2004 (9) TMI 702 - AT - SEBI

Summary

Issues Involved:
1. Liability of non-executive directors.
2. Applicability of Section 27 of the SEBI Act.
3. Vicarious liability under Section 11B of the SEBI Act.
4. Distinction between criminal and civil liability.
5. Role and responsibility of directors in day-to-day management.

Detailed Analysis:

1. Liability of non-executive directors:
The primary issue was whether the two college-going students, who were directors but not involved in the day-to-day management of Shalibhadra Securities Ltd., could be held liable. SEBI argued that even non-executive directors should be responsible for the company's misdeeds. However, the Tribunal concluded that the students could not be held liable merely because they were directors, as they did not participate in the company's daily affairs.

2. Applicability of Section 27 of the SEBI Act:
The Tribunal examined Section 27 of the SEBI Act, which states that a person is deemed guilty if they were in charge of and responsible for the company's conduct. The proviso exempts individuals if they prove the offence was committed without their knowledge or despite due diligence. The Tribunal noted that SEBI's order admitted the appellants were not involved in the day-to-day affairs, thus Section 27 should exempt them from liability.

3. Vicarious liability under Section 11B of the SEBI Act:
SEBI contended that the appellants, as directors, were vicariously liable under Section 11B. The Tribunal disagreed, stating that vicarious liability under Section 11B is not applicable if the directors were not involved in the day-to-day management. The Tribunal emphasized that the consequences under Section 11B are as severe as those under Section 27, and thus, the same standards should apply.

4. Distinction between criminal and civil liability:
The Tribunal highlighted the difference in the standard of proof required for criminal and civil cases. While criminal liability requires proof beyond a reasonable doubt, civil liability is based on the preponderance of probability. Despite this distinction, the Tribunal found that the principles of vicarious liability should not apply to the appellants under Section 11B, as SEBI's own findings indicated their non-involvement in daily operations.

5. Role and responsibility of directors in day-to-day management:
The Tribunal referred to various judgments, including those under the Negotiable Instruments Act, to support the view that directors not involved in day-to-day management should not be held liable. The Tribunal cited cases like Municipal Corporation of Delhi v. Ram Kishan Rohtagi, emphasizing that mere designation as a director does not imply responsibility for the company's actions unless there is evidence of their active involvement.

Conclusion:
The Tribunal set aside SEBI's order debarring the appellants from the securities market. It concluded that the appellants, being students and not involved in the company's day-to-day affairs, could not be held liable for the company's violations. The appeal was allowed, and no costs were imposed.