Manoj Agarwal vs Sebi

Order Reserved on: 4.7.2017 Date of Decision : 14.7.2017

Appeal No.66 of 2016

Manoj Agarwal, Non-Executive Director, Bhartiya Real Estate Development Ltd. 3, North Goalapara Road, Angus Bhadreshwar, Hooghly, West Bengal - 712 221. ...Appellant

Versus

The Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051. ...Respondent

Mr. Subir Kumar, Advocate for the Appellant.

Mr. Mustafa Doctor, Senior Advocate with Mr. Rakesh Puri and Mr. Rohan Agrawal, Advocates i/b. MDP & Patners for the Respondent.

CORAM : Justice J.P. Devadhar, Presiding Officer Jog Singh, Member Dr. C.K.G. Nair, Member

Per : Justice J.P. Devadhar

1.

This appeal is filed to challenge the order passed by the Whole Time Member

('WTM' for short) of the Securities and Exchange Board of India ('SEBI' for short)

on 21.1.2016. By the said order the WTM of SEBI while confirming the ex-parte

order dated 2nd December, 2014 has directed that the Bharatiya Real Estate

Development Limited ('BREDL' for short) and its present and past directors

including the appellant shall jointly and severally refund the money collected by

BREDL through issuance of redeemable preference shares with interest at the rate of

15% p.a. compounded on half yearly intervals, from the date when the repayment

became due (in terms of Section 73(2) of the Companies Act, 1956) to the investors

till the date of actual payment. Further, by the impugned order, BREDL and its 2

directors including the appellant are restrained from accessing the securities market

for a period of 4 years.

2. Appellant became a Director of BREDL on 19th August, 2010 and resigned as

Director of BREDL on 1.5.2012.

3. During the years 2011-12 and 2012-13 BREDL had collected Rs.40 lac and

Rs.59.06 lac (total Rs.99.06 lac) respectively from various preferential allottees.

Since the aforesaid amounts were collected without complying with the 'public issue'

norms stipulated under Section 56, 60 read with Section 2(36) and Section 73 of the

Companies Act, 1956, ex-parte order was passed on 2.12.2014 directing BREDL and

its directors not to mobilize funds from investors through the offer of Redeemable

Preference Shares/equity shares till further orders. By the said order, BREDL and its

directors including the appellant were prohibited from issuing prospectus or any

document soliciting money from the public until further orders. Thereafter, by the

impugned order dated 21.1.2016, BREDL and its directors including the appellant are

directed to refund jointly and severally the money collected by BREDL through the

issuance of Redeemable Preference Shares with interest at the rate specified therein.

4. In view of the fact that out of the amount of Rs.99.06 lakh, amount of Rs.59.06

lakh was collected by BREDL after the appellant ceased to be a Director of BREDL,

counsel for SEBI fairly stated on instruction that the obligation of the appellant to

refund the amount with interest jointly and severally with BREDL and other Directors

set out in the impugned order may be limited to Rs.40 lakh only, because, that was the

amount collected by BREDL during the period when the appellant was a Director of

BREDL.

5. Before setting out the arguments advanced by counsel on both sides, it would

be appropriate to quote Section 5 and Section 73(2) of the Companies Act, 1956

which reads thus:-

3

"Meaning of "officer who is in default".

5. 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."

"Allotment of shares and debentures to be dealt in on stock exchange

73. (1) .............................

(1A) .................................

(2) Where the permission has not been applied under sub-section (1), or, such permission having been applied for, has not been granted as aforesaid, the company shall forthwith repay without interest all moneys received from applicants in pursuance of the prospectus, and, if any such money is not repaid within eight days after the company becomes liable to repay it, the company and every director of the company who is an officer in default shall, on and from the expiry of the eighth day, be jointly and severally liable to repay that money with interest at such rate, not less than four per cent and not more than fifteen per cent, as may be prescribed, having regard to the length of the period of delay in making the repayment of such money.

2(A) .............................

2(B) .............................."

6. Arguments advanced by Mr. Subir Kumar, learned counsel for the appellant

may be summarized as follows:-

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(a) Appellant was not the person responsible for issuance of redeemable

preference shares of BREDL so as to attract the penal provisions

contained in Section 56 and 73(2) of the Companies Act, 1956 read with

Section 27 of the Securities and Exchange Board of India Act, 1992.

(b) Appellant had no knowledge about the real estate business and the

appellant had merely lent his name to be a director of BREDL at the

instance of Mr. Soumen Majumder and in fact for becoming a director

of BREDL, the appellant had neither paid any subscription money to

BREDL nor the appellant after becoming a director was involved in the

day to day affairs of BREDL. Appellant as a Non Executive Director of

BREDL had neither attended any of the board meetings to approve any

of the accounts, balance sheets and/or management/policy decisions of

BREDL. In these circumstances, the appellant could not be said to be

an "officer in default" under Section 73(2) of the Companies Act, 1956.

(c) Section 2(26) of the Companies Act, 1956 defines the expression

"Managing Director" to mean a director who exercises substantial

power of management of the company. In the present case, the

substantial power of management of BREDL was always with Mr.

Soumen Majumder and Ms. Shipra Banerjee. Relying on various

documents signed and filings made by Mr. Soumen Majumder and Ms.

Shipra Banerjee it is submitted by counsel for the appellant that Mr.

Soumen Majumder and Ms. Shipra Banerjee would alone fall within the

purview of 'Officer who is in default' defined under Section 5(a) of

Companies Act, 1956.

(d) In the absence of a designated Managing Director appointed by

BREDL, admittedly Mr. Soumen Majumder and Ms. Shipra Banerjee

pursuant to the responsibility cast on them had signed and filed various 5

documents with the Registrar of Companies. On all the letters of

allotment issued by BREDL, Ms. Shipra Banerjee had signed as

"Authorised Signatory" and therefore Mr. Soumen Majumder and Ms.

Shipra Banerjee would only be the officer in default covered under

Section 5(e) and 5(f) of the Companies Act, 1956.

(e) Case of the appellant does not fall within Section 5(g) of the

Companies Act, 1956 as pleaded orally by the counsel for respondent,

even though there is no finding recorded to that effect in the impugned

order.

(f) As per Rule 4BB of the Companies (Central Government's)

General Rules and Forms 1956, within thirty days of exercising its

powers under section 5(f) or section 5(g) of the Companies Act, 1956,

BREDL was required to file with the Registrar of Companies a return in

Form 1AA duly signed by the Secretary or, where there is no secretary

by a director. In the documents annexed at page 46 to 49 of the affidavit

in reply filed by SEBI, Ms. Shipra Banerjee is shown as authorised

person to submit returns on allotment. Therefore, when there was a

authorised person appointed by BREDL, the WTM of SEBI could not

have applied Section 5(g) of the Companies Act and hold that for

violation of Section 73(2) of the Companies Act, 1956 committed by

BREDL all the directors including the appellant were liable to be

penalised.

(g) In the complaint filed by a complainant which is set out at page

107 of the affidavit in reply filed by SEBI, Mr. Soumen Majumder is

shown as Managing Director of BREDL. Therefore, for the violation of

Section 73(2) the Managing Director of BREDL could be said to be an 6

"officer in default" under Section 5 of the Companies Act, 1956 and not

all the directors of BREDL.

(h) BREDL had not intended to raise funds by issuing redeemable

preference shares to the general public. However, on account of issuing

redeemable preference shares to more than 50 entities, as per settled

law, issuance of redeemable preferential shares became a deemed public

issue covered under Section 56 of the Companies Act, 1956. Section 56

of the Companies Act, 1956 which is akin to Section 27 of SEBI Act

casts certain obligation on the specified directors or on any other person

to whom the responsibility of issuing the prospectus was entrusted. In

the present case, the special resolution for issuance of redeemable

preferential shares was signed by Ms. Shipra Banerjee and notice of

extra ordinary meeting was signed jointly by Ms. Shipra Banerjee and

Mr. Soumen Majumder. Section 56(4) of the Companies Act, 1956

provides that a director or other person responsible for the prospectus

shall not incur any liability by reason of any non compliance or any

contravention if he satisfies the three conditions set out therein. In the

present case, appellant had no knowledge about issuance of redeemable

preference shares and therefore the appellant could not be penalized for

the failure on part of BREDL and other directors.

(i) Before issuance of redeemable preference shares, it was obligatory

on part of the authorised person of BREDL to make an application to

the stock exchanges seeking permission for issuance of redeemable

preference shares, however, no such application was made. Thus,

there was contravention of Section 73(2) of the Companies Act, 1956,

which is akin to Section 27 of the SEBI Act. In the present case the

appellant had neither participated in any of the board meetings nor any 7

notice of such meeting were received by the appellant and therefore the

appellant was neither aware of the acts done by other directors nor the

appellant was signatory to any of the board resolution or documents. In

such a case, for failure of BREDL to refund the amount to the investors,

the appellant could not be held to be an officer in default and made

liable to refund the amount jointly and severally. In support of the

above contention reliance is placed on a decision of the Bombay High

Court in case of H. Nanjundiah vs. V. Govindan reported in (1986) 59

Company Cases 356 (BOM) and a decision of the Supreme Court in

case of S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla and others

reported in (2005) 3 BLJR 2018 (SC).

(j) Relying on the master circular issued by the Ministry of

Corporate Affairs on 29.7.2011 it is submitted that a Company Secretary

could also be treated as an officer in default. In the present case, it is

submitted that Mr. Jayakrushan Das was the Company Secretary of

BREBL and therefore, for non compliance of Section 73(2), the

Company Secretary of BREDL ought to have been held to be an officer

in default. As per the master circular, status of a director and the timing

of commission of the offence are relevant factors to be taken into

consideration for holding a person to be an officer in default. In the

present case, it is submitted that neither the status of the appellant nor

the timing of issuance of preferential allotment shows that the appellant

could be considered as an officer in default.

(k) As BREDL had not issued any notice of board meeting to the

appellant, the appellant is deemed to have vacated the office of a

director under Section 283(g) of the Companies Act, 1956. Therefore, 8

the appellant who is deemed to have vacated the office of director could

not be declared to be an officer in default.

(l) In the website of Ministry of Corporate Affairs, BREDL is still

shown as an active company and Mr. Soumen Majumder is still shown

as a Director of BREDL. In these circumstances counsel for the

appellant submitted that the impugned order be quashed and set aside

qua the appellant and amount due to the investors be directed to be

refunded jointly and severally by BREDL and other directors of

BREDL.

7. We see no merit in the above contentions.

8. In the present case, fact that Rs.40 lac was collected by BREDL through

issuance of redeemable preference shares during the period when the appellant was a

director of BREDL is not in dispute. Similarly fact that the redeemable preference

shares were issued to more than 50 entities and as a result BREDL and its directors

were obliged to follow the public issue norms laid down under Section 56 of the

Companies Act, 1956 is also not in dispute.

9. In view of the fact that BREDL failed to follow the public issue norms

contained in Section 56 of the Companies Act, 1956 before issuance of redeemable

preference shares to more than 50 entities and no officer was authorised by BREDL to

comply with the public issue provisions contained in the Companies Act, 1956

including the obligation to refund the amount under Section 73(2), the WTM of SEBI

has held that all directors of BREDL were "officer in default" and accordingly

directed BREDL and all its directors including the appellant to refund the amount

collected from the investors with interest at the rate as more particularly set out in the

impugned order.

9

10. Argument that the appellant was not a person responsible for issuance of

redeemable preference shares and therefore for failure on part of BREDL and its

directors to comply Section 73(2) of the Companies Act, 1956 the appellant could not

be made liable is without any merit. In the present case, even though the intention of

BREDL was to collect Rs.40 lac by issuance of redeemable preference shares through

private placement and not by the general public, admittedly allotments were made to

more than 50 entities and therefore BREDL was obliged to follow the public issue

norms specified under the Companies Act, 1956. Since the said norms were not

followed, under Section 73(2) of the Companies Act, 1956 it was obligatory on part of

BREDL to refund the amount collected within the time stipulated therein. As the

amounts were not refunded to the investors it is held that BREDL and every director

of BREDL who is an "officer in default" shall refund jointly and severally the amount

with interest. Therefore, fact that the appellant was not responsible for issuance of

redeemable preference shares does not absolve the obligation of all the directors of

BREDL including the appellant to refund the amount collected from the investors

with interest as set out in the impugned order.

11. Argument of the appellant that he could not be said to be an "officer in default"

is without any merit. Section 5 of the Companies Act, 1956 defines the expression

'officer who is in default' to mean the officers named therein. Section 5(g) provides

that where any company does not have any of the officers specified in clauses (a) to

(c) of Section 5, then any director who may be specified by the Board in that behalf or

where no director is so specified then all the directors would be "officer who is in

default". In the present case, no material is brought on record to show that any of the

officers set out in clauses (a) to (c) of Section 5 or any specified director of BREDL

was entrusted to discharge the obligation contained in Section 73 of the Companies

Act, 1956. In such a case, as per Section 5(g) of the Companies Act, 1956 BREDL

and all the directors of BREDL are liable. Therefore, decision of the WTM that all 10

directors of BREDL including the appellant would constitute "officer in default"

cannot be defaulted.

12. Fact that appellant had merely lent his name to be a director of BREDL at the

instance of Mr. Soumen Majumder and for becoming a director of BREDL the

appellant had neither paid any subscription money to BREDL and the fact that the

appellant was not involved in the day to day affairs of BREDL would not absolve the

appellant from his obligation to refund the amount to the investors in view of the

specific provisions contained in Section 73(2) read with Section 5 of the Companies

Act, 1956. Admittedly, the appellant was a director of BREDL when amounts were

collected by BREDL in contravention of the public issue norms and there is nothing

on record to suggest that any particular officer/director was authorised to comply with

the public issue norms. In such a case, all directors of BREDL including the appellant

would be "officer in default" under Section 73(2) read with Section 5 of the

Companies Act, 1956.

13. Fact that Mr. Soumen Majumder and Ms. Shirpa Banerjee had signed various

documents and made filings before various authorities as authorised representatives of

BREDL would not mean that they were authorised to discharge the obligation arising

on account of deemed public issue. In other words, fact that Mr. Soumen Majumder

and Ms. Shipra Banerjee were authorised to perform various other functions could not

be a ground to infer that they were also authorised to discharge the public issue

obligation contained in Section 56 & 73 of the Companies Act, 1956. Therefore, fact

that Mr. Soumen Majumder and Ms. Shipra Banerjee had signed certain documents as

authorised person of BREDL cannot be a ground to presume that they were authorised

to discharge the obligation arising on account of deemed public issue.

14. Fact that the impugned order does not specifically refer to Section 5(g) of the

Companies Act, 1956 would not render the impugned order invalid. In the impugned

order it is specifically recorded that for non compliance of Section 73(2), obligation to 11

refund the amount with interest is on BREDL and the "officer in default". Expression

"officer in default" used in Section 73(2) has to be read with Section 5 of Companies

Act, 1956 which defines the expression "officer who is in default". Therefore,

argument of the appellant that impugned order does not refer to Section 5(g) of the

Companies Act, 1956 is without any merit.

15. Similarly, argument of the appellant that Mr. Soumen Majumder who was

instrumental in raising funds through issuance of redeemable preference shares and

Ms. Shipra Banerjee who had signed all the letters of allotment issued by BREDL

would be covered under the expression "officer in default" set out in Section 5(e) and

5(f) of the Companies Act, 1956 is also without any merit. Specific case of the

appellant is that BREDL had no intention to raise funds by offering redeemable

preference shares to the general public. In such a case, authority given to Mr. Soumen

Majumder and Ms. Shipra Banerjee to raise funds by issuing redeemable preference

shares through private placement could not be considered as authority given for

discharging the obligation arising on account of deemed public issue.

16. From the documents brought on record it is seen that BREDL had filed with

the Registrar of Companies an annual return form, wherein, designation of all the

persons named therein including the appellant are shown as directors of BREDL,

which obviously means that BREDL had not appointed any person as Managing

Director or Whole Time Director or Secretary or Manager. Moreover, there is no

material to show that any director was authorised to discharge the obligation arising

on account of deemed public issue. In these circumstances, decision of the WTM of

SEBI that all directors of BREDL were "officer in default" and that they are jointly

and severally liable to refund the amount with interest to the investors cannot be

faulted.

17. Fact that one complainant in his complaint had considered Mr. Soumen

Majumder to be a Managing Director of BREDL would not mean that Mr. Soumen 12

Majumder becomes a Managing Director of BREDL. Right to appoint a Managing

Director is with the Company and not with any complainant.

18. Reliance was placed by counsel for appellant on a decision of Bombay High

Court in case of H. Nanjundiah (supra). That decision has no relevance to the present

case, because that decision was rendered in context of Section 5 of the Companies Act

as it stood prior to its amendment in the year 1988. Section 5 of the Companies Act,

1956 as amended in the year 1988 does not contain the words "knowingly and

wilfully" to describe the officer of the company who is deemed to be an "officer in

default". Hence the decision of the Bombay High Court in case of H. Nanjundiah

(supra) rendered in the context of unamended Section 5 of the Companies Act, 1956 is

not relevant to the facts of present case.

19. Reliance was also placed by the counsel for the appellant on a decision of the

Supreme Court in case of S.M.S. Pharmaceuticals Ltd. (supra). That decision dealt

with the expression "officer in default" referred to in Section 141 of the Negotiable

Instruments Act, 1881. In the present case we are concerned with the expression

"officer who is in default" as defined under Section 5 of the Companies Act, 1956. Since the expression "officer in default" defined under Section 5 of the Companies

Act, 1956 is not pari materia with that expression defined under the Negotiable

Instruments Act, the Apex Court decision in the case of S.M.S. Pharmaceuticals Ltd.

(supra) would have no relevance to the fact of the present case.

20. Relying on a master circular issued by the Ministry of Corporate Affairs on

29.7.2011 it was contended that in the present case, Since Mr. Jaykrushan Das was

appointed as a Company Secretary by BREDL the said Company Secretary could be

an officer in default for non compliance of Section 73(2). We see no merit in the

above contention, because, there is nothing on record to suggest that Company

Secretary was authorised to comply with the obligations relating to the deemed public 13

issue. Hence the argument that the Company Secretary of BREDL ought to have been

made liable cannot be accepted.

21. Argument advanced on behalf of the appellant that the appellant had not

attended any board meeting of BREDL and therefore, the appellant is deemed to have

vacated the office under Section 283(g) of the Companies Act and consequently no

action could be taken against the appellant is also without any merit. Section 283(g)

of the Companies Act, 1956 applies only to a director who inspite of notice absents

himself from three consecutive meetings of the Board of Directors or absents himself

from all the meetings of the Board for a continuous period of three months. In the

present case, it is the case of the appellant that no notice of Board meeting was issued

to him. In such a case, question of the appellant remaining absent from the Board

meetings does not arise and consequently question of applying Section 283(g) of the

Companies Act, 1956 to the case of the appellant does not arise.

22. For all the aforesaid reasons, we see no merit in the appeal and the same is

hereby dismissed with no order as to costs. However, it is made clear that the liability

of the appellant under the impugned order is restricted to refunding the amount of

Rs.40 lac with interest jointly and severally with BREDL and other directors of

BREDL.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Jog Singh Member

Sd/-

Dr. C.K.G.Nair Member

14.7.2017 Prepared and compared by RHN