Team Code: R-387

BEFORE THE SUPREME COURT OF ISLANDIA

At Republic of Islandia

Appeal under Article 136 of the Constitution of Islandia

SLP(C) No. _____/2015

M/S GOODENOUGH JONES

...APPELLANT

V.

SECURITIES & INVESTMENT REGULATOR

OF ISLANDIA

...RESPONDENT

Memorandum Submitted to the Honble Chief Justice of Islandia and His Companion Justices
of the Supreme Court of Islandia

MEMORANDUM FILED ON BEHALF OF THE RESPONDENT

MEMORANDUM ON BEHALF OF THE RESPONDENT

TABLE OF CONTENTS
TABLE OF CONTENTS ....................................................................................................... II
INDEX OF AUTHORITIES ................................................................................................ IV
LIST OF ABBREVIATIONS .............................................................................................. VI
STATEMENT OF JURISDICTION .................................................................................. VII
STATEMENT OF FACTS ................................................................................................ VIII
STATEMENT OF ISSUES .................................................................................................... X
SUMMARY OF ARGUMENTS .......................................................................................... XI
ARGUMENTS ADVANCED .................................................................................................. 1
I.

THAT SIRI

OUGHT NOT TO HAVE DECIDED THE QUESTION OF JURISDICTION AS A

PRELIMINARY ISSUE BEFORE PROCEEDING TO ADJUDICATE THE MATTER ON MERIT. ....... 1

A.

That the question of jurisdiction should not be decided as a preliminary issue as it

will lead to delay in the proceedings.................................................................................. 1

B.

That presently the question of jurisdiction is a mixed question of fact and law. .... 2

II. THAT

THE WRIT PETITION FILED BY

GOODENOUGH

BEFORE THE

HIGH COURT

OF

ESSOS WAS NOT MAINTAINABLE. .......................................................................................... 3

A.

That the Appeal against the order passed by SIRI ought to have been made before

the SAT. ............................................................................................................................. 3

B.

That the Appellants could not have invoked the extraordinary writ jurisdiction of

the High Court. .................................................................................................................. 4

III.

THAT SIRI HAS JURISDICTION TO INQUIRE INTO THE CONDUCT OF A CHARTERED

ACCOUNTANT REGISTERED WITH THE

SCAI

AND ISSUE DIRECTIONS AGAINST A

CHARTERED ACCOUNTANT. ................................................................................................... 5

A.

That the issuance of SCN to Goodenough does not amount to regulating the

profession of Chartered Accountants. ................................................................................ 6

B.

That SIRI is vested with the duty and the powers necessary for protection of the

interests of investors. ......................................................................................................... 6

C.

That SIRI is empowered to take all ancillary steps and measures to see that the

interests of investors is protected. ...................................................................................... 7

D.

That the Auditors of a public listed company owe a duty of care to the

shareholders. ...................................................................................................................... 7
E.

That the Auditors of a listed company fall within the ambit of the expression

persons associated with the securities market. ................................................................ 8

II

MEMORANDUM ON BEHALF OF THE RESPONDENT

IV.

THAT IT IS NOT NECESSARY FOR SIRI TO ESTABLISH MENS REA FOR A VIOLATION

OF THE SIRI ACT AND THE FUTP REGULATIONS FRAMED THEREUNDER. .......................... 9

A.

That the definition of fraud under the FUTP Regulations does not warrant the

requirement of mens rea. ................................................................................................... 9

B.

That mens rea is not essential for establishing violation of the provisions of the

SIRI Act. .......................................................................................................................... 10

PRAYER ............................................................................................................................... XII

III

MEMORANDUM ON BEHALF OF THE RESPONDENT

INDEX OF AUTHORITIES
STATUTES
Chartered Accountants Act of 1949 ........................................................................................... 6
The Companies Act of 1956 ...................................................................................................... 7
The Constitution of India ........................................................................................................... 4
The SIRI Act of 1992 ................................................................................................. 1, 3, 4, 5, 6
REGULATIONS
FUTP Regulations of 2003 ........................................................................................................ 9
INDIAN CASES
Alka Synthesis Limited v. SEBI, [1995] 95 Comp Cas 663 (Guj) ............................................ 7
Controller of Insurance v. H.C. Das, AIR 1957 Cal 387 ........................................................... 8
D. P. Maheshwari v. Delhi Administration & Ors., (1983) 4 SCC 293 .................................... 2
Ghatmal Champala v. Amravati Dyeing Pvt. Ltd., AIR 1976 AP 70 .................................... 2, 3
ICAI v. P.K Mukherjee & Anr., AIR 1968 SC 1104 ............................................................. 7, 8
Jagannath Rao Dani v. Rambharosa and Anr. AIR 1933 PC 33................................................ 2
Karnavati Fincap Ltd. & Anr. v. Securities and Exchange Board of India, (1996) 87 Comp
Cas 186....................................................................................................................................... 8
Meenakshi Mills, Madurai v. The Commissioner of Income Tax, Madras AIR 1957 SC 49 ... 2
N. Narayanan v. Securities and Exchange Board of India, (2009) 8 MLJ 960 ........................ 5
Price Waterhouse and Co. & Ors. v. Securities and Exchange Board of India, (2010) 103 SCL
96 (Bom) ............................................................................................................................ 6, 7, 8
Punjab National Bank v. O C Krishnan & Ors., AIR 2001 SC 3208 ........................................ 4
Ramdayal Umraomal v. Ramdayal Umraomal, AIR 1979 MP 153 .......................................... 3
Registrar of Companies, Bombay v. P.N. Hegde, AIR 1954 Mad 1080 ................................... 8
Rose Valley Real Estates and Construction Ltd. & Anr. v. Securities and Exchange Board of
India, [2011] 102 CLA 325 (Cal) .............................................................................................. 5
S. Ganesan v. A.K. Joscelyne, AIR 1957 Cal 33 (42) ............................................................... 8
Securities and Exchange Board of India v. Cabot International Capital Corporation (2005)
123 Comp Case 841 (Bom)...................................................................................................... 10
Securities and Exchange Board of India v. Pan Asia Advisors Ltd. & Ors., 2015 (7) SCALE
6940............................................................................................................................................ 8

IV

MEMORANDUM ON BEHALF OF THE RESPONDENT

Sheela Devi v. Jaspal Singh, AIR 1999 SC 2859 ...................................................................... 4
The Chairman, SEBI v. Shriram Mutual Fund & Anr., AIR 2006 SC 2287 ............................. 9
Tin Plate Co. of India Ltd. v. State of Bihar & Ors., AIR 1999 SC 74 ..................................... 4
SAT JUDGMENTS/ ORDERS
National Securities Depository Ltd. v. Securities and Exchange Board of India, Appeal No.
207/2005, SAT Order dated 29th September 2006 .................................................................... 4
Price Waterhouse v. Securities Exchange Board of India, Appeal No. 8/2012, SAT Order
dated 1st June 2011 .................................................................................................................... 2
Pyramid Saimira Theatre Ltd. v. Securities and Exchange Board of India, Appeal No.
242/2009, SAT Order dated 7th April 2010 ............................................................................ 10
T & R Welding products (India) Ltd. v. Securities and Exchange Board of India and Madras
Stock Exchange Ltd., Appeal No. 20/2011, SAT Order dated 2nd September 2011 ................ 4
BOOKS
S. AGRAWAL & R. J. BABY, A LEGAL COMMENTARY ON SECURITIES AND EXCHANGE BOARD
OF INDIA ACT, 1992

(Amit Agrawal ed., Taxmann Publications Pvt. Ltd. 2011) ..................... 6

MEMORANDUM ON BEHALF OF THE RESPONDENT

LIST OF ABBREVIATIONS
Anr.

Another

CA Act

Chartered Accountants Act 1949

Constitution

The Constitution of India

FUTP Regulations, 2003

Prohibition of Fraudulent and Unfair Trade

Practices Relating to Securities Market

TrueTech

TrueTech Limited

Goodenough

Goodenough Jones

Ors.

Others

Section

SAT

Securities Appellate Tribunal

SEC Act, 1934

Securities Exchange Act of 1934

SCN

Show Cause Notice

SCAI

Society of Chartered Accountants of Islandia

SIRI

Securities and Investment Regulator of Islandia

U.S.

United States

&

And

Paragraph

VI

MEMORANDUM ON BEHALF OF THE RESPONDENT

STATEMENT OF JURISDICTION
The Appellant, Goodenough has filed a Petition for grant of Special Leave before The
Honble Supreme Court of Islandia, pursuant to Article 136 of the Constitution of Islandia,
which reads as under:
136. Special leave to appeal by the Supreme Court.(1) Notwithstanding
anything in this Chapter, the Supreme Court may, in its discretion, grant special leave to
appeal from any judgment, decree, determination, sentence or order in any cause or matter
passed or made by any court or tribunal in the territory of India.
(2) Nothing in clause (1) shall apply to any judgment, determination, sentence or
order passed or made by any court or tribunal constituted by or under any law relating to the
Armed Forces.

VII

MEMORANDUM ON BEHALF OF THE RESPONDENT

STATEMENT OF FACTS
I.
Goodenough, a registered partnership firm with the SCAI was the statutory auditor for
TrueTech, a public limited company, for the period April, 2003 to September, 2013.
II.
Mr Pradyuman, Chairman of TrueTech confessed to various financial irregularities and
fraud in TrueTech through a letter addressed to the national stock exchanges. Subsequently,
he was arrested on various charges and a number of Regulatory Authorities commenced
investigation in the fraud.
III.
The investigation conducted by SIRI into the affairs of Truetech revealed substantial
difference between the balance shown in the books of accounts of TrueTech, and the balance
as per official bank statements. It concluded that sales/revenue figures in TrueTechs books
had been inflated which distorted the decision of millions of investors.
IV.
In view of the investigation a SCN was issued to Goodenough alleging that the audit was
not conducted as per the prescribed standards and that the firm failed in its duties while
auditing. Furthermore, it was alleged that Goodenough was liable for having participated in
the fraud and was called upon to show cause as to why an action should not be taken against
them for violating the provisions of the SIRI Act and the rules and regulations thereunder.
V.
In reply to the notice, Goodenough raised a preliminary objection to the jurisdiction of
SIRI to investigate into this matter. SIRI disposed of the objection by an order which held
that the question of jurisdiction is a mixed question of fact and law and cannot determined
that this stage.
VI.
Goodenough filed a writ petition before the High Court of Essos challenging the order of
SIRI contending that SIRI ought to decide the question of jurisdiction as a preliminary issue.
However, the petition was subsequently rejected and the High Court upheld the arguments of
SIRI.

VIII

MEMORANDUM ON BEHALF OF THE RESPONDENT

VII.
Goodenough sought for a special leave before the Honble Supreme Court of Islandia
against the order of the High Court. While contesting the jurisdiction of SIRI in the present
matter it argued that the issue of jurisdiction ought to have been decided as a preliminary
issue. The question as to what would be the standard of care to be adopted by auditors while
auditing and whether the establishment of mens rea was necessary for violation of the Act
and regulations thereunder arose for consideration of the court.
VIII.
Leave was granted and the matter is listed for hearing on the issues framed by the
Honble Court.

IX

MEMORANDUM ON BEHALF OF THE RESPONDENT

STATEMENT OF ISSUES
I. WHETHER SIRI

OUGHT TO HAVE DECIDED THE QUESTION OF JURISDICTION AS A

PRELIMINARY ISSUE BEFORE PROCEEDING TO ADJUDICATE THE MATTER ON

MERITS?

II. WHETHER A WRIT

PETITION FILED BY

GOODENOUGH BEFORE

THE

HIGH COURT

OF

ESSOS WAS MAINTAINABLE IN VIEW OF THE REMEDIES ENVISAGED UNDER THE SIRI
ACT?
III. WHETHER SIRI

HAS JURISDICTION TO ENQUIRE INTO THE CONDUCT OF A

CHARTERED ACCOUNTANT

REGISTERED WITH THE

SCAI

AND ISSUE DIRECTIONS

AGAINST A CHARTERED ACCOUNTANT?

IV. WHETHER IT IS NECESSARY FOR SIRI TO ESTABLISH MENS ERA FOR A VIOLATION OF
THE SIRI ACT AND FUTP REGULATIONS FRAMED THEREUNDER?

MEMORANDUM ON BEHALF OF THE RESPONDENT

SUMMARY OF ARGUMENTS
I. That SIRI ought not to have decided the question of jurisdiction as a preliminary
issue before proceeding to adjudicate the matter on merits.
The question of jurisdiction was a mixed question of law and fact and therefore it cannot
be decided as a preliminary issue before appreciating evidence. The jurisdictional fact can
only be determined upon the completion of inquiry. It is further stated that a composite order
on jurisdiction and merits should be passed in this case so that any delay in the proceedings
could be avoided.
II. That a writ petition filed by Goodenough before the High Court of Essos was not
maintainable.
The SIRI Act provides that any order passed by the SIRI may be appealed before the
statutory authority, i.e., Securities Appellate Tribunal. In view of an effective and efficacious
remedy available under the Act itself, a writ petition was not maintainable. Further, there was
no extraordinary situation which had arisen in this case that could be treated as a warrant for
holding that it is necessary to exercise the power under Article 226 of the Constitution.
III. That SIRI has jurisdiction to enquire into the conduct of a Chartered Accountant
registered with the SCAI and issue directions against a Chartered Accountant.
SIRI is duty bound to protect the interest of the investors in securities market and to
promote the development of, and to regulate the securities market by such measures as it
thinks fit. SIRI for discharge of its statutory duties has powers vide enough to issue any
preventive or remedial direction to persons or class of persons including Chartered
Accountants. Further, it is argued that issuing of such directions would not amount to
regulating the profession of Chartered Accountant.
IV. That it is not necessary for SIRI to establish mens rea for a violation of the SIRI Act
and FUTP Regulations framed thereunder.
The provisions and the scheme of the enactments do not envisage the requirement of
mens rea for holding a person liable for its contravention. The intention of the party is wholly
irrelevant and it is thereby submitted that mens rea is not an essential ingredient for a
violation of the SIRI Act and the FUTP Regulations.

XI

Team Code: R-387

ARGUMENTS ADVANCED
I.

THAT SIRI

OUGHT NOT TO HAVE DECIDED THE QUESTION OF JURISDICTION AS A

PRELIMINARY ISSUE BEFORE PROCEEDING TO ADJUDICATE THE MATTER ON MERIT.

Goodenough in its reply to the SCN contended that the issue of jurisdiction was a pure
question of law and that it ought to be decided first before proceeding with the merits of the
matter. SIRI rejected this contention of Goodenough and passed an order dated 23rd February
2014, holding that the present issue at hand was a mixed question of law and fact and that the
jurisdictional fact can only be determined upon a complete inquiry on merits. It also held that
a composite order on jurisdiction and merits would be passed upon completion of the
inquiry.1 It is thereby submitted that, the question of jurisdiction in the instant matter, which
is whether Goodenough had connived with the management of TrueTech to fabricate the
accounts and financial statements of TrueTech cannot be decided as it is a mixed question of
law and fact and the same cannot be decided unless the inquiry proceeds into the merits.
It is further submitted that the question of jurisdiction should not be decided as a
preliminary issue [A] as it will lead to delay in the proceedings. Moreover, [B] as the issue at
hand is a mixed question of fact and law it can only be decided after delving into the merits
of the matter and therefore, SIRI ought not to have decided the question of jurisdiction as a
preliminary issue before proceeding to adjudicate the matter on merits.
A. That the question of jurisdiction should not be decided as a preliminary issue as it
will lead to delay in the proceedings.
In its reply to the SCN, Goodenough contended that the issue of jurisdiction is a pure
question of law and that under the settled law of the land it ought to be decided first before
proceeding with the adjudication on the merits of the matter.2 However, SIRI rejected this
contention of Goodenough and passed an order holding that the present issue at hand was a
mixed question of law and fact and that the jurisdictional fact can only be determined upon a
complete inquiry on merits.3 The SIRI Act provides for an appeal against all types of orders
passed by the SIRI.4 In view of that, it becomes necessary that the original proceedings
should be decided on all points, so that the appellate authority may not be required to remand

9, Moot Proposition.
Id.
3
Supra note 1.
4
The SIRI Act of 1992 15T [hereinafter The Act].
2

MEMORANDUM ON BEHALF OF THE RESPONDENT

the matter in case such question is allowed.5 The course of litigation should normally proceed
unhampered. With a view to expedite the trial and conclusion of litigation before the original
authority or court, it is submitted that the question of jurisdiction should be allowed to be
decided along with the main issue instead of deciding the matter in a piecemeal manner. A
three judge bench of the Honourable Supreme Court in the case of D. P. Maheshwari v. Delhi
Administration & Ors.6 has opined that in order to achieve a speedy culmination of the
litigation, as a matter of policy, tribunals should decide all issues in dispute at the same time
without trying some of them as preliminary issues.
Therefore, in the instant case, it is submitted that SIRI was indeed correct in passing the
order, by holding that the present issue need not be decided at the preliminary stage.
B. That presently the question of jurisdiction is a mixed question of fact and law.
Pursuant to the SCN issued by the Respondents, the Appellants objected to the
jurisdiction of SIRI to enquire into the conduct of the Chartered Accountants. In the instant
case, SIRI passed an order dated 23rd February 2014, holding that the present issue at hand
was a mixed question of law and fact and that the jurisdictional fact can only be determined
after a complete inquiry on merits.7 The moot question essentially was that whether
Goodenough has connived with the management of TrueTech to fabricate and fudge its books
of accounts.8 Therefore, it is contended that the question of jurisdiction, in the instant case,
cannot be determined without delving into the merits of the case and hence cannot be
disposed off as a preliminary issue.
Further, it is contended that Chartered Accountants are professionals who are governed
by separate legal regime and their activities are beyond the jurisdiction of SIRI. A mixed
question of law and facts involve, first, the ascertainment of facts on the evidence adduced
and then a determination of the rights of the parties on an application of the appropriate
principles of law to the facts ascertained.9 In the instant case, the question of whether SIRI
has jurisdiction over the conduct of chartered accountants is the issue of jurisdiction. The
same cannot be decided as a preliminary issue without delving into the merits of the case as it
is a mixed question of law and fact, requiring recording of evidence. 10.The SCN in the instant
case was issued on the basis of the material found against the Appellants during investigating
5

Ghatmal Champala v. Amravati Dyeing Pvt. Ltd., AIR 1976 AP 70 [hereinafter Ghatmal]; Jagannath Rao Dani
v. Rambharosa and Anr. AIR 1933 PC 33.
6
D. P. Maheshwari v. Delhi Administration & Ors., (1983) 4 SCC 293.
7
Supra note 1, at 9.
8
Price Waterhouse v. Securities Exchange Board of India, Appeal No. 8/2012, SAT Order dated 1st June 2011.
9
Meenakshi Mills, Madurai v. The Commissioner of Income Tax, Madras AIR 1957 SC 49.
10
Ramdayal Umraomal v. Ramdayal Umraomal, AIR 1979 MP 153.

MEMORANDUM ON BEHALF OF THE RESPONDENT

into the affairs of TrueTech.11 The role of Appellant in the manipulation of financial
statements of TrueTech can be conclusively ascertained only after evidence is brought on
record.
It is submitted that the jurisdiction of the Tribunal is dependent on the fact that whether
the interests of the investors in the securities market was affected or harmed by the acts of
Goodenough. Such a question can only be answered after adducing evidence in the case. It is
further submitted that SIRI is required to regulate the securities market and, therefore, can
take preventive steps to safeguard the interests of investors and the SCAI cannot take away
the jurisdiction of SIRI in connection with the same.
It has been held that where jurisdiction is a mixed question of law and fact requiring
recording of evidence, the same cannot be tried as a preliminary issue.12
It is therefore submitted that SIRI rightly passed the order dated 23rd February 2014
holding that the present issue at hand was a mixed question of law and fact and that the
jurisdictional fact can only be determined upon a complete inquiry on merits.
II.

THAT

THE WRIT PETITION FILED BY

GOODENOUGH

BEFORE THE

HIGH COURT

OF

ESSOS

WAS NOT MAINTAINABLE.

The SIRI Act provides that the orders passed by the SIRI may be appealed before the
SAT which is the Appellate authority under the Act.13 SIRI passed an order dated 23rd
February 2014 holding that the issue of jurisdiction in the present case was a mixed question
of law and fact and that the jurisdictional fact can only be determined upon a complete
inquiry into the merits.14 It is contended that the writ petition filed before the High Court by
the Appellant was not maintainable before the High Court as (a) the order passed on 23
February, 2014 by SIRI was appealable before SAT u/s 15T of the Act .Further, it is
submitted that (b) in the instant case, there is no extraordinary situation which arises that can
be treated as a warrant for holding that it is necessary to exercise the power under Article 226
in the interest of justice.
A. That the Appeal against the order passed by SIRI ought to have been made before
the SAT.
S.15T of the SIRI Act provides that any person aggrieved by an order of the Board under
the Act or the rules or regulations made thereunder may prefer an appeal to a SAT having
11

Supra note 1, at 7.
Ghatmal, supra note 5.
13
The Act, supra note 4.
14
Supra note 1, at 5.
12

MEMORANDUM ON BEHALF OF THE RESPONDENT

jurisdiction in the matter.15 It has been held by SAT that the words "an order" as is used in
the aforementioned provision are comprehensive enough to include every order or decision
taken by the Board.16 It is stated that the words used in 15T of the Act are of widest
amplitude and every order is included within the expression an order. 17 In the instant case,
the order passed by the Board on 23rd February, 2014 was a mere procedural order, and it is
submitted that the same is appealable before the SAT as mandated by the SIRI Act. It is
relevant to see whether the aggrieved has exhausted the available statutory remedy for
deciding whether power under Article 226 should be exercised or not. . The Apex Court has
held that when there is a hierarchy of appeal provided in the Act itself, a fast track procedure
cannot be allowed to be derailed by taking recourse to proceedings under Articles 226 of the
Constitution.18 In the present case, like noted earlier, there is already a hierarchy of appeal
provided in the Act, namely, filing of an appeal against the order of SIRI, under 15T. Thus
the Appellant cannot invoke the writ jurisdiction of the High Court under Article 226 of the
Constitution.
B. That the Appellants could not have invoked the extraordinary writ jurisdiction of
the High Court.
In view of the order passed by the SIRI dated 23rd February 2014, the Appellant
approached the High Court of Essos seeking for a writ to quash the order. It is a settled rule
that a writ petition is not maintainable without the aggrieved having exhausted the statutory
remedy available to him.19 In the instant case, the statutory remedy available was to appeal
before the SAT, making the writ petition not maintainable before the High Court.
Additionally, the Supreme Court has ruled that it is important to give reason for not availing
the other available remedy before invoking the writ jurisdiction.20 From the facts of the case,
it is amply clear that the Appellant has not given any satisfying reason for invoking the writ
jurisdiction of the High Court while there was a statutory remedy available under S. 15T of
the Act.
The Respondents may contend that appeal u/s 15T of the SIRI Act is no bar to move the
writ jurisdiction of the court, since the order impugned has been passed without jurisdiction.
15

The Act, supra note 4.

National Securities Depository Ltd. v. Securities and Exchange Board of India, Appeal No. 207/2005, SAT
Order dated 29th September 2006.
17
T & R Welding products (India) Ltd. v. Securities and Exchange Board of India and Madras Stock Exchange
Ltd., Appeal No. 20/2011, SAT Order dated 2nd September 2011.
18
Punjab National Bank v. O C Krishnan & Ors., AIR 2001 SC 3208; The Constitution of India, Article 226.
19
Tin Plate Co. of India Ltd. v. State of Bihar & Ors., AIR 1999 SC 74.
20
Sheela Devi v. Jaspal Singh, AIR 1999 SC 2859.
16

MEMORANDUM ON BEHALF OF THE RESPONDENT

However, the Madras High Court has ruled that when there is an alternative remedy available
and such remedy is effective and efficacious and has full expertise in respect of securities, a
writ petition cannot be entertained.21 Further, the Calcutta High Court while dealing with a
similar issue has opined that the power under Article 226 can be exercised only in limited
cases which is (a) in absence of a functioning Tribunal, (b) for examining the vires of the
statute or the provision under which the decision or order is made and (c) when the order is
not appealable under the Act. 22
In the instant case, the SIRI Act expressly provides for the SAT to hear appeals against
the orders of the SIRI. In such a case, the power of the High Court to hear to the appeals
against the orders of the SIRI stands barred.
Additionally, in this case there is no extraordinary situation that could warrant the
exercise of power under Article 226. From the order of the Board the Appellant was entitled
to appeal to the Tribunal that has been functioning and is competent to decide all the
questions including the questions of jurisdiction of the Board to pass the order and violation
of the principles of natural justice.
Therefore, in light of the above arguments, it is submitted that the High Court should not
have exercised the power under Article 226 to review the order of the Board.
III.

THAT SIRI

HAS JURISDICTION TO INQUIRE INTO THE CONDUCT OF A CHARTERED

ACCOUNTANT REGISTERED WITH THE SCAI AND ISSUE DIRECTIONS AGAINST A CHARTERED
ACCOUNTANT.

SIRI is established with the objective of regulating the securities market and to protect the
interest of investors in the securities market.23 Goodenough was the statutory auditor for
TrueTech for the period April 2003 to September 2013.24 11 of the SIRI Act casts a
statutory duty upon SIRI to protect the interests of its investors in securities and to promote
the development of, and to regulate the securities market by such measures as it thinks fit.25
In order to achieve the same, SIRI has the powers to issue directions to any person or class of
persons referred to in 12, or associated with the securities market.26

21

N. Narayanan v. Securities and Exchange Board of India, (2009) 8 MLJ 960.

Rose Valley Real Estates and Construction Ltd. & Anr. v. Securities and Exchange Board of India, [2011]
102 CLA 325 (Cal).
23
Supra note 1, at 5.
24
Supra note 1, at 2.
25
The Act, supra note 4, 11(1).
26
The Act, supra note 4, 11B(iii)(a).
22

MEMORANDUM ON BEHALF OF THE RESPONDENT

Further, it is contended that the SIRI has jurisdiction to inquire into the conduct of
Chartered Accountants and issue necessary directions. The argument is further buttressed
with the following contentions below.
A. That the issuance of SCN to Goodenough does not amount to regulating the
profession of Chartered Accountants.
Goodenough is a partnership firm registered with the SCAI, established under the CA
Act, 1949.27 In the instant case, SIRI issued a SCN to Goodenough alleging that Goodenough
had failed in its duties while auditing the financial statements of TrueTech. Goodenough was
called upon to show cause why directions should not be issued to them prohibiting them from
issuing audit certificates regarding compliance of obligations of listed companies and market
intermediaries registered with SIRI and/or restraining Goodenough from accessing the
securities market for a specified period.28 The CA Act prohibits and penalises any person
who seeks to regulate in any manner whatsoever the profession of chartered accountants.29
A two-judge Bench of the Bombay High Court has held that directions under 11B can be
issued to any person and in case there exists sufficient material against the Chartered
Accountants, SIRI shall have the power to take remedial or preventive measures against such
persons.30 Further, the Court has held that by taking remedial and preventive measures in the
interest of investors and for regulating the securities market, if any steps are taken by SIRI, it
can never be said that it is regulating the profession of Chartered Accountants.31 Therefore,
issuance of a SCN in no way amounts to regulation of the conduct of Goodenough and is not
in conflict with 24A (1) (ii) of the CA Act.
B. That SIRI is vested with the duty and the powers necessary for protection of the
interests of investors.
11 (1) of the SIRI Act, provides that it is the duty of the Board to protect the interest of
the investors in securities and to promote the development and to regulate the securities
market by such measures as it thinks fit.32 The term measure includes anything desired or
done with a view to the accomplishment of a purpose, a plan or course of action intended to

27

Supra note 1, at 2.
Supra note 1, at 7.
29
Chartered Accountants Act of 1949, 24A(1)(ii) [hereinafter CA Act].
30
S. AGRAWAL & R. J. BABY, A LEGAL COMMENTARY ON SECURITIES AND EXCHANGE BOARD OF INDIA ACT,
1992 220 (Amit Agrawal ed., Taxmann Publications Pvt. Ltd. 2011) [hereinafter AGRAWAL]
31
Price Waterhouse and Co. & Ors. v. Securities and Exchange Board of India, (2010) 103 SCL 96 (Bom)
[hereinafter Price].
32
Id.
28

MEMORANDUM ON BEHALF OF THE RESPONDENT

obtain some object, any course of action proposed or adopted by the Government. Such
measures may be in the form of executive instructions; it may be by way of subordinate
legislation or in the form of directions or order which the Board is otherwise specifically
authorised to make under various provisions of the Act or Rules framed thereunder. 33 It is
thereby submitted that the measures taken by SIRI by means of an SCN is merely with the
intention of protecting the interests of the investors. It does not amount to regulation of the
CA profession but it is only a means of regulating the securities market.
C. That SIRI is empowered to take all ancillary steps and measures to see that the
interests of investors is protected.
The powers available to the SIRI under the Act are to be exercised in the interest of
investors and interest of securities market. In order to safeguard the interest of investors or
interest of securities market, SIRI is entitled to take all ancillary steps and measures to see
that the interest of investors is protected.34 The Bombay High Court has also viewed that the
SIRI has got inherent powers to take all ancillary steps to safeguard the interest of investors
and securities market.35 Thereby it is contended that the SCN issued by SIRI to Goodenough
is sustainable as it was issued in exercise of its ancillary powers with respect to protection of
interests of the investors in the securities market.
D. That the Auditors of a public listed company owe a duty of care to the shareholders.
Statutory auditors are appointed by the shareholders by majority. They owe a duty to the
shareholders and are required to give a correct picture of the financial affairs of the
Company.36 As per the provisions of 224 of the Companies Act, 1956, every company
shall, at each meeting appoint an auditor or auditors to hold office till the conclusion of the
next annual general meeting.37 A statutory auditor in under a duty to exercise reasonable care
as would satisfy a man that the accounts are genuine.38

An auditor is placed by the

shareholders to look into the accounts of a company and to report to them what the true
condition of its affairs is and whether that condition is correctly reflected in the accounts
published.39 Further, it is the duty of the auditor not to confine himself merely to the task of

33

Alka Synthesis Limited v. SEBI, [1995] 95 Comp Cas 663 (Guj).

Price, supra note 31.
35
Price, supra note 31.
36
Price, supra note 31.
37
The Companies Act of 1956, 224 [hereinafter Companies Act].
38
ICAI v. P.K Mukherjee & Anr., AIR 1968 SC 1104 [hereinafter ICAI].
39
S. Ganesan v. A.K. Joscelyne, AIR 1957 Cal 33 (42).
34

MEMORANDUM ON BEHALF OF THE RESPONDENT

arithmetical accuracy of the balance sheet40 and if the auditors were to rely on the statements
of the management even in respect of matters which were capable of direct verification, his
appointment by the shareholders to examine the accounts of the company would be perfectly
useless and serve no purpose.41 An audit is intended for the protection of the shareholders and
the auditor is expected to examine the accounts maintained by the Directors with a view to
inform the shareholders of the true financial position of the Company. The Directors occupy
a fiduciary position in relation to the shareholders and in auditing the accounts maintained by
the Directors the auditor acts in the interest of the shareholders and in auditing the accounts
maintained by the Directors the auditor acts in the interest of the shareholders who are in the
position of beneficiaries.42 In the instant case, as already noted, Goodenough was the
statutory auditor for TrueTech for the period April 2013 to September 2013.43 They owed a
duty of care to the shareholders and were required to give a correct picture of the financial
affairs of the TrueTech. It is thereby submitted that Goodenough was in breach of this duty.
E. That the Auditors of a listed company fall within the ambit of the expression
persons associated with the securities market.
The expression persons associated with the securities market was first interpreted by
the Gujarat High Court44 as anybody who has a connection or intercourse with the securities
market. Subsequently the Bombay High Court in the matter of Price Waterhouse & Co &
Ors. v. SEBI45 held that the expression persons associated with securities market need not
include persons directly connected with the securities market and it would be sufficient to
wrap any person within the purview of such expression if the person may impact the interests
of investors and stability of the securities market.46 It would cover anyone who directly or
indirectly or in a subterfuge manner dealt with the securities to deceive the real investors in
Indian stock market.47 In the instant case, even though Goodenough did not have a direct
connection with the securities market, the statutory duty regarding auditing the accounts of
the company and preparation of balance sheets may have a direct bearing in connection with
the interest of investors and the stability of the securities market. Therefore, Goodenough

40

Registrar of Companies, Bombay v. P.N. Hegde, AIR 1954 Mad 1080.

Controller of Insurance v. H.C. Das, AIR 1957 Cal 387.
42
.ICAI, supra note 38.
43
Supra note 1, at 1.
44
Karnavati Fincap Ltd. & Anr. v. Securities and Exchange Board of India, (1996) 87 Comp Cas 186.
45
Price, supra note 31.
46
Price, supra note 31.
47
Securities and Exchange Board of India v. Pan Asia Advisors Ltd. & Ors., 2015 (7) SCALE 6940.
41

MEMORANDUM ON BEHALF OF THE RESPONDENT

falls within the purview of the expression persons associated with the securities market,
empowering SIRI to issue directions against them as under 11B of the SIRI Act.
IV.

THAT IT IS NOT NECESSARY FOR SIRI TO ESTABLISH MENS REA FOR A VIOLATION OF THE
SIRI ACT AND THE FUTP REGULATIONS FRAMED THEREUNDER.
During the course of the preliminary hearing of the appeal before the Apex Court, a
question arose as to whether it was necessary for SIRI to establish mens rea for a violation of
the SIRI Act and FUTP Regulations framed thereunder.48 It is thereby submitted that mens
rea is not an essential ingredient for a violation of the SIRI Act and the FUTP Regulations.
A. That the definition of fraud under the FUTP Regulations does not warrant the
requirement of mens rea.
At the very outset, it may be noted that the provisions of regulation 3 (b),(c) and (d) of the
FUTP Regulations are in peri materia with the provisions of s. 12A(a), (b) and (c) of the Act
and are couched in general term to cover wide range of manipulative practices. The FUTP
Regulations

broadly

define

fraud

as

any

act,

expression,

omission

or

concealment committed whether in a deceitful manner or not by a person or by any other

person with his connivance or by his agent while dealing in securities in order to induce
another person or his agent to deal in securities, whether or not there is any wrongful gain or
avoidance of any loss.49
It is clear from this definition that any act omission or concealment to be a fraud within
the meaning of the Regulations need not be committed in a deceitful manner. The words
whether in a deceitful manner or not are significant and clearly indicate that intention to
deceive is not an essential requirement of the definition of fraud as given in the Regulations.
The Supreme Court in the case of Chairman, SEBI v. Shriram Mutual Fund & Anr.50 has
expressly held that unless the language of the statute indicates the need to establish the
presence of mens rea, it is wholly unnecessary to ascertain whether such a violation was
intentional or not.51 In the decision of Pyramid Saimira Theatre Ltd.52 the Court went into the
question of whether the element of mens rea was indeed required to establish the violation of
Regulation 3 and the Court answered in the negative. In other words mens rea or criminal

48

Supra note 1, at 13.

FUTP Regulations of 2003, Regulation 2(1)(c) [hereinafter FUTP].
50
The Chairman, SEBI v. Shriram Mutual Fund & Anr., AIR 2006 SC 2287.
51
Id.
52
Pyramid Saimira Theatre Ltd. v. Securities and Exchange Board of India, Appeal No. 242/2009, SAT Order
dated 7th April 2010 [hereinafter Pyramid].
49

MEMORANDUM ON BEHALF OF THE RESPONDENT

intent is not an essential ingredient to establish fraud.53 Therefore, in the instant case, for a
violation of the SIRI Act or Regulations framed thereunder, it is submitted that establishing
mens rea is not essential for imposing a liability under the enactments.
B. That mens rea is not essential for establishing violation of the provisions of the SIRI
Act.
The Act and the Regulations are intended to regulate the Securities Market and the related
aspect., The imposition of penalty, in the given facts and circumstances of the case, proper
exercise or judicial discretion of the case, cannot be tested on the ground of no mens rea, no
penalty.54 The Apex Court has also opined that penalty is attracted as soon as the
contravention of the statutory obligation as contemplated by the Act and the regulations is
established and hence the intention of the parties committing such violation becomes wholly
irrelevant.55 Even though, the Apex Court in the judgement of Shriram made observations
pertaining to Chapter VI A of the Act, the ratio and the observations made thereunder,
however, applies to all the provisions of the Act and the regulations.56 In the instant case, the
issue at hand is whether SIRI needs to establish mens rea for violation of the provisions of
the Act or the FUTP Regulations framed thereunder.

It is thereby submitted that mens rea or intention is not an essential requirement for
establishing violations of the SIRI Act or the Regulations framed thereunder.

53

Id.
Securities and Exchange Board of India v. Cabot International Capital Corporation (2005) 123 Comp Case
841 (Bom).
55
Pyramid, supra note 52.
56
Pyramid, supra note 52.
54

10

Team Code: R-387

PRAYER
Wherefore, in the light of facts stated, issues raised, arguments advanced and authorities
cited, it is most humbly and respectfully prayed before this Honourable Court that it may be
pleased to hold:
(a) That SIRI ought not to have decided the question of jurisdiction as a preliminary issue;
(b) That the writ petition filed by the Appellants before the High Court of Essos was not
maintainable;
(c) That SIRI has jurisdiction to enquire into the conduct of a Chartered Accountant,
registered with the SCAI and issue any directions against them;
(d) That it is not necessary for SIRI to establish mens rea for a violation of SIRI Act and
FUTP Regulations framed thereunder;
And
Pass any other order or grant any other relief in favour of the Respondent, which this
Honourable Court may deem fit to meet the ends of equity, justice and good conscience.

Date: 18th September, 2015

Place: Republic of Islandia

Sd/Counsel(s) For Respondent