2019 (12) TMI 480 - AT - SEBI

Default by company to refund the amount collected under the Collective Investment Schemes ( CIS ) - officer in default - vicarious liability of a peson who was a director only for 50 days - HELD THAT - If a company is liable to refund the monies received from the investors and if the company fails to pay the amount then the amount can be recovered jointly and severally from every Director of the Company who is an officer in default. Therefore, when the company is the offender, the vicarious liability of the acts of the Directors cannot be computed automatically. The contention that being a Director of the Company the appellant cannot disown his responsibility for the acts of the Company is misconceived. It is not possible to lay down any hard and fast rule as to when a Director would be vicariously responsible for the acts as a Director in charge of day-to-day affairs of the Company. However a finding has to be arrived at that the appellant was responsible for the day-to-day affairs of the Company and was involved in the collection of the monies and in the implementation of the schemes. In our view, it is not necessary that every director is required to be penalized merely because he is a director on the ground that he was deemed to 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 was not responsible for the affairs of the company in which case penalty could not be fastened upon him on the mere ground that he was a director. 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. In the instant case, a penalty of ₹ 1 crore has been imposed which is wholly excessive and against the provision of Section 15D of the SEBI Act. AO by a separate order has already given a finding that the Company and its Directors were directly responsible for sponsoring the CIS without registration and were instrumental in generating the monies through this scheme in violation of the Regulations and the Act. The AO has already imposed penalties against the Company and the said Directors. The appellant in the instant case no doubt was a director only for a period of 50 days and in our opinion there is no finding that he was responsible either for sponsoring the scheme or for carrying out the scheme. We have also found that he was not instrumental in the launching/ sponsoring or carrying on the scheme. Thus, no penalty could be imposed upon the appellant.

Summary

Issues Involved:
1. Whether the appellant was appointed as a director of PACL Limited.
2. Whether the appellant was responsible for sponsoring or carrying out the Collective Investment Scheme (CIS) without registration.
3. Appropriateness of the penalty imposed on the appellant.

Detailed Analysis:

1. Appointment as Director:
The appellant contended that he was never appointed as a director and was only a consultant. However, the Adjudicating Officer (AO) found sufficient evidence indicating the appellant’s appointment as a director, including letters to the Registrar of Companies (RoC) and Form 32. The Tribunal noted that these documents were undisputed and in the public domain, and thus, the appellant's claim lacked merit. The appellant's new argument of memory loss due to age was deemed inadmissible at this stage. The Tribunal concluded that the appellant was indeed appointed as a director for a brief period from August 10, 1998, to September 29, 1998.

2. Responsibility for CIS:
The AO penalized the appellant for sponsoring and being instrumental in executing the CIS without registration under Regulations 3 & 4 of the CIS Regulations, 1999. However, the Tribunal found these findings to be perverse and unsupported by evidence. Section 12(1B) of the SEBI Act and Regulations 3 & 4 of the CIS Regulations, 1999, require a certificate of registration for sponsoring or carrying on a CIS. The Tribunal noted that there was no evidence showing the appellant's involvement in the execution or collection of money under the CIS. The scheme was launched and executed by other directors before the appellant’s appointment. The AO’s conclusions were based on surmises and conjectures without documentary evidence.

3. Penalty Imposed:
The Tribunal reviewed the penalty of ?1 crore imposed on the appellant and found it excessive and against Section 15D of the SEBI Act. Section 15D prescribes a maximum penalty of ?10,000 per day for carrying on a CIS without registration, or ?5 lakhs for 50 days of directorship. The Tribunal concluded that the penalty of ?1 crore was unjustified. The AO had already penalized the company and other directors who were directly responsible for the CIS. Given the lack of evidence of the appellant’s involvement in sponsoring or executing the scheme, the Tribunal quashed the penalty.

Conclusion:
The Tribunal found no evidence that the appellant was responsible for the CIS or its execution. The penalty imposed was deemed excessive and unsupported by the provisions of the SEBI Act. Consequently, the Tribunal quashed the impugned order and allowed the appeal.