MEMORNADUM ON BEHALF OF PETITIONER

BEFORE THIS HONOURABLE COMPANY LAW BOARD

MUMBAI

MR. JIGNESH PATEL

(PETITIONER)

VS.

JUDAS LIMITED

(RESPONDENT)

MEMORIAL ON BEHALF OF THE PETITIONER

MEMORNADUM ON BEHALF OF PETITIONER

TABLE OF CONTENTS
TABLE OF CONTENTS.II
LIST OF ABBREVIATIONS..III
LIST OF SOURCES

o Books ReferredIV
o Statutes Referred...........................................................................................IV
STATEMENT OF JURISDICTION..V
FACTS SUMMARY .VI
ISSUES RAISED...VII.
ARGUMENTS ADVANCED ..VIII
PRAYER...........XIV

MEMORNADUM ON BEHALF OF PETITIONER

LIST OF ABBREVATIONS

1. C.A. CHARTERED ACCOUNTANT

2. S.C.- SUPREME COURT
3. Sec. - SECTION
4. Vs. - VERSUS
5. & - AND
6. I.D.B.I INDUSTRIAL DEVELOPMENT BANK OF INDIA
7. LTD. - LIMITED
8. A.O.A- ARTICLES OF ASSOCIATION
9. E.G.M- EXTRAORDINARY GENERAL MEETING
10.A.G.M- ANNUAL GENERAL MEETING
11.W.E.F- WITH EFFECT FROM
12.S.E.B.I SECURITIES EXCHANGE BOARD OF INDIA
13.Honble HONOURABLE

LIST OF SOURCES

MEMORNADUM ON BEHALF OF PETITIONER

LIST OF BOOKS:
1. Company Law by Dr. Avatar Singh, 15th edition, Eastern book company.
2. Company Law by Dr. G.K. Kapoor and A.K. Majumdar 16th edition, Taxmann
publications
3. A.Ramaiyas, Guide to the Companies Act, 17th edition, Lexis Nexis Butterworths
India

STATUTES REFFERED:
1. COMPANIES ACT, 1956
2. SEBIS LISTING AGREEMENT
3. CHARTERED ACCOUNTANT ACT, 1949

WEBSITES VISITED:
1. http//www.lawukcompany(last visited on 5th April, 2014)
2. www.manupatra.com (last visited on 4th April, 2014)

STATEMENT OF JURISDICTION
THE COUNSEL ON BEHALF OF THE PETITIONER HAVE SUBMITTED THEIR
PLEADINGS BEFORE THIS HONBLE COMPANY LAW BOARD OF MUMBAI BY
FILING AN APPLICATION UNDER SECTION 398 OF THE COMPANIES ACT 1956

MEMORNADUM ON BEHALF OF PETITIONER

FOR SEEKING RELIEF IN CASE OF MISMANAGEMENT AS A SIGNIFICANT
CHANGE IN THE MANAGEMENT AFFAIRS FUTURE OPERATIONS OF THE
COMPANY HAS BEEN PREJUDICIAL TO THE INTERESTS OF THE COMPANY.

FACTS SUMMARY

Judas private Ltd was incorporated in 1997 with its registered office in Mumbai with
initial shareholding of Rs. 1,00,000 under Companies Act 1956.

MEMORNADUM ON BEHALF OF PETITIONER

When the total shareholding of the company was increased by Rs. 20,00,000 by a

special resolution, the company changed its nature into a public company.
The company presently has a paid capital of Rs. 10 Crores with 10 directors.
According to the provisions of the AOA of the company 1 director from the total

number retired every year.

On 1st March 2013, the company held its AGM and two of its directors Mr. Rajesh
Shah and Mr. Suresh Patel were scheduled to retire owing to the age limit prescribed

in the AOA of the company.

This matter was not taken up in the meeting and the company decided on the
following matters :
1. Rs. 2, 00, 000/- to be given as guarantee to J&T Ltd. for a loan that the latter that
is
to be taken from IDBI in 2013.
2. Appointing Mr. Vijay as the Ca for the company and allotting his firm preference
shares worth Rs. 50,000 with a lock in period of 1 year and interest of 5% p.a.
3. Mr. Sumesh Shah, brother-in-law of Mr. Rajesh Shahs wife and Mr. Jayesh

Thakore as independent directors of the Company wef. 02.04.2013.

The meeting was chaired by Mr. Suresh Patel, Mr. Rajesh Shah was not present in the

meeting.
After a few months a notice was issued by IDBI to the company as to the default by

J&T Ltd. And they nominated Mr. Bohra as a director of companys board.
An EGM was convened by the company chaired by the new Managing Director of the
company Mr. Jignesh Patel who put the matter before the shareholders who attented

the meeting.
The nomination was not accepted as Mr. Bohra was Mr. Jignesh Patels maternal

uncles son.
The chairman challenged the appointments made earlier in the meeting of 01.03.2013
and also alleged that the allotment of shares to Mr. Vijays firm was illegal.

ISSUES RAISED
1. Whether the decisions that were taken in the A.G.M on 1 st March, 2013 can be
held valid or not.
1.1 Whether inclusion of the two members that were to be retired as prescribed by
the A.O.A of the company is valid or not and decisions that were taken by them
thereof.

MEMORNADUM ON BEHALF OF PETITIONER

2. Whether allotting shares worth Rs. 50,000 in Vijays (appointed as the C.A. of
the company) firm is valid or not.
3. Whether appointment of Ramesh Bohra is valid or not.

ARGUMENTS ADVANCED
1. Whether the decisions that were taken in the A.G.M on 1 st March, 2013 can be
held valid or not.

MEMORNADUM ON BEHALF OF PETITIONER

The very direction of this argument goes towards questioning the validity of the decisions
that were taken in A.G.M held on 1st March, 2013 by the company. For the furtherance of the
matter the petitioner shall explain the invalidity of the decisions that were taken in the
A.G.M.
Three decisions that were taken by the presiding directors in the A.G.M were:
(i)

Rs. 2, 00, 000/- to be given as guarantee to J&T Ltd. for a loan that the latter that

(ii)

is
to be taken from IDBI in 2013.
Appointing Mr. Vijay as the Ca for the company and allotting his firm preference

(iii)

shares worth Rs. 50,000 with a lock in period of 1 year and interest of 5% p.a.
Mr. Sumesh Shah, brother-in-law of Mr. Rajesh Shahs wife and Mr. Jayesh
Thakore as independent directors of the Company w.e.f 02.04.2013.

For this matter the chairing directors of the A.G.M were supposed to retire on the same day as
prescribed by the A.O.A of the company. But this matter was not brought up in the A.G.M.
This implies malfunctioning corporate governance which can be explained as cooperation,
trust, reliance and interdependency between the members of the company.
As prescribed itself in the A.O.A of the company that every year one director shall retire but
in this case the two directors who were supposed to retire chaired the A.G.M and took
decisions in the matters of the company.
It was therefore not valid on the part of the respondents to preside the A.G.M and take
decisions thereof in the matters of the company as it is going against the powers prescribed to
the directors in the A.O.A of the company.
In this case Mr. Sumesh Shah is the brother-in-law of Mr. Rajesh Shahs wife, where Mr.
Rajesh Shah is the Director of the company and Mr. Sumesh Shah is related to Mr Rajesh
Shah as his brother. Therefore taking into consideration the Explanation to Clause 49 (1)(A)
(i) (b) which states an independent director shall mean one who is not related to promoters or
management at the board level or at one level below the board. But in the present case he is
related to the management at the board level because he is brother of Mr. Rajesh Shah who is
the director of J&T Ltd. Therefore the object of independence of the director is defeated as it
is against the provisions of the Listing Agreement.

MEMORNADUM ON BEHALF OF PETITIONER

Also the term relatives1 is well defined in the Schedule 1A which is the List of Relatives to
the Companies Act of 1956. It is given in reference to sec 6(c) of the Act. The schedule
clearly mentions the brother (including Step-brother) as in the list of relatives. Therefore Mr
Sumesh Shah is the brother of Mr Rajesh Shah who is the Director of the company. Therefore
it can be said that Mr. Sumesh Shah is related to the Director of the Company and hence he is
not an independent director. It is not complying with the principles of good corporate
governance as the independence of the directors is been jeopardized. Thus, the appointment
of Mr. Sumesh Shah as an independent directors is not valid as it is violating the provisions of
law.
1.1 Whether inclusion of the two members that were to be retired as prescribed by
the A.O.A of the company is valid or not and decisions that were taken by them
thereof.
According to the A.O.A of the company which clearly states that every year one director shall
retire from the company out of 10 directors which is not obeyed by the respondents and
therefore they took part in the A.G.M of the company held on 1 st March,2013 this also taking
decisions in the matters of the company.
This is ultra vires of the A.O.A of the company which clearly mentioned the retirement of
directors every year which was not followed by Mr. Rajesh Shah and Mr. Suresh Patel.
The Articles of a company usually provide for the election of a Chairman and to determine
the period for which he is to hold office and the Chairman and the other members and
directors are bound to follow the regulations as prescribed by the Articles unless it has been
altered or rectified by special resolution under Section 31 of the Companies Act, 1956.
Furthermore, AOA of a company being a business document has to be interpreted strictly,
unless there are compelling circumstances to import into it a meaning other than normal.
Therefore the Chairman in itself was not a proper person to pass the resolutions, therefore all
the resolutions passed in the meeting will be invalid.

2. Whether allotting shares worth Rs. 50,000 in Vijays (appointed as the C.A. of
the company) firm is valid or not.
1 See Sec 6 (c) of Companies Act 1956

MEMORNADUM ON BEHALF OF PETITIONER

The counsel on behalf of the petitioner humbly submits before the Honble Company Law
Board that the allotment of preference shares to Mr. Vijays firm of worth Rs. 50,000 with a
lock in period of 1 year and interest of 5% p.a. is not valid according to Sec. 226(3) of
Companies Act, 1956. Sec. 226(3) reads as:
None of the following persons shall be qualified for appointment as auditor of a company

a body corporate;
an officer or employee of the company;
a person who is a partner, or who is in the employment, of an officer or employee of

the company;
a person who is indebted to the company for an amount exceeding one thousand
rupees, or who, has given any guarantee or provided any security in connection with
the indebtedness of any third person to the company for an amount exceeding one

thousand rupees;
a person who is a director or member of a private company, or a partner of a firm,

which is the managing agent or the secretaries and treasurers of the company;
a person who is a director or the holder of shares exceeding five per cent. in nominal
value of the subscribed capital, of any body corporate which is the managing agent or
the secretaries and treasurers, of the company: Provided that any shares held by such
person as nominee or trustee for any third person and in which the holder has no
beneficial interest shall be excluded in computing the percentage of shares held by
him for the purpose of this clause.

Now, according to this clause Mr. Vijay is disqualified because he is indebted to the company
as the amount exceeds more than one thousand. And Sec. 226(4) and 226(5) says that
(4) A person shall also not be qualified for appointment as auditor of a company if he is, by
virtue of sub- section (3), disqualified for appointment as auditor of any other body corporate
which is that company's subsidiary or holding company or a subsidiary of that company' s
holding company, or would be so disqualified if the body corporate were a company.
As the main task of the Chartered Accountant is to audit the financial documents of the
company that is why this provision is applicable here and Mr. Vijay is termed as Auditor here.
(5) If an auditor becomes subject, after his appointment, to any of the disqualifications
specified in subsections (3) and (4), he shall be deemed to have vacated his office as such.

MEMORNADUM ON BEHALF OF PETITIONER

Section 226(3) of the Companies Act, 1956 specifies that a person shall be disqualified to act
as an auditor if he is indebted to the company for an amount exceeding one thousand rupees.
This provision aims to ensure that the auditor is independent and is under no financial
obligation to the company. Where an auditor purchases goods or services from a company
audited by him on credit, he is definitely indebted to the company and if the amount
outstanding exceeds rupees one thousand, he is disqualified for appointment as an auditor of
the company.
Therefore, in this case Mr. Vijay has become indebted to the company and consequently he
has deemed to have vacated his office. And it is also against the professional ethics according
to clause 4 of part 1 of second schedule of Charted Accountant Act, 1949 which reads as A
charted accountant in practice shall be deemed to be guilty of professional misconduct, if he
expresses his opinion on financial statements of any business or enterprise in which he, his
firm, or a partner in his firm has a substantial interest.
Thus, here is professional misconduct on the part of Mr. Vijay and allotment of preference
shares is not valid according to the schedule and clauses of the said act.
3. Whether appointment of Ramesh Bohra is valid or not.
The Counsel on behalf of the petitioner humbly submits before the Honble Company
Law Board that the appointment of Mr. Ramesh Bohra as an independent director is valid
and should have been accepted by the shareholders. The Counsel shall deal with the
concept of Nominee Directors as in the present case IDBI has nominated him as their
director on the companys Board as there was default on the part of the J&T Company.
Then the counsel shall relate the position of the nominee director with that of the
independent director.
The definition of Director given by the Companies Act, 1956 (hereinafter called the act)
is an inclusive one and it provides that the expression" 'Director' includes any person
occupying the position of the director, by whatever name called " 2. It further provides that
any person in accordance with whose directions or instructions, the board of directors of a
company is accustomed to act, shall deemed to be a director of the company. 3 The Act
2 See Sec 2(13) of Companies Act 1956
3 Explanation (1) to section 303 (1)

MEMORNADUM ON BEHALF OF PETITIONER

does not contain any definition of the term nominee directors. The Act thus makes no
distinction between the directors on the basis of their being nominee directors as far as
liability for violation of the provisions of the Company Act and other Acts are concerned.
Clause 49(1)(A) of the Listing Agreement of SEBI states about the constitution of the
Board of Directors. Its explanation (ii) states that Institutional directors on the boards of
companies shall be considered as independent directors whether the institution is an
investing institution or a lending institution.4
In the present case, the situation is when the directors are representing the third party in
the Board. Here IDBI is a lending institution to the J&T Ltd as the latter has taken loan
from the IDBI in the year 2013 for which a guarantee has also been given. Therefore as
per the facts of the case notice was issued by IDBI to the company as to the default by
J&T Ltd and in order to take such matter in the board, it has nominated Mr Ramesh Bohra
as their representative.
The nominee directors main duty is to represent and safeguard the interests of their
company in the Board. Because of their heavy commitments, such providers of money
naturally desire to safeguard their interests. Besides they will also like to ensure that the
money is invested in the stipulated purposes only. The right to nominate the directors on
the Boards of finance companies is usually contained in the contract itself. Therefore
IDBI has all authority to nominate its director. But in this case the shareholders have
challenged the nomination of Mr. Ramesh Bohra as he was Mr. Jignesh Patels maternal
uncles son. Here on the basis of the list of relatives enshrined in the Schedule 1A to the
Companies Act of 1956, Maternal Uncles son is not mentioned in the list. So here Mr.
Jignesh Patel is the Managing Director of the company who is chairing the EGM and is
not related to Mr. Ramesh Bohra because their relation does not find any place in the List
of Relatives in the above said schedule and therefore he cannot be said to have related
with the director. Therefore Ramesh Bohra is an independent director as well and the
shareholders are bound to accept his nomination.
Furthermore, as per Clause 49 1(A) of Listing Agreement of SEBI, considering both
explanation (i) and explanation (ii), clarifies that nominee directors appointed by a public
financial institution or bank which has invested in or lent to the company shall be deemed
4 Explanation (ii) to sub clause (i) to Clause 49 of the Listing Agreement of SEBI

MEMORNADUM ON BEHALF OF PETITIONER

to be independent directors. Therefore, Ramesh Bohra is an independent director as well
and his appointment is valid as in accordance provisions of the law.
Thus, the loan agreement would have been regulating the relationship between the
company and IDBI and therefore, not accepting the nomination of Mr. Bohra is a breach
of such agreement and hence IDBI has all the rights to ask from the Board for the specific
performance of the contract by the company by the way of accepting the appointment as
valid.

MEMORNADUM ON BEHALF OF PETITIONER

PRAYER

WHEREFORE IN THE LIGHT OF ISSUES RAISED, ARGUMENTS ADVANCED

AND AUTHORITIES CITED, THE COUNSEL HUMBLY PRAYS BEFORE THIS
HONOURABLE COMPANY LAW BOARD TO ADJUDGE AND DECLARE THAT:

MR. SUMESH SHAH SHOULD NOT BE DECLARED AS AN INDEPENDENT

DIRECTOR OF THE COMPANY

APPOINTMENT OF MR. RAMESH BOHRA AS AN INDEPENDENT

DIRECTOR IS VALID
PREFERENCES SHARES ALLOTED TO MR. VIJAYS FIRM IS NOT IN
ACCORDANCE WITH LAW

ANY OTHER RELIEF THAT THE BOARD MAY DEEM FIT IN THE EYES OF
JUSTICE, EQUITY AND GOOD CONSCIENCE. THE COUNSEL ON BEHALF OF
PETITIONER SHALL FOREVER BE DUTY BOUND TO PRAY.

PLACE: Mumbai
DATE: 07th April, 2014

Counsel For: Petitioner