCE THEIR CLAIM OF INDEMNITY. [3] THAT THE SEBI HAS JURISDICTION TO ISSUE SHOW CAUSE NOTICE AGAINST M&R. [A] THAT THE AUDITOR OF COMPANY OWES DUTY TO THE INVESTORS UNDER SECTION 227 OF THE COMPANIES ACT, 1956. [B] THAT THE SEBI HAS JURISDICTION TO ISSUE SHOW CAUSE NOTICE OVER M&F AUDIT FIRM WHICH IS REGISTERED WITH ICAI. [C] THAT THE SEBI BEING A SPECIFIC LAW WILL PREVAIL OVER ICAI WHICH IS A GENERAL LAW.
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xv
ARGUMENTS ADVANCED
[1] THAT THE SUIT FILED BY THE GROUP OF TELCEL PUBLIC SHAREHOLDERS IS MAINTAINABLE
It is submitted that the suit filed by the Group of Telcel Public Shareholder is maintainable. [A] THAT THE SUPREME COURT HAS JURISDICTION TO MAINTAIN THE PETITION It is submitted that, public shareholder has suffered a loss for relying on the financial statement of the company. Hence they filed a recovery suit in the civil court but civil court dismissed the suit on the ground that civil court is barred in terms of the applicable SEBI laws. It is further submitted that, challenging the order of civil court GTPS filed a suit in High court and High court dismissed the claim on the same ground which the civil court has given. Aggrieved by the same, GTPS has filed a Special leave petition under section 136 of the Constitution of India before this Honble court. It is submitted that, power under section 136 is permitted to be invoked in very exceptional circumstances when a question of law of general public importance arises. The power under Article 136 is an extraordinary power to be exercised in rare and exceptional circumstances.1 The Article confers a discretionary power to interfere in suitable case, meant to advance the cause of justice. Even in cases where special leave is granted, the discretionary power vested in the court continues to remain with the court even at the stage when appeal comes up for hearing.2But in the instant case, where larger interest of
1
Jamshed Hormusji Wadia v. Board of Trustees, Port of Mumbai, (2004) 3SCC 214; See Narpat Singh v. Jaipur Development Authority, (2002) 4 SCC 666; See D. D. Basu, Chandrachud, YV and Manohar, VR and Bannerjee, BP (eds.) Shorter Constitution of India, 18th ed. 2001, II rep. 2003, Wadhwa & Co., Nagpur; See Mahendra P. Jain (rev.), V N Shukla, Constitution of India, 10th ed. 2001, V rep. 2006, Eastern Book Company, Lucknow, See Y.V. Chandrachud, et al., (revs.), Shorter Constitution of India, Durga Das Basu, 13th Edition, 2001, Wadhwa and Company, Nagpur. 2 Ashok Nagar Welfare Association v. R.K Sharma, AIR 2002 SC 335.
public shareholders involved the suit has to be maintained. It is submitted that, in the instant case GTPS are holding 105 Crore which is not a smaller amount, therefore it can be said that here larger public interest is involved. It is further submitted that, the suit if GTPS can be maintained as the supreme court has the power under section 9 of the Civil Procedure code and SEBI cant interfere in it as under Section 9 there is a pre-existing common law right under section 9 of the CPC and that pre-existing common law right is not taken away by the provisions of sections 15Y and 20A of SEBI Act 1992 It is because what is barred under section 15Y and 20A is only those acts which falls either under the said Act or under the regulations framed there under.3 [B] THAT THE SHAREHOLDER CAN CLAIM REPRESENTATIVE ACTION AS LEAVE HAS ALREADY GRANT BY SUPREME COURT It is submitted that, when the petitioner are persons who are interested on the same issue of law as well as issue of fact, they can apply under Order I rule 8 of Civil procedure Code. It provides that when there are a number of persons similarly interested in a suit, one or more of them can, with the leave of the court, sue or be sued on behalf of themselves and others.4The plaintiff in a representative suit need not obtain the previous consent of the persons whom he seeks to represent. It is further submitted that, to bring a case within provision of Order I rule 8 of the Code of Civil procedure all the members of a class should have a common interest in a subject-matter and a common grievance and the relief sought should, in its nature, be beneficial to all.5
Kesha Appliances v. Royal Holdings Services Ltd, 2006 130 Comp Cas 227 Bom. See, M.R. Goyal v. Usha International, 1998 93 Comp Cas 634 Delhi; See Mulla on Code of Civil Procedure, 19th Edn. , Lexisnexis Butterworths, 2005. 4 Lingam Ramaseshayya v Myneni Ramayya, AIR 1957 AP 964; See, Hasnali v. Mansoorali, AIR 1948 PC 66 AT P 70; See, Moran Mar Basselios v.Thukalan Paulo Avira, AIR 1959 SC 31; See, Sarkar, Code of Civil Procedure , vol 1, 11th Edn., LexisNexis Butterworths, 2009; See, Thakker C.K, Code of Civil Procedure, vol1, Eastern Book Publication, 2005. 5 T.N Housing Board v. T.N Ganapathy, 2004) 6 SCC 85; Teja Singh v. Union Territory, Chandigarh, AIR 1982 P&H 169; See Takwani C.K, Civil Procedure, 6th Edn ,Eastern Book Company,2009.
It is further submitted that, Since, GTPS has suffered loss; they can file representative action6 against the company which is a wrongdoer. In Duke of Bedford v Ellis7 Lord McNaughton stated that: Given a common interest and common grievance, a representative suit was in order if the relief sought was in its nature beneficial to all whom the plaintiff proposed to represent. It is submitted that, representative action is permissible provided that three conditions were satisfied: A common interest A common grievance The relief sought was by its nature beneficial to all whom the plaintiff
proposed to represent.8 In Market & co.ltd v Knight Steamship Co.Ltd.9 Buckley L.J stated that: It may be, and in I think it is the case, that in representative action the plaintiff must be in a position to claim some relief which is common to all. It is further submitted that, a shareholder of a company can sue the company for relief from the company when numerous persons has the same interest in any proceeding10 In Prudential Assurance Co. Ltd. v Newman Industries11 the plaintiffs were minority shareholders in Newman, brought an action for recovery against Newman and against the two officers of Newman who had effectively controlled it at the material times. Vinelott J held that a representative action was procedurally permissible in these
Representative action may be defined as a legal action in which one or a few members of a class sue on behalf of themselves and other members of the same class; a lawsuit brought by the stockholders of a corporation, on its behalf, for the enforcement of a corporate right., referred in Seally and Worthington, Cases and Materials on company Law, 8th Edn. , 2007, Oxford University Press. 7 (1901) A.C. 1. 8 Taff Vale Railway Company v Amalgamated Society of Railway Servent, (1901) A.C. 426; See, Temperton v Russell, (1893) 1 Q.B. 715. 9 (1910) 2K.B. 1021. 10 Penningtons Company Law, 8th Edn., Oxford university press; See, Palmers Company Law, vol. 2, Thompson Sweet & Maxwell. 11 (1979) 3 ALL E.R. 507; See, Plimbing Union v Times Newspaper Ltd. (1980) Q.B.585.
circumstances and it is only permissible in cases where the claim arises from same issue of law and fact. It is submitted that, in India the concept of representative action as a common law remedy has been accepted by the court in various decisions though there is no specific provision for that. In Sitaram Jaipuria and Ors. v. Banwarilal Jaipuria12 it was held that representative action can be brought by the shareholders of the company. It is further submitted that, in N.V.R. Nagappa Chettiar And Anr. v. The Madras Race Club by its Secretary, Mr. H.L. Raja Urs And Ors.,13 court stated shareholder or shareholders are entitled to bring an representative action (1) in respect of matters which are ultra vires the company and which the majority of shareholders, were incapable of sanctioning;14 or; (2) where the act complained of constitutes a fraud on the minority; or (3) where the action of the majority is illegal. Here representative action was accepted by the court and the appeal was allowed. In Ramkissendas Dhanuka v. Satya Charan,15 Bombay High Court has accepted the view that: Normally in a representative action by a minority shareholder the company would be made a defendant.
[2] THAT THE ADJUDICATION ON THE INDEMNITY CLAIM OF THE INDEPENDENT DIRECTORS IS PERMISSIBLE
It is submitted that the Adjudication on the indemnity claim of the Independent Directors is permissible.
[A] THAT THE INDEPENDENT DIRECTORS DO NOT COME WITHIN THE PURVIEW OF OFFICER IN DEFAULT.
Clause 49 of the Listing agreement defines Independent director as a Director who is a non-executive Director of the company, moreover a Director who apart from receiving directors remuneration, does not have any material pecuniary relationships or
12 13
AIR 1972 Cal 105. (1949) 1 MLJ 662. 14 Burland v. Earle, (1902) A.C. 83; Also see, Palmer's Company Law, 17th Ed., at p 236 237; See, Halsbury's Laws of England ,2nd Ed., Vol. 5, pg 445 paragraph 728. 15 (1950) 52 BOMLR 501.
transactions with the company, its promoters, its directors ,its senior management or its holding company ,its subsidiaries and associates which may affect independence of the director; and who is not related to promoters or management at the board level or at one level below the board In the report of Kumarmangalam Birla Committee, it is stated that that Independent Directors are the persons who are non-executive Director and who do not participate in the day-to-day activities of the company. 16 The same has been affirmed by the committees on the same concern.17 It is submitted that various provision of the Companies act 1956, provide that in case of contravention of the provision of the Act, the officer in default18 shall be held liable. This essentially means that liability is to be imposed only on those particular officers who are in default and not on all directors. Therefore, it is submitted that in the instant case Telcels Board of Directors is compromised of seven independent directors (Mr. Yoda Singh Khara, Mr. Han Solo Jha, Ms. Padm Kulkarni, Mr. Palpatine Venkatraman, Prof. Jabba Prasanna, Mr. Qui-Gon Gangadhar and Dr. Obi-Wan Balan), who are reputed academicians and retired civil servants (collectively, the Independent Directors) and two executive Directors named Luke Naik and Ms. Lia Naik. It is further submitted that, the two executive director in its confession letter has made it clear that their action or their criminal liability were entirely their own and did not involve any other board member, past or present. In this context, it is submitted that blame can and should be apportioned and in all circumstances it would be neither wise
16
Report of the Committee Appointed by the SEBI on Corporate Governance under the Chairmanship of Shri Kumar Mangalam Birla, at Section 6.5 17 Second Report of Naresh Chandra Committee, Section 4.1, Narayana Murthi committee concept of independent Director, Feb. 8, 2003, at section 4.4. 18 Section 5 of Companies Act, 1956 defines "officer who is in default"- For the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any punishment or penalty, whether by way of imprisonment, fine or otherwise, the expression "officer who is in default" means all the following officers of the company, namely:- (a) the managing director or managing directors; (b) the whole-time director or whole-time directors; (c) the manager;(d) the secretary; (e) any person in accordance with whose directions or instructions the Board of directors of the company is accustomed to act;(f) any person charged by the Board with the responsibility of complying with that provision: Provided that the person so charged has given his consent in this behalf to the Board; (g) where any company does not have any of the officers specified in clauses (a) to (c), any director or directors who may be specified by the Board in this behalf or where no director is so specified, all the directors: Provided that where the Board exercises any power under clause (f) or clause (g), it shall, within thirty days of the exercise of such powers, file with the Registrar a return in the prescribed form.
nor practical to hold all the officers liable, doing so would only unnecessarily disrupt the smooth functioning of the company.19 It is further submitted that the combined effect of section 2(30) and section 5 of the Companies Act, 1956 is that all Directors of the Company cannot at all be construed as officer in default, unless each of the directors is an officer in default within the meaning of section 5 of the companies Act 1956.20 In the instant case, the company has 2 executive Director named Luke Naik and Ms. Lia Naik ,therefore it is submitted that all directors of the company will be officers in default within the meaning of section 5 only when there is no managing Director , whole time Director, executive Director.21 The Ministry of Corporate Affairs has issued a general circular advising Registrar of Companies to take extra care in examining the cases where Directors are identified as Officer in default and that before taking penal action under the Companies Act, 1956 against the Directors to verify prescribed compliances. 22 According to this circular, Independent Director does not participate in the day-to-day management of the company,23 so while considering the non-executive directors for including in the list of officers in default for a particular violation of the Companies Act, it should be examined whether the violation has taken place with his knowledge attributable through board process, with his consent or connivance and whether he acted diligently or not.24 Hence it is submitted that the Independent Directors are not the officers in default.
[B] THAT THE INDEPENDENT DIRECTOR CAN CLAIM INDEMNITY UNDER SECTION 201 OF THE COMPANIES ACT, 1956.
Section 201 of the companies Act 1956 states that, a provision in the companys articles or in any agreement that excludes the liability of the directors for negligence, default, misfeasance, breach of duty or breach of trust, is void. But if a director has been
19 20
Nallini Puri, Officers in Default, (2003) 5 Comp. LJ 18. Sivandhi Adityan v. Addl. Registrar of companies (1995) 83 Comp. Cas. 616(Mad). 21 Vijay kumar Gupta v. Registrar of Companies (2004) 118 Comp.cas. 604; See A.R Ramaiya, Guide to the Companies Act, Part 1, 2010, Wadhwa, Nagpur. 22 Government of India, Ministry of Corporate Affairs, General Circular No. 08/2011 23 S.P Punj v. Registrar of companies, Delhi, (1991) 1 Comp. LJ 167 (Del). 24 Supra note 22, at 2(e).
acquitted against such charges, the company may indemnify him against costs incurred in defense. 25 It is vehemently submitted that the Independent Directors has filed their suit in the Civil Court as well as in the Karnataka high Court but both were rejected on the ground that request of indemnification is barred by the companies Act 1956.Therefore, it is submitted that Section 201 of the Companies Act 1956,enable a company to indemnify against liability incurred in defense any of its officers in the event only of his having been found by a competent court to be innocent or to have acted bona fide.
[C] THAT THE INDEPENDENT DIRECTORS HAVE NOT ACTED BONA FIDE
It is submitted that a Director of a Company indisputably stands in a fiduciary capacity vis-a-vis the Company. He must act for the paramount interest of the company. Therefore, it is submitted that the Director owe a duty of care and a duty of Loyalty26. In Globe Motors Ltd. V. Mehta Teja Singh & Co,27 it was stated that in addition to their fiduciary duties, the directors also owe a duty of care to the company not to act negligently in the management of its affairs - the standard being that of a reasonable man in looking after his own affairs. There is a striking contrast between the directors' heavy duties of loyalty and good faith and their very light obligation of skill and diligence. Directors have to display some degree of both.28
25
Section 201 of Companies Act 1956 :Avoidance of provisions relieving liability of officers and auditors of company.(1) Save as provided in this section, any provision, whether contained in the articles of a company or in an agreement with a company or in any other instrument, for exempting any officer of the company or any person employed by the company as auditor from, or indemnifying him against, any liability which, by virtue of any rule of law, would otherwise attach to him in respect of any negligence, default, misfeasance, breach of duty or breach of trust of which he may be guilty in relation to the company, shall be void; Provided that a company may, in pursuance of any such provision as aforesaid indemnify any such officer or auditor against any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgment is given in his favour or in which he is acquitted or discharged or in connection with any application under section 633 in which relief is granted to him by the Court. 26 Sangramsinh P. Gaekwad & Ors. vs Shantadevi P. Gaekwad (Dead) by .Lrs. & Ors ., AIR 2005 SC 809. See, Palmer's Company Law, 23rd Edn., p.848. See, Kamal Kumar Dutta & anr. v. Ruby General Hospital Ltd. & Ors., 2006 (7)SCC 613 27 1984 Company Cases 445; See Company Law Digest, vol.2, Taxmanns Publication, 2009. 28 L.C.B. Gower, The Principles of Modern Company Law., 3rd edn., at page 549.
It is submitted that, under English law to determine if there has been a breach of either duty, courts use the business judgment rule and the fairness standard. Courts analyze each duty differently, depending on whether the challenged transaction involves a disinterested director, or an interested, self-dealing director. If a director is disinterested, the business judgment rule applies to determine if the director breached his or her duty of care; however, if a director is interested, the presumption of the business judgment rule is rebutted and the fairness standard applies to determine if the director breached his or her duty of loyalty.29 In the instant case, it is submitted that the Independent director is not liable for the action taken by the promoters of the company they are merely finger heads of the company and do not participate in the day-to-day management of the company. Moreover the Independent director owes a duty of care and loyalty towards the company, but that does not render him liable for the Act committed by the promoters of the company. In support of this argument,it is submitted that , in Lagunas Nitrate Co v Lagunas Nitrate Syndicate,30 it has been stated that if the directors act within their powers, if they act with such care as is to be reasonably expected of them having regard to their knowledge and experience and if they act honestly for the benefit of the company they discharge both their equitable as well as legal duty to the company In Official Liquidator v P.A. Tendolkar,31 this Honble Supreme court stated that it is certainly a question of fact, to be determined upon evidence in each case. whether a Director alleged to be liable for negligence, breach of duty, has acted reasonably as well as honestly and with due diligence, so that he could not be held liable for conniving at fraud or misfeasance or breach of duty or negligence which take place. It is enough to prove whether his negligence is of such a nature as to whether enable frauds to be committed and losses thereby incurred by the company. Therefore, it is submitted that Independent Director has not done nothing which can make them liable for the same and consequently it can be said that Independent Director cannot be held liable for the act
29 30
Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993). (1899) 2 Ch 392. 31 (1973) 43 Comp .Cas 382.
done by the executive Director. Here the company will be liable for the Act of its executive director under alter ego principle which means mental state of the directors and officers who control and determine the management of the company can be attributed to the company, such as to render the company (and not ordinarily the directors and officers) liable in law in respect of the actions undertaken by its human controllers. 32 Therefore, it is submitted that Director can claim for indemnity under section 201 of the Companies Act 1956 after satisfying the requirement of section 633 of Companies Act, 1956.
[D] THAT THE PETITIONER CAN BE EXCUSED UNDER SUBSECTION(1)& (2) OF SECTION 633 OF THE COMPANIES ACT, 1956
Section 633 states that where a Director may be liable in respect of the negligence, default, breach of duty, misfeasance or breach of trust but if he has acted honestly and reasonably and having regard to all the circumstances of the case, he ought fairly to be executed, the court may relieve him either wholly or partly from his liability on such terms as it think fit. 33 It is submitted that, while referring to any proceeding under sub-section (2) of Section 633 the Parliament intended to restrict it only to the proceeding arising out of negligence, default, breach of trust, misfeasance or breach of duty in respect of duties prescribed under the provisions of the Companies Act.
32 33
Esso Standard Inc. v. Udharam Bhagwandas Japanwalla, 1975 45 Comp Cas 16 Bom. Section 633 of the Companies Act :Power of Court to grant relief in certain cases.(1) If in any proceeding for negligence, default, breach of duty, misfeasance or breach of trust against an officer of a company, it appears to the Court hearing the case that he is or may be liable in respect of the negligence, default, breach of duty, misfeasance or breach of trust, but that he has acted honestly and reasonably, and that having regard to all the circumstances of the case, including those connected with his appointment, he ought fairly to be excused, the Court may relieve him, either wholly or partly, from his liability on such terms as it may think fit: Provided that in a criminal proceeding under this sub-section, the Court shall have no power to grant relief from any civil liability which may attach to an officer in respect of such negligence, default, breach of duty, misfeasance or breach of trust. (2) Where any such officer has reason to apprehend that any proceeding will or might be brought against him in respect of any negligence, default, breach of duty, misfeasance or breach of trust, he may apply to the High Court for relief and the High Court on such application shall have the same power to relieve him as it would have had if it had been a Court before which a proceeding against that officer for negligence, default, breach of duty, misfeasance or breach of trust had been brought under sub-section (1).
The Act extends special protection against a liability that may have been incurred in good faith .It is submitted that, the Independent Director can exonerate himself by satisfying the court that his actions were honest and reasonable; in other words, by showing that he did not intend to commit default or contravene the provision of the statute.34 However, he must be vigilant, and if he acts bona fide with due diligence takes all care to ensure compliance, he would be entitled to relief under section 633.35 In Amara pictures (p) Ltd, In re36 it was held that section 633 gives discretion to the court to relieve the person proceeded against for those acts mentioned therein, provided the court finds that the person has acted reasonably and honestly in the circumstances of the case. Independent Director though a part of board of Directors they have not done any act for which the company will be liable. It is already submitted that Independent Directors do not participate in the day-to-day management of the company, in this connection in O.P Khaitan v Shree Keshariya investment ltd,37 court held that in granting relief under section 633, it was necessary to make a distinction between those directors who were on the board purely by virtue of their technical skill, or because they represented certain special interests and those who were in effective control of the management and affairs of the company, and it would be unreasonable to fastened liability where such directors do not participate into the day to day management of the company. Therefore it is submitted that the object of the provision thus appears to be to provide against harassment in deserving cases and give relief from liability to persons who, has acted honestly and reasonably and, in the instant case keep in mind the circumstances and fact of the case, the Independent Director ought fairly to be excused. In the light of the above submissions it is submitted that, director has acted bona fide can claim for indemnification.
34 35
Supra note 19, at page 27. H. Nanjudiah v. Govindan, Registrar of Companies, Maharashtra and another, (1986) 39 Comp Cas 356; See, Company Law Digest, vol3, 3rd Edn., Taxmanns Publication, 2009. 36 (1970)40 Comp Cas 130.See, G.D Bhargava v. Registrar of Companies, (1970)40 Comp Cas 664. 37 (1978) 48 Comp Cas 85 (Del)
10
[E] THAT THE INDEPENDENT DIRECTOR CAN BE RELIED UPON CONTRACT ACT TO ENFORCE THEIR CLAIM OF INDEMNITY.
Section 12438 defines a contract of indemnity as one under which the promisee promises to save the other from loss caused to him by the petitioners conduct, or from the action of a third person.39 Section 125 describes the rights of the promisee under a contract of indemnity, when sued. The promisee is entitled to recover the damages which he has been compelled to pay in a suit in respect of the matter for which he has been compelled to pay in a suit in respect of the matter for which he has been indemnified, the costs which he was compelled to pay in the suit and the amounts paid by him under the terms of any compromise, in the circumstances given in the section. 40 It is submitted that, the petitioner can claim his right to indemnification under this two subsequent provision as a deed of indemnification has been executed by the company in favour of the Director. It is submitted that, in the case of Gajanan Moreswar Parelkar v Moreswar Madan Mantri,41 Chagla J. has made it clear that if the indemnifier had incurred a liability and that liability is absolute, he is entitled to call upon the indemnifier to save him from that liability and pay it off by stating that: It is true that under the English common law no action could be maintained until actual loss had been incurred. It was very soon realized that an indemnity might be worth very little indeed if the indemnifier could not enforce his indemnity till he had
38
Section 124 of Contract Act 1872: "Contract of indemnity" is defined as a contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person, is called a "contract of indemnity" 39 Dr. R G Padia and Nilima Bhadbhade, Pollock & Mulla on Indian Contract Act and Specific Relief Acts, 13th Edn. 2007, LexisNexis Butterworths, New Delhi. 40 Section 125 of Contract Act 1872: Right of indemnity-holder when sued is defined: The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor- (1) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies; (2) all costs which he may be compelled to pay in any such suit, if in bringing of defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorized him to bring or defend the suit; (3) all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contract to the orders of the promisor, and was one which it would have been prudent for the promise to make in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit. 41 AIR 1942 BOM 302.
11
actually paid the loss. If a suit was filed against him, he had actually to wait till a judgment was pronounced and it was only after he had satisfied the judgment that he could sue on his indemnity. It is clear that this might under certain circumstances throw an intolerable burden upon the indemnity-holder. He might not be in a position to satisfy the judgment and yet he could not avail himself of his indemnity till he had done so. Therefore, the court of Equity stepped in and mitigated the rigour of the common law. The court of Enquiry held that if his Liability had become absolute then he was entitled to pay into Court sufficient money which would constitute a fund for constitute a fund for paying off the claim whenever it was made.I have already held that section 124 and section 125, contract Act, are not exhaustive of the law of indemnity and that the courts in England do. Therefore, if the indemnifier had incurred a liability and that liability is absolute, he is entitled to call upon the indemnifier to save him from that liability and pay it off.42 Hence it is submitted that, the independent director who are not in default at all should get indemnity before the proceeding under section 124 and section 125 of the Indian contract act 1872. Moreover, it can be said that the justification given by Chagla J behind the principle laid down should taking into account with regard to Companies Act 1956 also and upon this justification, it can be urged that section 201 of Companies Act, 1956 is really in need of amendment. The Law Commission of India accepted the view that to indemnify does not mean to reimburse in respect of money paid, but, in accordance with its derivation, to save from loss in respect of the liability against which the indemnity has been given. 43
[3] THAT THE SEBI HAS JURISDICTION TO ISSUE SHOW CAUSE NOTICE AGAINST M&R.
It is submitted that the SEBI has jurisdiction to issue show cause notice to M&R.
42
Profulla Kumar Basu v Gopee Bullabh Sen, AIR 1946 Cal 159; See, Ramalingathudayan v Unnamalai Achi, AIR 1914 Mad 655; See, Abdul Majeed v Abdul Rashid, AIR 1036 All 598; See, Chunibhai Patel v Natha Bhai Patel, AIR 1944 Pat 185. 43 Thirteenth Report of Law Commission of India, 1958, Para 104.
12
[A] THAT THE AUDITOR OF COMPANY OWES DUTY TO THE INVESTORS UNDER SECTION 227 OF THE COMPANIES ACT, 1956.
It is submitted that SEBI issued show cause notice to M&R which is registered with ICAI, an Audit firm under section 11, 11B and 11(4) of the SEBI Act and Regulation 11 of the (Prohibition of fraudulent and unfair trade practices Relating to Securities Market) Regulation 2003 and it has its jurisdiction to do the same. It is further submitted that the M&F being the auditors of the company can be held liable for the manipulation of the account of Telcel company as they owes a duty of care towards the investors of the company. It is submitted, that auditors owes an important duty towards the investors. In terms of Section 227 of the Companies Act, 1956, in his audit report, an auditor shall inter alia state that he had obtained all the information and explanation which to the best of his knowledge and belief were necessary for the purpose of his audit. Further, in terms of Section 227 (1A) (f) of the Companies Act, 1956, an auditor shall inquire (where it is stated in the books and papers of the company that any shares have been allotted for cash) whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance-sheet is correct, regular and not misleading.44 Section 227 of the Companies Act, 1956 facilitates the auditor's duty to report a true and fair view of the company's financial status, by giving the auditor the right to inspect and examine the books and accounts, balance sheet and vouchers and other documents as may be necessary for the purpose of audit report. Further the auditor can also require any information or explanation from any officers of the company. It is obligatory on the officers to furnish any such information as required by the auditor.45 It is further submitted that the auditor must take reasonable care to ascertain that books furnished by the company show its true position. The auditor may also carry his search outside the books by conducting any inspection or inquiry under the powers given
44 45
Price Waterhouse & Co v SEBI, 2010 160 Comp. Cas. 324(BOM). Re: Bhavnagar Vegetable Products Ltd, (1977) 18 GLR 889.
13
by Section 227. Therefore, the auditor must not confine himself to checking arithmetical accuracy of the balance sheets and accounts but must also see that they reflect the true and fair view of the company's financial affairs. It is further submitted that, the auditor shall discharge his professional responsibility with high ethical standards and an auditor when making a report should not, (a) fail to disclose a material fact known to him, which is not disclosed in a financial statement with which he is concerned in a professional capacity , (b) fail to report a material mis-statement known to him to appear in a financial statement with which he is concerned in a professional capacity and (c) fail to obtain sufficient information to warrant the expression of an opinion or his exceptions are sufficiently material to negate the expression of an opinion. He also must realize his obligations to third parties and in view of the fact that the reports made by him are likely to be relied on, he must use his utmost skill and care that the statements issued do reflect the true and accurate state of affairs and free from any ambiguity.46 In London Oil Storage Co. Ltd. v. Seear, Hasluck & Co (1904), 47 Lord Alverstone stated as follows: An auditor must exercise such reasonable care as would satisfy a man that the accounts are genuine, assuming that there is nothing to arouse his suspicion of honesty and if he does that he fulfils his duty; if his suspicion is aroused, his duty is to probe the thing to the bottom, and tell the directors of it and get what information he can. In re London and General Bank48, Lord Justice Lindley recorded his valuable opinion in regard to the duties of an auditor in the following words: ".....he must be honest, i.e., he must not certify what he does not believe to be true, and he must take reasonable care and skill before he believes that what he certifies is true. What is reasonable care in any particular case must depend upon the circumstances of that case. Where there is nothing to excite suspicion very little inquiry will be reasonably sufficient, and in practice I believe businessmen select a few cases at haphazard, see that they are right, and assume that others like them are correct also. Where suspicion is aroused more care is obviously necessary, but. still, an auditor is not
46 47
Institute Of Chartered Accountants Of India v. K. Bhagavatheeswaran, AIR 1968 SC 1104 Dicksee on Auditing, 17th Edn, p 632. 48 (1895)2 Ch 673.
14
bound to exercise more than reasonable care and skill, even in a case of suspicion, and he is perfectly justified in acting on the opinion of an expert where special knowledge is required......" It is further submitted that the Bombay High Court in Price Water House & co. v SEBI stated that: Auditors owe a duty to the shareholders and are required to give a correct picture of the financial affairs of the Company. It is not uncommon nowadays that for financial gains even small investors are investing money in the share market. Therefore it is submitted that, the auditors owes a duty towards the investors of the company and in the instant case M&F audit firm which is has been appointed and reappointed as statutory auditors of the Company Telcel owes a duty towards the investors of the Companies as the investors are expected to rely upon the accounts of the company before investment. It is further submitted that auditors M&F has committed a fraud under regulation 2(c) (8) of the Securities and Exchange Board of India (Prohibition Of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 by making a false statement which they believe not to be true so, SEBI can take action against them under Regulation 11 of the Securities and Exchange Board of India (Prohibition Of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003.
[B] THAT THE SEBI HAS JURISDICTION TO ISSUE SHOW CAUSE NOTICE OVER M&F AUDIT FIRM WHICH IS REGISTERED WITH ICAI.
It is submitted that, under Section 11(B) & 11(4)(b) , it may be mentioned that SEBI, entrusted with the responsibility to protect the interest of the investors, has to act swiftly to curb further mischief and to take such action as is necessary, in its opinion, to sustain public confidence in the integrity of capital markets.49 It is further submitted that, Section 11(4) read with Section 11 B of SEBI Act, 1992 gives unrestricted power to SEBI to intervene for an orderly development / functioning of the market and in the
49
SEBI v. Shri Samir C. Arora, Appeal No. 83/2004
15
interest of investors there is no doubt about the authority or power of SEBI Act, 1992 to issue orders under the above mentioned sections. The main rationale of taking action under Section 11(4) read with Section 11B would be emergent situation or impending dangers to the market conditions or security to the market. This provision is for safeguarding the market.50 It is further submitted that observation given by Bombay high Court in Ramrakh R. Bohra v. SEBI,51 that the sections 'empower the Board to issue directions for the purpose of securing the proper management of intermediary or person, as may be appropriate in the interests of the investors in securities and securities market....' is very significant. It is further submitted that Delhi High Court MZ Khan v. SEBI
52
had stated
that 'under section 11 of the SEBI, Act, the SEBI has the power to protect the interest of the investors in securities and to promote the development of and to regulate the securities market, by such measures as it thinks fit. The power is of very wide nature and is not hedged in by any restrictions.... Therefore, it is submitted that SEBI has a drastic power under section 11,11B and 11(4) to protect the interest of the investors. It is further submitted that, if the object of the SEBI Act is looked into, it comes out that it is to protect the interest of the investors in securities and promote development of security market apart from to regulate it. The preamble of the SEBI Act 1992 reads as follows: An Act to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto. It is submitted that, the shares of the Telcel Company are listed on the Bombay Stock Exchange (the BSE), therefore So far as listed Companies are concerned, the SEBI has all the powers under the Act and the Regulations to take all remedial and pr otective measures to safeguard the interest of investors and so far as the role of Auditors is concerned, it is very important role under the companies Act. It is further submitted that, in the instant case SEBI has issued show cause notice against the M&F with a view
50 51
Ubs Securities Asia Ltd. v. Securities And Exchange Board Of India, (2005) 6 Comp LJ 64 SAT [1999] 33 CLA 243. 52 AIR 1999 Delhi 164
16
to see that such type of incidents may not happen in future in connection with the public listed companies. In this connection it can be stated that manipulation of accounts, are likely to affect the interest of the investors and securities market so SEBI has jurisdiction over it as the main object is to protect the interest of the investors. It is further submitted that the two executive Directors of the Company have written a confession letter to the board of director stating that the account of the company has been manipulated. On the basis of the material submitted, SEBI initiate an investigation and found that the books of account of the company were manipulated with knowledge and intention, therefore it is submitted that this will have a direct bearing on the securities market. Hence it cannot be said that SEBI has no power to issue show cause notice though the M&F is registered with ICAI.53 In Price Water House & co. v SEBI ,examining the provisions of the SEBI Act, 1992 the High Court observed that they were "of wide amplitude and would therefore take within its sweep a Chartered Accountant if his activities are detrimental to the interest of the investors or the securities market". Court has also observed: In order to safeguard the interest of investors or interest of securities market, SEBI is entitled to take all ancillary steps and measures to see that the interest of the investors is protected. Looking to the provisions of the SEBI Act and the Regulations framed there under, in our view, it cannot be said that in a given case if there is material against any Chartered Accountant to the effect that he was instrumental in preparing false and fabricated accounts, the SEBI has absolutely no power to take any remedial or preventive measures in such a case. It cannot be said that the SEBI cannot give appropriate directions in safeguarding the interest of the investors of a listed Company. ICAI has been established under Chartered Accountants Act, 1949. The preamble of the Act states that: Whereas, it is expedient to make provision for the regulation of the profession of chartered accountants and for that purpose to establish an Institute of Chartered Accountants
53
Supra note 44.
17
It is submitted that, from the preamble it is clear that CA Act 1949 (As amended by The Chartered Accountants (Amendment) Act, 2006 (No. 9 of 2006) that it regulates the profession of Chartered Accountants only. It is further submitted that, the words Every Person, Any person, A member, and Any member used in the provisions of the Act specifically states that the this Act is only for members of Audit Firms. Therefore, SEBI can sue Audit firms as a whole for the protection of the interest of the investors.
[C] THAT THE SEBI BEING A SPECIFIC LAW WILL PREVAIL OVER ICAI WHICH IS A GENERAL LAW.
It is submitted that, SEBI is a specific law as, it is expressly deal with the interest of investors at a large in securities and regulates the securities market, whereas CA Act 1949 under which ICAI has established is a Statutory Act as well as a general law as it is for the purpose of regulating the profession of chartered accountants. It is further submitted that Specific law provisions will always prevail over the general law provision. In the case of J.K. Cotton Spg. & Wvg. Mills Co. Ltd v. State of Uttar Pradesh 54 there is a conflict regarding who will prevail over another, between Securities Contracts (Regulation) Act and Companies Act. Finally it is held that SCR Act is a special law relating to stock markets and the Companies Act is a general law in the matter of regulation of stock exchange, and as such in the event of any conflict between a general law and a specific law the provisions of the specific law will prevail over the general law. Therefore, it is submitted that SEBI will prevail over the CA Act and it has jurisdiction.
54
AIR 1961 SC 1170; See, State Bank of Bikaner & Jaipur v. Deputy Commissioner Of Income Tax, (1999) 65 TTJ JP 480; See, Mohansingh Gurucharansingh v. State Of Gujarat and anr., AIR 1996 Guj. 80.
18
PRAYER
In light of the facts mentioned, issues raised, arguments advanced and authorities cited, it is prayed before this most Honourable Court that it may please adjudge and declare that: THAT THE RECOVERY SUIT FILED BT GTPS IS MAINTAINABLE. THAT THE INDEPENDENT DIRECTORS CAN CLAIM FOR INDEMNITY. THAT THE SEBI HAS JURISDICTION OVER M&R CO.
And pass any order the Honble Court may deem it fit in light of justice, equity and good conscience.
19
All of which is most respectfully submitted, Counsels for the Petitioners.
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IN THE HONOURABLE SUPREME COURT OF INDIA

IN THE MATTER OF-

versus TELCEL (INDIA) LIMITED

INTRA KLS MOOT COURT COMPETITION, 2011

STATEMENT STATEMENT STATEMENT SUMMARY [1]

JURISDICTION...................................................................................IX FACTS.............................................................................................X ISSUES..........................................................................................XII

ARGUMENTS.....................................................................................XIII THE SUIT FILED BY THE GROUP OF TELCEL PUBLIC

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Vol. Comp. Cas.

Volume Company cases.

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SEBI v. Shri Samir C. Arora, Appeal No. 83/2004

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