869 IN THE LEARNED COMPANY LAW BOARD

IN THE MATTER OF

NIDHI JAIN AND ORS. PLAINTIFFS v. VERMA VENTURES LTD. AND TAPAN VERMA DEFENDANTS

SUIT NO.:.. /2013 [UNDER SECTION 10(E) OF THE COMPANIES ACT, 1956 READ WITH REGULATION 7(1), 22 OF THE COMPANY LAW BOARD REGULATIONS, 1991]

ON BEHALF OF THE DEFENDANTS

II TABLE OF CONTENTS Index of authorities ...................................................................................................................... IIII Statement of facts.......................................................................................................................... IV Statement of jurisdiction .................................................................................................................V Issues for consideration ................................................................................................................ VI Summary of Arguments ............................................................................................................... VII Arguments advanced....................................................................................................................... 1 I. The class action suit filed by the plaintiff is not maintainable. ............................................... 1 II. Defendants are not liable for misstatement in Television announcement under the companies Act, 1956 ..................................................................................................................................... 3 Prayer for Relief.............................................................................................................................. 7

-MEMORIAL ON BEHALF OF DEFENDANTS-

III

INDEX OF AUTHORITIES Cases Akerhielm v. Rolf De Mare, 1959 AC 789...................................................................................... 3 All India Indian Overseas Bank SC and ST Employees' Welfare Association v. Union of India, (1996) 6 SCC 606 ....................................................................................................................... 1 B.Subba Reddy v. S.S.Organics Limited [2009]151Comp Cas 190 (AP)....................................... 1 T.N. Housing Board v. T.N. Ganapathy, 1990 1 SCC 608 ............................................................. 2 Yugantar And Others v. Union Of India And Others 1998 94 CompCas 621 Delhi ..................... 4 Other Authorities Business Law, Ethics and Communication, The institute of Charted accountant of India ............. 3 C R Dutta, Company law, (6th edn., Wadhwa and Company, 2008) .............................................. 5

-MEMORIAL ON BEHALF OF DEFENDANTS-

IV STATEMENT OF FACTS On March 31, 2013, Tapan Verma, the managing director of Verma Ventures Ltd. (Company), appointed Mr. Anupam Sankhla, a young chartered accountant, to ascertain the financials of the Company before it went for a public issue for the purposes of the prospectus. Mr. Sankhla calculated the past five years profits & losses as per the books of the company as on December 31, 2012, which showed an increase in net profit every year. On May 2, 2013, Mr. Sankhla was told by a friend that as per Schedule II of the Companies Act, profits are to be calculated on the accounts immediately preceding the issue of the prospectus. Mr. Sankhla, being aware of a television announcement on May 5, 2013, immediately recalculated the financials as per the books on March 31, 2013 which showed a fall in the net profit for the last year. He wrote a letter on May 3, 2013 addressed to Tapan at the Companys New Delhi office attaching the new details and asking him not to announce the earlier figures. On May 5, 2013, Nidhi Jain, an avid investor, was watching ZTV Business at her house in Jodhpur when an announcement was made on television stating that the Company would file a prospectus on 9th May for the issue of shares with a price band of Rs. 40-50. Inter alia, it stated that as per the chartered accountant of the Company there was a consistent increase in net profit every year.. On May 7, 2013, Tapan received the letter from Mr. Sankhla and quickly made the changes to the prospectus before filing it. Nidhi subscribed to the issue through her broker, Abhimanyu Sen and was allotted 50 shares. On June 12, 2013, she happened to look at the prospectus of the Company and found the financials to be different. She approached Abhimanyu as she was aware that his other clients had also subscribed to shares in this public issue. They jointly filed the suit against the Company and Mr. Sankhla.

-MEMORIAL ON BEHALF OF DEFENDANTS-

V STATEMENT OF JURISDICTION

The Counsel for the Defendants most humbly submits that this Learned Company Law Board has the requisite jurisdiction under Section 10(E) of the Companies Act, 1956 read with Regulation 7(1) of the Company Law Board Regulations, 1991 to hear this matter and adjudicate accordingly.

All of which is urged in detail in the arguments advanced and is submitted most respectfully.

-MEMORIAL ON BEHALF OF DEFENDANTS-

VI ISSUES FOR CONSIDERATION

I. II.

WHETHER THE CLASS ACTION SUIT FILED BY PLAINTIFF IS MAINTAINABLE? WHETHER DEFENDANTS
ARE LIABLE FOR MISSTATEMENT IN

TELEVISION

ANNOUNCEMENT UNDER THE COMPANIES ACT, 1956?

-MEMORIAL ON BEHALF OF DEFENDANTS-

VII SUMMARY OF ARGUMENTS

I.

THE CLASS ACTION SUIT FILED BY PLAINTIFF IS NOT MAINTAINABLE.

The Company Law Board cannot exercise the powers of Civil Court under the Civil Procedure Code except what is explained under section 10E(4C) of the Companies Act. The companies Act does not provide anything for class action suit. The Civil procedure code cannot be brought into Companies Act before this Tribunal to bring the class action suit within ambit of the Act. The class action suit does not satisfy the criteria of numerous persons having the common interest.

II.

DEFENDANTS ARE NOT LIABLE FOR MISSTATEMENT IN TELEVISION ANNOUNCEMENT

UNDER THE COMPANIES ACT, 1956.

Prospectus must be in writing. An oral invitation (viz., TV or radio advertisement) shall not be regarded as a prospectus. In the present case there is neither any mala fide intention by the director nor the director has any reasonable ground to believe that calculated profit by expert is untrue. Since, in the present case, plaintiff has not even bothered to look into the prospectus; the director cannot be made liable for plaintiffs own wrong. If the director are made liable for plaintiffs negligence for not reading the prospectus, then whole process of issuing prospectus with strict compilation of norms will be devoid of any object.

-MEMORIAL ON BEHALF OF DEFENDANTS-

1 ARGUMENTS ADVANCED

I. THE CLASS ACTION SUIT FILED BY THE PLAINTIFF IS NOT MAINTAINABLE.

It is submitted that the Company Law Board cannot exercise the powers of Civil Court under the Civil Procedure Code except what is explained under section 10E(4C) of the Companies Act.1 In that case the Court held that there is no provision of Companies Act or Regulations (except Regulation 44) which confers the power on the CLB to decide preliminary issues as per Order XIV Rule 2 of CPC. It must be, therefore, held that CLB has no power to decide preliminary issues nor can exercise powers under CPC other than those conferred under Section 10E(4C) of the Companies Act.2 As per the provision of section 10E of the Companies Act, except those mentioned in the said provision, no other provisions of Civil Procedure Code are applicable. In this context, a reference must be made to the decision of the Supreme Court in All India Indian Overseas Bank SC and ST Employees' Welfare Association v. Union of India,3 wherein, deciding the power of National Commission the Court held that: [I]nterestingly, herein, in Clause (8) of Article 338, the words used are "the Commission shall...have all the powers of the Civil Court trying a suit". But the words "all the powers of a Civil Court" have to be exercised "while investigating any matter referred to in Sub-clause (a) or inquiring into any complaint referred to in Sub-clause (b) of Clause 5". All the procedural powers of a civil court are given to the Commission for the purpose of investigating and inquiring into

1 2

B.Subba Reddy v. S.S.Organics Limited [2009]151Comp Cas 190 (AP) Ibid. 7 3 (1996) 6 SCC 606 -MEMORIAL ON BEHALF OF DEFENDANTS-

2 these matters and that too for that limited purpose only. The powers of a civil court of granting injunctions, temporary or permanent, do not inhere in the Commission nor can such a power be inferred or derived from a reading of Clause (8) of Article 338 of the Constitution. The companies Act does not provide anything for class action suit. The Civil procedure code cannot be brought into Companies Act before this Tribunal to bring the class action suit within ambit of the Act. The fact that class action suit is being introduced in Companies bill, 2012 clearly shows that it has no application under the present Companies Act, 1956.

Arguendo: The requirement of maintainability of the class action suit is that the parties must be numerous and persons on whose behalf the suit is instituted must have the same interest. 4 Since In the present case there is no clear identification that whether other parties has the common grievance which they seek to redress. The fact that Mrs. Nidhi approached Mr. Abhimanyu Sen only, shadows a doubt that other parties might have really suffered under the present case. Moreover, it is generally a rare occasion that a person subscribe the shares of the company without going through the prospectus, and, hence, does not satisfy the criteria of numerous persons having the common interest.

T.N. Housing Board v. T.N. Ganapathy, 1990 1 SCC 608 -MEMORIAL ON BEHALF OF DEFENDANTS-

II. DEFENDANTS ARE NOT LIABLE FOR MISSTATEMENT IN TELEVISION ANNOUNCEMENT UNDER
THE COMPANIES ACT, 1956

II.1

Prospectus does not include oral invitation

As per 2(36) of Companies Act, 1956 "prospectus" means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of, a body corporate. Prospectus must be in writing.5 An oral invitation (viz., TV or radio advertisement) shall not be regarded as a prospectus.6 An oral invitation to subscribe for shares shall not be considered as prospectus. Therefore, television announcement made on 5th May, cannot be deemed as prospectus. Hence, director and company is not liable under 62.

II.2. Arguendo: 1. Defendant had no reasonable ground to believe that statement were untrue in Television Announcement A director cannot be made liable under 62 while issuing prospectus, if he had reasonably ground to believe that statements made in prospectus were true and believed them to be true.7 The question is not whether the defendant in any given case honestly believed the representation to be true in

5 6

Business Law, Ethics and Communication, The institute of Charted accountant of India, p. 6.57 Ibid. 7 S. 62(2) -MEMORIAL ON BEHALF OF DEFENDANTS-

4 the sense assigned to it by the court on an objective consideration of its truth or falsity, but whether he honestly believed the representation to be true in the sense in which he understood it albeit erroneously when it was made.8 In the present case there is neither any mala fide intention by the director nor the director has any reasonable ground to believe that calculated profit by expert is untrue. In fact, as soon as he came to knowledge of it, he immediately made the changes to the prospectus before filing it which clearly reveals his bona fide intention. It is further submitted that in the case of Yugantar And Others v. Union Of India And Others,9 which is very pertinent to the present case, the court held that: [T]he bank's Explanation that the losses that had been shown were due to the revised accounting norms and not as a result of any operating loss suffered is acceptable. The bank, as stated earlier, had made operating profits and it was only the compliance with the banking norms which resulted in the above loss being shown.10 Therefore, the representation made in the advertisement, "India's highest profit making nationalised bank public offer at Rs. 45 per share" was not misleading. The Court further held that The notation so considered, coupled with the factum of declaration of losses and the factum of operating profits of the bank, cannot be labelled as fraudulent or deceptive.11 Applying the same principle in the present case, it is very clear that profits of the company has just changed due to the fact of revised accounting norms. Further, it is submitted that there has been always a growth in net profit for last 5 years. It was only the compliance with the accounting norms

8 9

Akerhielm v. Rolf De Mare, 1959 AC 789 1998 94 CompCas 621 Delhi 10 Ibid. 20 11 Ibid. -MEMORIAL ON BEHALF OF DEFENDANTS-

5 which resulted in the decline of net profit for last year. Hence, The notation so considered, coupled with the factum of declaration of decline in net profit for last year and the factum of operating profits of the company, cannot be labelled as fraudulent or deceptive. 2. The director cannot be made liable for plaintiffs own wrong Under 62, an allottee can claim damages if he had applied for shares on faith of prospectus containing untrue statement.12 . Every investor dealing with company is presumed to have read the prospectus and understood them in their true perspective. Even if the parties dealing with the company does not have actual notice of content of these documents it is presumed that they have an implied notice of them.13 Since, in the present case, plaintiff has not even bothered to look into the prospectus; the director cannot be made liable for plaintiffs own wrong. If the director are made liable for plaintiffs negligence for not reading the prospectus, then whole process of issuing prospectus with strict compilation of norms will be devoid of any object.

3. The vicarious liability of the Company. The Company can be made vicariously be made liable if it is proved that those acting on behalf of the company acted fraudulently and were authorized to act in its behalf.14 Since in the present case, as abovementioned, there was no fraudulent practice adopted by the directors; the Company cannot be made vicariously liable.

12 13

C R Dutta, Company law, (6th edn., Wadhwa and Company, 2008) p. 617 Ibid. 14 C R Dutta, Company law, (6th edn., Wadhwa and Company, 2008) p. 1451 -MEMORIAL ON BEHALF OF DEFENDANTS-

-MEMORIAL ON BEHALF OF DEFENDANTS-

7 PRAYER FOR RELIEF

Wherefore in the light of facts stated, issues raised, arguments advanced and authorities cited, it is most humbly and respectfully prayed before this Learned Company Law Board to: Dismiss the suit with cost.

And pass any other order in favor of the Defendants it may deem fit in the ends of equity, justice and good conscience.

All of which is most humbly and respectfully submitted.

Date: August 22, 2013 (Counsel for defendants) Counsel Code- 869

S/d__________________

-MEMORIAL ON BEHALF OF DEFENDANTS-