Sayanti Sen vs Sebi

Order Reserved on: 21.06.2019

Date of Decision : 09.08.2019

Appeal No. 163 of 2018

Sayanti Sen 15C, Hindustan Park, Ward No. - 88, Kolkata - 700 029. ..... Appellant

Versus

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

Mr. Vinay Chauhan, Advocate with Mr. K.C. Jacob, Advocate i/b Corporate Law Chambers India for the Appellant.

Mr. Mustafa Doctor, Senior Advocate with Mr. Anubhav Ghosh, Ms. Rashi Dalmia and Mr. Abhishek Mishra, Advocates i/b The Law Point for the Respondent.

CORAM : Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member

Per : Justice Tarun Agarwala, Presiding Officer

1.

Securities and Exchange Board of India ('SEBI' for

short) received a complaint against Silicon Projects India

Limited ('SPIL' for short) in respect of issue of Secured 2

Redeemable Non-Convertible Debentures ('NCDs' for short)

and consequently made an investigation as to whether SPIL

had made any public issue of securities without complying

with the provisions of the Companies Act, 1956. On

investigation, it was found that SPIL had made an offer of

NCDs in the financial years 2009-10, 2010-11, 2011-12 and

raised an amount of Rs. 18.03 crore from 406 allottees. This

offer of NCDs was found to be in violation of the provisions

of SEBI Act, 1992, the Companies Act, 1956 and SEBI (Issue

and Listing of Debt Securities) Regulations, 2008 ('ILDS

Regulations' for short). Accordingly, SEBI passed an order

dated March 3, 2016 and issued certain directions including

debarment and refund to the investors against SPIL and its

Directors. Since the directions were not complied with, SEBI

initiated recovery proceedings against the Company and its

Directors.

2. Subsequently, it came to notice that the appellant along

with Shri Shib Narayan Das and Ms. Antara Mukherjee were

also Directors of SPIL during the issuance of the NCDs. SEBI

also found that these persons were also engaged in fund

mobilizing activity and also violated the provisions of SEBI

Act, the Companies Act and ILDS Regulations and 3

accordingly issued an interim order dated March 7, 2016,

namely:-

"i. The past Directors of SPIL viz. Mr. Shib Narayan Das (PAN: AGBPD7440C; DIN:

02414547), Ms. Antara Mukherjee (PAN: AWZPM5169R;DIN:02418378), Ms. Sayanti Sen (PAN: DGIPS5090H; DIN: 03442949), are prohibited from issuing prospectus or any offer document or issue advertisement for soliciting money from the public for the issue of securities, in any manner whatsoever, either directly or indirectly, till further orders;

ii. The abovementioned past Directors of SPIL are restrained from accessing the securities market and further prohibited from buying, selling or otherwise dealing in the securities market, either directly or indirectly, till further directions;

iii. The abovementioned past Directors of SPIL shall provide a full inventory of all their assets and properties."

3. By the same interim order the appellant and the other

Directors were directed to show cause as to why action should

not be taken under Section 11 and 11B of the SEBI Act read

with Section 73(2) of the Companies Act and Section 27(2) of

the SEBI Act and why the appellant and two others should not

be jointly and severally be directed to refund the money

collected though the offer of NCDs along with interest and

why they should be restrained from accessing the securities

market etc. 4

4. In response to the interim order-cum-show cause notice

the appellant filed a reply contending that she was appointed

as a receptionist in the year 2009 on a salary of Rs. 3000/-

which was increased to Rs. 4000/- in the year 2010 and, on

March 2011, she was made a Director of the Company and

her salary was increased to Rs. 5000/- per month. The

appellant contended that she tendered her resignation as a

Director on December 1, 2011 and Form 32 was filed before

the Registrar of Companies. It was contended that the

appellant had nothing to do with the issuance of NCDs and

had never attended any meeting of the Board of Directors nor

was signatory to any Resolution in relation to the issuance of

NCDs. It was also stated that she was never involved in any

activity of the Company. It was also brought on record that

CBI investigated the case against the Company in 2016 and

all the Directors including Shri Shib Narayan Das was

arrested and though the appellant was questioned but was not

arrested nor any charge sheet was filed against her though a

charge sheet has been filed against other Directors.

5. It has also come on record that Shri Shib Narayan Das

was the key person and, in his capacity of Chairman and

Director of the Company used to sign all documents which 5

were filed before the Registrar of Companies and was also

signatory to the audit report, annual report, and notice of the

annual general meeting of member of the Company.

6. In the light of the aforesaid submissions the Whole

Time Member ('WTM' for short) after considering the matter

and after giving an opportunity of hearing passed the

impugned order holding that the appellant is jointly and

severally liable to refund the money collected by SPIL as she

was a Director in the Company. The WTM further held that

since Shri Shib Narayan Das was the key person of the

Company, the recovery of the amount will be made from the

assets of Shri Shib Narayan Das in the first instance and

thereafter from the appellant and other Directors. The

appellant being aggrieved by the aforesaid order has filed the

present appeal.

7. We have heard Shri Vinay Chauhan, the learned counsel

for the appellant and Shri Mustafa Doctor, the learned senior

counsel for the respondent.

8. The WTM found that SPIL came out with an offer with

NCDs which was in violation of Section 56, 60 read with

Section 2(36), Section 73 and Section 117C of the Companies 6

Act read with ILDS Regulations. The WTM held that even

though the appellant may not be involved in the decision

making process, nonetheless, the appellant cannot wriggle out

of her responsibility as a Director of the Company and plead

ignorance of the affairs of the Company and therefore held

that being a Director the appellant was responsible for the

prospectus and for compliance of Section 56(1), 56(3) and

56(4) of the Companies Act and was liable jointly and

severally under Section 73(2) of the Companies Act on the

ground that every Director of the Company, were officers in

default, and were liable to repay the money along with

interest. The WTM further came to the conclusion that in

view of Section 5(g) of the Companies Act there was no

material brought on record to show that any of the officers set

out in Clauses (a) to (c) of Section 5 of the Companies Act or

any specified Director of the SPIL were entrusted to discharge

the obligation contained in Section 73 of the Companies Act

and consequently all the past and present Directors of the

SPIL, as officer in default under Section 5(g) of the

Companies act were liable to make refund jointly and

severally along with interest.

7

9. In our view the order of the WTM is patently erroneous

and against the provisions of Section 73(2) read with Section

5(g) of the Companies Act. The WTM has proceeded with the

assumption that in the absence of any officer being nominated

as an officer in default then all the Directors were liable under

Section 5(g) of the Companies Act. The approach adopted by

the WTM ignoring the evidence that has come on record

makes the impugned order illegal and unsustainable.

10. Before proceeding further it would be essential to

extract a few provisions of the Companies Act. For facility,

Section 5 and Section 73 of the Companies Act is extracted

hereunder:-

Section 5

"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;

8 (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."

Section 73

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

(1) Every company, intending to offer shares or debentures to the public for subscription by the issue of a prospectus shall, before such issue, make an application to one or more recognized stock exchanges for permission for the shares or debentures intending to be so offered to be dealt with in the stock exchange or each such stock exchange.

(1A) Where a prospectus, whether issued generally or not, states that an application under sub-section (1) has been made for permission for the shares or debentures offered thereby to be dealt in one or more recognised stock exchanges, such prospectus shall state the name of the stock exchange or, as the case may be, each such stock 9

exchange, and any allotment made on an application in pursuance of such prospectus shall, whenever made, be void, if the permission has not been granted by the stock exchange or each such stock exchange, as the case may be, before the expiry of ten weeks from the date of the closing of the subscription lists :

Provided that where an appeal against the decision of any recognized stock exchange refusing permission for the shares or debentures to be dealt in on that stock 22 exchange has been preferred under section 22 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), such allotment shall not be void until the dismissal of the appeal.

(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."

11. From a perusal of Section 73(2) of the Companies Act it

is apparently clear that in the first instance it is the Company

which is liable to repay the monies received from the

investors and if the Company fails to repay the amount then

the amount shall be recovered jointly and severally from 10

every Director of the Company who is an officer in default.

Thus, when the Company is the offender, vicarious liability of

the Directors cannot be imputed automatically. It is the

cardinal principle that there can be no vicarious liability

unless the statutes specifically provides for it.

12. The usual pattern in economic legislations is that when

an offence is committed by a company, the liability is not

imposed on all the officers of the company en bloc. Those

who are guilty are generally sorted out from those who are not

guilty. The Companies Act, however, makes a slight

departure from this conventional pattern. It gives an

opportunity to the board of directors to distribute the work as

between the members of the board or to appoint a managerial

person like managing director or whole time director or

manager. If nothing of this sort is done, only then the whole

board is liable to be prosecuted.

13. As per Section 5 of the Companies Act it becomes clear

that a managing director, whole time director, manager,

secretary and any person who has been authorized by the

board or by any director are now officers in default. Section

5(g) of the Companies Act makes it apparently clear that if

there is a managing director appointed in a company, he 11

would be an officer in default. Further, in the absence of any

managing director, if the board has specified any particular

director or manager or any other person as an officer in

default in which case only that specified director or manager

etc. as the case may be would be an officer in default.

14. Section 5(g) of the Companies Act further provides that

apart from the directors any officer can also be penalized if

his role can be attributed to be an officer in default. If any

officer has played some role in bringing about the default or

he might have performed the duties assigned to him then he

could be penalized as an officer in default. Section 5(g) of the

Companies Act thus makes it clear that in the absence of any

managing director or any specific order of a board, then by a

deeming fiction, all the directors of the company would be

officers in default.

15. In Agritech Hatcheries & Food Ltd. vs Valuable Steels

India Pvt. Ltd., (1999) 96 Com Cases 534 (Mad), it has been

held that where there is a managing or whole time director or

a manager, it would be an abuse of the process of the court if

proceedings are launched against the ordinary directors

without examining their role in default. Similar view was also

reiterated in Smt. G. Vijaylakshmi & Ors. vs. SEBI (2000) 12

100 Comp Cases 726 (AP)]. The reason is not far to see. It is

not necessary that every director is required to be penalized

merely because he is a director on the ground that he is

responsible for the affairs of the company. If the director can

explain that he had no role to play in the alleged default or

that he did not perform his duties assigned to him under the

agreement of his appointment, the presumption of guilt and

thereafter penalty cannot be fastened upon him.

16. The Supreme Court in Sunil Bharti Mittal vs. Central

Bureau of Investigation & Ors. in Criminal Appeal No. 35

of 2015 (arising out of Special Leave Petition (Crl.) No.

3161 of 2013) held that a Director can only be prosecuted if

there was sufficient evidence of his active role or where the

statutory regime attracts the doctrine of vicarious liability.

17. Ordinarily directors of a company are not allowed to be

prosecuted under Section 220 of the Companies Act for

default in filing the accounts when the company has a

managing director at the relevant time as has been held in

Ravindra Narayan vs ROC, Jaipur, (1994) 81 Com Cases

925 (Raj). This decision was accepted by the Department of

Company Affairs and a circular dated 24.06.1994 was issued

accordingly.

13

18. The contention that the appellant being a Director of the

Company cannot disown responsibility for the acts of the

Company is misconceived. In the instant case, the power

under Section 11 or 11B of the SEBI Act has been exercised

debarring the appellant from accessing the securities market

on the ground that the appellant was responsible for the acts

of the Company and thereby in an indirect manner has

introduced the concept of strict liability of vicarious liability

under Section 11 or 11B of the SEBI Act. In this regard it

would be, thus, relevant to peruse Section 27 of the SEBI Act

which reads as follows:-

"27(1) Where an offence under this Act has been committed by a company, every person who at the time the offence was committed was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:

Provided that nothing contained in this sub- section shall render any such person liable to any punishment provided in this Act, if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.

(2) Notwithstanding anything contained in sub-

section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any 14

neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

Section 27 of the Act states that a person is deemed to be

guilty of an offence on condition that he was in charge

and responsible to the company. The proviso to Section

27 states that:

"Provided that nothing contained in this sub- section shall render any such person liable to any punishment provided in this Act, if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence."

19. In our view it is not possible to lay down any hard and

fast rule as to when a Director would be vicariously

responsible for the acts of the Directors in charge of day today

affairs of the Company. In a given case a Director who had no

role to play in the day today affairs of the Company could still

be made liable for any penal consequences under Section 11B

but when there is an order debarring a Director under Section

11B, in that case the principles evolved under Section 27 of

the SEBI Act or the ingredients mentioned therein are

required to be considered, since the consequences under an 15

order under Section 11B is far reaching and similar to the

consequences of an order under Section 27 of the SEBI Act.

The spirit of Section 27 of the SEBI Act would indicate that if

a finding is given that the appellants have nothing to do with

the day today affairs of the Company then they cannot be held

guilty of any violation as there is no such thing as vicarious

liability under Section 11B of the SEBI Act.

20. Section 27 of the SEBI Act, 1992 deals with offences by

companies. Section 27 of SEBI Act is pari materia to Section

141 of the Negotiable Instruments Act and similar provisions

are also contained under the Drugs and Cosmetics

Act, Income Tax Act, Essential Commodities Act, Food

Adulteration Act, Environment Protection Act etc. Dealing

with the directors of the company who did not have anything

to do with the day to day affairs of the company, the Supreme

Court in a number of pronouncements held as follows:-

Municipal Corporation of Delhi v. Ram Kishan Rohtagi and

Ors. - (1983) 1 SCC 1 the Apex Court in paragraph 15 held as

under:-

"vicarious liability being an incident of an offence under the Act. So far as the Directors are concerned, there is not even a whisper nor a shred of evidence to show, apart from the 16

presumption drawn by the complainant, that there is any act committed by the Directors from which a reasonable inference can be drawn that they could also be vicariously liable. In these circumstances, therefore, we find ourselves in complete agreement with the argument of the High Court that no case against the Directors (accused 4 to 7) has been made out ex-facie on the allegations made in the compliant and the proceedings against them were rightly quashed."

Sham Sunder and Ors. v. State of Haryana - (1989) 4 SCC

630 - paragraph 10:-

"It is therefore, necessary to add an emphatic note of caution in this regard. More often it is common that some of the partners of a firm may not even be knowing of what is going on day to day in the firm. There may be partners, better known as sleeping partners who are not required to take part in the business of the firm. There may be ladies and minors who were admitted for the benefit of partnership. They may not know anything about the business of the firm. It would be a travesty of justice to prosecute all partners and ask them to prove under the proviso to sub- section (1) that the offence was committed without their knowledge. It is significant to note that the obligation for the accused to prove under the proviso that the offence took place without his knowledge or that he exercised all due diligence to prevent such offence arises only when the prosecution establishes that the requisite condition mentioned in sub-section (1) is established. The requisite condition is that the partner was responsible for carrying on the business and was during the relevant time in charge of the business. In the absence of any such proof, no partner could be convicted. We therefore, reject the contention urged by counsel for the State."

17 21. In this regard the Ministry of Corporate Affairs while

initiating prosecution against the Directors under the

Companies Act came across a lot of hurdles as to who was an

officer in default and whether any Director could be

prosecuted without there being evidence with regard to being

responsible for the affairs of the Company. In this regard, the

Ministry of Corporate Affairs issued a Master Circular dated

29th July, 2011 on prosecution of Directors and clarified that

the prosecution should be filed primarily against the

Managing Director and against such Directors who were in

charge and responsible for the affairs of the Company. It was

clarified that extra care should be taken in examining such

cases and no such Director should be held liable for any act of

omission or commission by the Company which would

constitute a breach or violation of any provisions of the

Companies Act which had occurred without his knowledge or

consent or where he had acted diligently in the Board process.

22. In Manoj Agarwal vs. SEBI (Appeal No. 66 of 2016

decided on 14.7.2017) the Tribunal found that there was no

material to show that any of the officers set out in Clauses (a)

to (c) of Section 5 or any specified director of the said 18

Company was entrusted to discharge the obligation contained

in Section 73 of the Companies Act.

23. In Mr. Yogesh G. Gemawat vs. SEBI (Appeal No. 227

of 2016 decided on 16.04.2019) this Tribunal found that in

the absence of any document to show that any director was

specified as per Clauses (a) to (c) of Section 5 of the

Companies Act or any valid document to show that any

person was authorized by the Board of Directors, the

appellant could not escape the liability as per Clause (g) of

Section 5 of the Companies Act.

24. In Pritha Bag vs. SEBI (Appeal No. 291 of 2017

decided on 14.02.2019) this Tribunal held that in the absence

any finding that the appellant was entrusted to discharge his

functions contained in Section 73 of the Companies Act and

in the absence of any material to show that the said appellant

was entrusted to discharge as an officer in default as set out in

Clauses (a) to (c) of Section 5 of the Companies Act, the said

appellant could not be penalized under Section 73(2) of the

Companies Act. The said decision is squarely applicable in

the instant case.

19

25. In SEBI vs. Gaurav Varshney, (2016) 14 SCC 430 the

Supreme Court held that a company being a juristic person,

all its deeds and functions are the result of acts of others.

Therefore, officers of a company who are responsible for acts

done in the name of the company are sought to be made

personally liable for acts which result in criminal action being

taken against the company. It makes every person who, at the

time the offence was committed, was in charge of, and was

responsible to the company for the conduct of business of the

company, as well as the company, liable for the offence. The

liability arises from being in charge of and responsible for the

conduct of business of the company at the relevant time when

the offence was committed and not on the basis of merely

holding a designation or office in a company. Conversely, a

person not holding any office or designation in a company

may be liable if he satisfies the main requirement of being in

charge of and responsible for the conduct of business of a

company at the relevant time. Liability depends on the role

one plays in the affairs of a company and not on designation

or status.

26. In the light of the aforesaid the WTM has held that the

Company has violated provisions of Section 73(2) of the 20 Companies Act and has therefore in the same breadth has

booked all the Directors to be responsible for the day today

affairs of the Company. This approach as stated earlier was

wholly incorrect. Section 73(2) of the Companies Act makes

it apparently clear that if in the first instance it was the

Company which was liable to repay the monies received from

the investors and if the Company failed to repay the amount

then the amount would be recovered jointly and severally

from every Director of the Company as an officer in default.

Therefore, where the Company is the offender vicarious

liability of the Directors cannot be imputed automatically.

27. Thus, the WTM was required to arrive at a specific

finding that a Director or Directors were responsible for the

acts of the Company. The mere fact that a person is a Director

would not make him automatically responsible for refund of

monies under Section 73(2) of the Companies Act.

28. In the light of the aforesaid, we find that the WTM has

given a categorical finding that Shri Shib Narayan Das was

responsible for the affairs of the Company. It was not open

for the WTM to pass further orders on the other Directors,

namely, the appellant especially when there is no finding nor 21

there is a shred of any evidence to indicate that the appellant

was also responsible for the affairs of the Company.

29. Thus, the direction of the WTM against the appellant

that she is also liable to refund the monies collected by the

Company during the respective period of Directorship of the

appellant along with interest cannot be sustained. The

impugned order to that extent cannot be sustained and is

quashed.

30. The appeal is allowed with no order as to costs.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C.K.G. Nair Member

09.08.2019 Prepared and compared by:msb