2011 (2) TMI 1258 - HC - Companies Law

Appellant floated a Collective Investment Scheme (C.I.S.) and collected money from the general public. - The SEBI filed a complaint against the Appellants for violation of sections 11B, 12(1B) of the Act and Regulations 5(1), 68(1), 68(2), 73 & 74 punishable under section 24(1) read with section 27 of the Act, as the Appellant Nos. 2 to 5 and Hemant Sharma being the Directors of the Appellant No. 1 were responsible for the conduct of its business. Complaint against the company already wounded up - held that - a person in the commercial world having a transaction with a company is entitled to presume that the Directors of the company are in charge of the affairs of the company. If any restrictions on their powers are placed by the memorandum or articles of the company, it is for the Directors to establish it at the trial. It is in that context that section 141 of the Negotiable Instruments Act provides that when the offender is a company, every person, who at the time when the offence was committed was in charge of and was responsible to the company for the conduct of the business of the company, shall also be deemed to be guilty of the offence along with the company. - Decided against the appellant. This statement of the Appellants does not absolve the Appellants of their criminal liability even if they have not floated any new C.I.S. after the public notice issued on 18-12-1997. In terms of Regulation 5(1) the Appellant was bound to make an application for grant of certificate within two weeks from the date of coming into force of the Regulation which mandatory requirement was not complied with by the Appellants. They did not even comply with Regulation 74 which provided for the procedure as contemplated under Regulation 73 to formulate the scheme of re-payment. Merely writing to the Respondent that the Appellant was desirous of taking benefit of scheme under section 12(1B), the Appellant was not absolved from the further liabilities.

Summary

Issues Involved:
1. Conviction under Section 24(1) read with Section 27 of the SEBI Act, 1992.
2. Compliance with SEBI (Collective Investment Scheme) Regulations, 1999.
3. Validity of prosecution post-company winding up.
4. Attribution of responsibility to directors.
5. Quantum of sentence.

Detailed Analysis:

1. Conviction under Section 24(1) read with Section 27 of the SEBI Act, 1992:
The appellants challenged their conviction under Section 24(1) read with Section 27 of the SEBI Act, 1992, and the sentence of one year of rigorous imprisonment and a fine of five lakhs each. The High Court upheld the conviction, stating that the company and its directors were responsible for the conduct of its business and thus liable for the contraventions.

2. Compliance with SEBI (Collective Investment Scheme) Regulations, 1999:
The appellants were found to have floated a Collective Investment Scheme (C.I.S.) and collected Rs. 0.35 crores without complying with SEBI regulations. SEBI's complaint highlighted violations of sections 11B, 12(1B) of the Act, and Regulations 5(1), 68(1), 68(2), 73, and 74. The court noted that despite the statutory obligation, the appellants did not apply for registration nor filed winding up and repayment reports, thus violating SEBI regulations.

3. Validity of prosecution post-company winding up:
The appellants argued that the company was wound up on 5-7-2001, and thus, the prosecution initiated on 21-12-2002 was invalid. The court rejected this argument, clarifying that until the company is dissolved, it retains its entity, and its directors remain liable for its acts. The winding up under the Companies Act does not absolve the company from compliance with SEBI regulations.

4. Attribution of responsibility to directors:
The court held that the directors, being in charge of the company's day-to-day affairs, were responsible for the violations. The testimony of SEBI officials and the company's documents established that the directors were aware of and responsible for the company's operations. The court referenced the Supreme Court's stance in S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, emphasizing that directors are presumed to be in charge of the company's affairs unless proven otherwise.

5. Quantum of sentence:
The appellants contended that the sentence was excessive. The court, however, found the sentence appropriate given the severity of the violations and the continued non-compliance with SEBI regulations. The court noted that the appellants had ample opportunity to comply with the regulations and refund the investors but failed to do so.

Conclusion:
The High Court dismissed the appeal, upholding the conviction and sentence. The court emphasized the directors' responsibility for the company's compliance with SEBI regulations and the continuing nature of the offence until the investors were refunded. The judgment reinforced the legal obligation of companies and their directors to adhere to regulatory requirements and the consequences of non-compliance.