2017 (1) TMI 827 - AT - Companies Law

Penalty on the appellants under Section 15HB of SEBI Act - the appellants have violated regulation 23(1) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 - obligation cast on the BoD of a company under the Takeover Regulations, 1997 - Held that - In the present case the appellants as BoD of the company knew very well that prior approval of the general body of shareholders was necessary before entering into any document for encumbering the assets of the company and accordingly the appellants as BoD of the company had convened EOGM on January 18, 2010. Even after knowing their obligation under regulation 23, the appellants ought not to have indulged in encumbering the Vile-Parle (West) property of the company in gross violation of regulation 23 of the Takeover Regulations, 1997. In the absence of any compelling reason for entering into the MoU on December 26, 2009, before the EOGM scheduled on January 18, 2010 the appellants who have grossly violated regulation 23 of the Takeover Regulations, 1997, deserve harsh punishment. In these circumstances, we see no reason to interfere with the penalty of ₹ 1 crore imposed on the eight appellants which is directed to be paid jointly and severally.

Summary

Issues Involved:
1. Whether entering into an MoU on December 26, 2009, during the offer period, violated regulation 23(1) of the Takeover Regulations, 1997.
2. Whether the MoU executed by the company was a legally enforceable contract.
3. Whether the penalty imposed by the Adjudicating Officer was justified.
4. Whether the independent directors were liable for the violation.
5. Whether the maximum penalty of ?1 crore was proportionate.

Issue-wise Detailed Analysis:

1. Violation of Regulation 23(1) of the Takeover Regulations, 1997:
The Tribunal emphasized that regulation 23(1) of the Takeover Regulations, 1997 mandates that the Board of Directors (BoD) of a company must obtain prior approval from the general body of shareholders before selling, transferring, encumbering, or otherwise disposing of the company's assets during the offer period. The Tribunal noted that the BoD of the company entered into an MoU on December 26, 2009, for the joint development of the Vile-Parle (West) property with developers, while the public offer made by Mr. Pramod Jain and others was subsisting. This action was taken without prior shareholder approval, thereby violating regulation 23(1). The Tribunal held that entering into an MoU, even if subject to shareholder approval, constituted a violation of regulation 23(1) as it amounted to an agreement for encumbering the assets of the company.

2. Legally Enforceable Contract:
The appellants argued that the MoU was not a binding contract but rather an agreement contingent on shareholder approval. However, the Tribunal rejected this argument, stating that the MoU contained specific terms that encumbered the Vile-Parle (West) property. The MoU included clauses that required the company to refund amounts received with interest if shareholders rejected the proposal and prevented the company from entering into other transactions involving the property until the amounts were repaid. These terms indicated that the MoU created enforceable rights and obligations, thereby encumbering the property in violation of regulation 23(1).

3. Justification of Penalty:
The Tribunal upheld the penalty imposed by the Adjudicating Officer, noting that the BoD of the company was aware of the requirement to obtain shareholder approval before entering into any agreement that encumbered the company's assets. Despite this knowledge, the BoD proceeded to execute the MoU, thereby grossly violating regulation 23(1). The Tribunal found no compelling reason for the BoD's actions and concluded that the penalty was justified.

4. Liability of Independent Directors:
The appellants in Appeal No. 101 of 2014 argued that they were independent directors and not involved in the execution of the MoU. The Tribunal rejected this argument, stating that the independent directors were part of the BoD that authorized the exploration of alternative uses for the Vile-Parle (West) property and convened the Extraordinary General Meeting (EOGM) to seek shareholder approval for the joint development. The independent directors were aware of the MoU and did not oppose its execution. Therefore, they could not escape liability for the violation of regulation 23(1).

5. Proportionality of Penalty:
The appellants contended that the maximum penalty of ?1 crore was excessive. The Tribunal disagreed, emphasizing that the appellants, as members of the BoD, knowingly violated regulation 23(1) by encumbering the company's assets without shareholder approval. Given the seriousness of the violation and the absence of any compelling reason for the BoD's actions, the Tribunal held that the penalty was proportionate and deserved.

Conclusion:
The Tribunal dismissed both appeals and upheld the penalty of ?1 crore imposed on the appellants, to be paid jointly and severally. The Tribunal found that the appellants' actions constituted a gross violation of regulation 23(1) of the Takeover Regulations, 1997, and that the penalty was justified and proportionate.