Soumen Chatterjee vs Sebi
- CitationAppeal No.27 of 2020
Ratio decidendi
The rule this decision rests on
A director of a company who is also an employee cannot be presumed, merely by reason of his designation as an executive or employee director, to have knowledge of the day-to-day affairs and irregularities of the company; a restraint order against such a director cannot rest on that presumption alone and requires evidence linking him to the financial irregularities. Attendance at board meetings does not by itself make a director deemed to have knowledge of the affairs and mismanagement of the company, so as to justify continuing an interim restraint order against him; the same standard must be applied to independent and non-executive directors who attended the same meetings. Where a director relies on statutory compliance certificates and internal audit reports which record no non-compliance, and there is no evidence that he was involved in the day-to-day affairs of the company or that the misappropriation occurred during his tenure, an ex-parte interim restraint order against him cannot be sustained, and it is quashed insofar as it relates to him, without prejudice to proceedings on the basis of any subsequent evidence of his involvement.
Written by Miss Lucy from the judgment below, not taken from a headnote.
Judgment
As delivered
BEFORE THE SECURITIES APPELLATE TRIBUNALMUMBAIOrder Reserved on: 21.12.2020Date of Decision: 07.1.2021Appeal No.27 of 2020Soumen ChatterjeeAged 34, son of Sushanta ChatterjeeEx-employee Director-Research,Guinness Securities Limited.3B, Arindam Apartment,Garia Station Road,Kolkata - 700084. ... AppellantVersusSecurities and Exchange Board of IndiaSEBI Bhavan, Plot No.C4-A,G Block, Bandra Kurla Complex,Bandra (East), Mumbai - 400051. ... RespondentMs. Anjali Agarwal, Advocate for the Appellant.Mr. Chauduri Suraj, Advocate with Mr. Aubhav Ghoshand Mr. Ravishekhar Pandey, Advocates i/b. The LawPoint for the Respondent.CORAM: Justice Tarun Agarwala, Presiding OfficerDr. C.K.G. Nair, MemberJustice M.T. Joshi, Judicial MemberPer : Justice Tarun Agarwala, Presiding Officer21.The present appeal has been filed against theconfirmatory order dated 31st July, 2019 passed by theWhole Time Member („WTM‟ for short) under section19 of the Securities and Exchange Board of India Act,1992 (hereinafter referred to as „SEBI Act‟) read withsection 11(1), 11(4) and 11D of the SEBI Actconfirming the ex-parte ad-interim order dated 19thDecember, 2018 against the appellant and 28 otherentities. By the said order the appellant has beenrestrained from accessing the securities market andfurther prohibited from buying, selling or otherwisedealing in securities either directly or indirectly orbeing associated with the securities market in anymanner whatsoever till further directions. Theappellant has also been restrained from undertakingany activities in the securities market either directly orindirectly and has further been restrained fromdisposing of or alienating any assets, whether movableor immovable including money lying in the bankaccounts except with the prior permission of Securitiesand Exchange Board of India (hereinafter referred to as3„SEBI‟). By the said impugned orders the depositorieshave also been directed to ensure that no debits aremade in the demat accounts held jointly or severally bythe appellant and the banks have also been directed toensure that no debits are made in the bank accountsexcept for the purpose of payment of money to theclient/investors under the written confirmation of theconcerned stock exchange.2. The above ex-parte ad-interim order dated 19thDecember, 2018 as confirmed by the confirmatoryorder dated 31st July, 2019 was passed in the matter ofGuiness Securities Limited (hereinafter referred to as„GSL‟) which is a stock broking Company and is amember of the National Stock Exchange of India Ltd.,BSE Ltd., Metropolitan Stock Exchange of India Ltd.and is also a depository participant of CentralDepository Services Ltd. and National SecuritiesDepository Ltd.3. SEBI examined the irregularities in the conduct ofthe affairs of GSL which was brought to its notice by4NSE through its report dated 21st November, 2018.Following irregularities was noted namely:-(i) Misappropriation of client securities by GSLand its associates;(ii) Lack of solvency of GSL;(iii) Falsification of books;(iv) Non-settlement of funds and securities;(v) Funding to clients having debit balances byproviding further exposure;(vi) Non-redressal of investor complaints;(vii) Non furnishing of information to SEBI.4. Based on the aforesaid irregularities an ex-parte ad-interim order was passed which was consequentlyconfirmed.5. The appellant was appointed initially as a ResearchAnalyst in the stock broking company and, thereafter,was appointed as a Director-Research employee witheffect from 29th December, 2015. It is alleged that theappellant submitted his resignation 27th October, 2018.In the appointment letter the appellant‟s role waslimited to that of a Research Analyst and was requiredto provide sound research work and a specific duty was5defined, namely, that he would be responsible forefficient, satisfactory and economical operation in thearea of research and its related activities. Accordingto the appellant, he had no knowledge of the day to daytrading or any activity relating to the same of theCompany. The appellant had set out in detail his areaof work as a Director-Research and contended that heonly attended three board meetings and all documentsthat were produced during the board meeting did notshow any irregularity. It was contended that theappellant had no access to the financial irregularitiescommitted by the Company nor had any role to play insuch activities. Under the terms of his employment theappellant‟s employment was confined only to theresearch department though he was designated as aDirector but in fact he was an employee and wasgetting a salary. It was contended that the appellantwas not involved in the day to day affairs of theCompany nor had any knowledge of the violation andirregularities committed by the Company and that hehad been restrained only on the basis of presumption6and only on the ground that he was designated as aDirector.6. In the ex-parte ad-interim order dated 19thDecember, 2018 no role or complicity of the appellantwas brought on record while conducting theinvestigation into the affairs of GSL nor was there anyadverse material against the appellant. The appellantwas however restrained on the basis that the Companycannot act by itself and only acts through its directors.The directors are expected to exercise their power onbehalf of the Company with utmost care, skill anddiligence. The board of directors are responsible forthe conduct of business of the Company and are liablefor any non-compliance of law and such liability canbe fastened upon individual director and, on this basisthat the appellant was a Director, was accordinglyrestrained under the ex-parte ad-interim order.7. The appellant filed his objections and prayed forvacation of the interim order contending that he wasnot in control of the day to day running nor had anyknowledge of the irregularities alleged to have been7committed by the Company. It was contended that hewas only an employee and the irregularities committedby the Company cannot be fastened upon him. TheWTM while considering his objections found that theappellant was an employee of GSL but was promotedas an Executive Director and was handling animportant department of GSL and, therefore, wasdeemed to be aware of the day to day functioning ofthe Company. The WTM also found that the appellanthad attended three board meetings and, therefore, theappellant cannot rely upon statutory compliancecertificate or internal audit report and, therefore,confirmed the interim order against the appellant.8. We have heard Ms. Anjali Agarwal, Advocate forthe Appellant and Mr. Chauduri Suraj, Advocateassisted by Mr. Aubhav Ghosh and Mr. RavishekharPandey, Advocates for the Respondent.9. Having heard the counsel for the parties we are of theopinion that the continuation of the interim orderagainst the appellant is not justifiable at this stage. Aninterim order which was passed on 19th December,82018 and confirmed on 31st July, 2019 cannot beallowed to continue till further orders. The appellanthas already been restrained for more than two yearsfrom accessing the securities market. The appellant isout of employment and cannot get another employmenton account of the restraint order. He has also beenrestrained from alienating his assets and his demataccounts, bank accounts have been frozen. Such harshorders without any specific finding against theappellant cannot be allowed to continue. Till date noshow cause notice has been issued pursuant to thesubmission of the forensic report. It was contended bythe learned counsel for the respondent that a showcause notice will be issued very shortly by the end ofJanuary, 2021. Be that as it may. In our opinion, therestraint order cannot be allowed to continue anyfurther. The appellant has already been restrained forthe past two years and we see no justifiable reason toallow this restraint order to continue also for thefollowing reasons.910. We find from a perusal of the ex-parte ad-interimorder dated 19th December, 2018 that six clients ofGSL emerged as a top six sellers during the period 1stJanuary, 2008 to 31st August, 2018 which led to themisappropriation of clients securities by GSL to thetune of Rs.233.75 crores. The interim report states thatthese six client sold securities without correspondingpurchases and GSL had delivered the securities ofother clients for sale made by these six clients resultingin the alleged misappropriation. Apart from the otherirregularities this was by and large the mainirregularity against the Company and, consequently,against the appellant.11. The six clients as per the ex-parte ad-interim orderand the alleged misappropriation is of different periodwhich is culled out from the order itself namely:-(a) SKB Securities Ltd. - January, 2008 to 31stAugust, 2018.(b) Param Commodities Pvt. Ltd. - July, 2009 toJune, 2012.(c) Paramarth Agro Marketing Pvt. Ltd. - June,2009 to October, 2013.10(d) Apurva Commodity Pvt. Ltd. - January, 2008 toMay, 2012.(e) Awadhoot Marketing Pvt. Ltd. - April, 2014 toMay, 2015.(f) Superfast Tours and Travels Pvt. Ltd. - June,2012 to August, 2018.12. The aforesaid six clients of GSL as per the ex-partead-interim order misappropriated 233.75 crores duringthe aforesaid period. Admittedly, the appellant wasappointed as a Director on 29th December, 2015.Majority of the misappropriation is prior to theappellant‟s appointment except in the case of SKBSecurities Ltd. and Superfast Tours and Travels Pvt.Ltd.. Nothing has been brought on record to indicateas to how much security was misappropriated by theaforesaid two entities from the time the appellantbecame a Director. In the absence of any specificfinding in this regard, we are of the opinion that onmere ipse dixit the restraint order cannot be allowed tocontinue any further on the ground that the appellantwas an Executive Director and is presumed to be inknowledge of the affairs of the Company. The WTM11has lost sight of the fact that the appellant was theemployee and was promoted as an employee Directorbecause the law required the Company to do so.13. We find that the WTM has discharged certaindirectors of GSL on the ground that they areindependent Director and/or Non-Executive Directorsand, therefore they may not be aware of the day to dayfunctioning and wrong doings of GSL in connectionwith the misappropriation of client‟s securities,falsification of accounts, non-settlement of funds andsecurities etc. The WTM was of the opinion that thesedirectors were either Independent Directors or Non-Executive Directors and may not be involved in theday to day functioning of GSL and that these Directorswere justified in relying upon the statutory compliancecertificate and internal audit report in the boardmeeting which never pointed out any non-complianceby GSL and on the contrary the statutory compliancecertificate affirmatively mentioned compliance of thelaw by GSL. The WTM while discharging thesedirectors held as under:-12"I have considered the replies of Noticee nos. 4, 5,6, 7, 8, 9, 10, 13, 14 and 15. One of the maincontention raised by these Noticees except Noticeeno. 4, 8, 9 and 10, is that they were eitherindependent directors and/non- executivedirectors, and as such they were not involved in theday to day functioning of GSL. It has also beencontended that they relied on the statutorycompliance certificate and internal audit reportwhich never pointed out towards any non-compliance by GSL and on the contrary thesestatutory compliance certificates affirmativelymentioned regarding GSL's compliance with alllaws. On perusal of the statutory compliancecertificates furnished by the Noticees, I observethat the statement of statutory compliancescontains the details of applicable statutes andnature of compliances and signature of the nodalofficer certifying compliances with the applicablestatutes. As regards the compliances with respect tosecurities laws, I observe that the companysecretary of GSL has certified that provisions of allthe regulations applicable have been compliedwith. The company secretary of GSL has alsocertified that there have been no non-compliance/violations of any regulations. Further, the InternalAudit report furnished by the Noticees also statesthat no material fraud/ non-compliance/ violationby GSL is observed during the course of the audit.These certificates/ reports submitted to the board ofdirectors coupled with the fact that these Noticeeswere either independent and/ or non-executivedirectors of GSL, prima facie shows that they mightnot be aware of the day to day functioning andwrongdoings of GSL in connection withmisappropriation of client securities, falsificationof books of accounts, non-settlement of funds/securities of clients etc. I also note that forensicaudit by NSE and BSE is presently underway whichwill bring out the role played by these Noticees andif found liable these Noticees shall always be13proceeded against in accordance with law.However, at this stage, I find no reason to continuethe directions issued vide interim order datedDecember 19, 2018."14. However, the same stand was taken by theappellant that nothing was brought to his notice duringthe board‟s meeting which he attended. The appellantalso relied upon the statutory compliance certificateand the internal audit report which did not point outany irregularity or non-compliance by GSL but theWTM for reasons best known to him applied adifferent standard/yardstick contending that since theappellant was an Executive Director he is deemed to bein the knowledge of the day to day affairs of theCompany. In our opinion, this presumption is totallyerroneous, misconceived and cannot be sustained.There is no magic in the words "Executive Director".Section 27 of the SEBI Act clearly indicates that everyperson who was responsible for the conduct of thebusiness of the Company would be deemed guilty ofthe offence and would be liable to be proceededagainst but such person would not be punished if he14proves that the offence was committed without hisknowledge or that he has exercised due diligence toprevent the commission of the offence. In the instantcase, the appellant has relied upon the compliancecertificate and internal audit report contending thatnothing was brought to his notice with regard to theirregularities alleged to have been committed by theCompany. There is no evidence which has come in theinvestigation report that the appellant was involved inthe day to day affairs of the Company especially whenthere was a Managing Director existing in theCompany.15. Merely because the appellant has attended threeboard meetings does not make the appellant deemed tohave knowledge of the affairs and mismanagement ofthe Company. By this yardstick the WTM should havealso restrained the independent and Non-ExecutiveDirectors in as much as these Directors have alsoattended the same board meeting of the Company. Notonly this, we find that one of the Independent Directorshad chaired the meeting of the board of directors as15Chairman but for whatever reasons the WTM hasremoved the restraint order may be because he was aretired IAS Officer. In our opinion, if an independentor non-executive Director chairs the meeting of theboard of directors he becomes far more responsiblethan any other Director attending the meeting of theboard of directors.16. Thus, for the aforesaid reasons, since the stand ofthe appellant was the same as that of the independentand non-executive director, there is no reason todistinguish the case of the appellant with that of theother independent/non-executive directors. If anythingagainst the appellant is found in the forensic reportwhich shows his involvement in the financialirregularities it will always be open to the respondentto proceed against him by issuance of a show causenotice but at this stage, in the absence of any explicitinvolvement of the appellant in the financialirregularities alleged to have been committed by theCompany, the restraint order cannot be allowed tocontinue any further. We are of the opinion that in the16absence of any evidence showing the linkage of theappellant in the financial irregularities of GSL, theappellant cannot be held liable for the alleged activitiesundertaken by GSL.17. For the reasons stated aforesaid, the impugned ex-parte interim order dated 19th December, 2018 asconfirmed by the order dated 31st July, 2019 cannot besustained and allowed to continue in so far as it relatesto the appellant. The impugned order is accordinglyquashed in so far as it relates to the appellant. Theappeal is allowed. In the circumstances of the case,parties shall bear their own costs.18. The present matter was heard through videoconference due to Covid-19 pandemic. At this stage itis not possible to sign a copy of this order nor acertified copy of this order could be issued by theregistry. In these circumstances, this order will bedigitally signed by the Private Secretary on behalf ofthe bench and all concerned parties are directed to acton the digitally signed copy of this order. Parties will17act on production of a digitally signed copy sent by faxand/or email.Digitally signed by
RAJALAKS RAJALAKSHMI H Justice Tarun Agarwala NAIR HMI H NAIR Date: 2021.01.07 Presiding Officer 15:47:41 +05'30'
Dr. C. K. G. Nair Member
Justice M.T. Joshi Judicial Member
07.1.2021 RHN
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