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2018 (1) TMI 1095 - HC - Companies LawOffences by companies - applicants are arraigned as accused in Securities and Exchange Board of India (SEBI) - Held that - The documents, record and averments in the complaint, justify the rejection of the application of discharge of applicants. In the present case, it is noted that the words in charge of are missing in the complaint, however, reading the existing averments in the complaint read with adjudication order, prima facie makes out a case against the applicants and they are not entitled for the discharge. It is also pertinent to note that in paragraph 13 of the complaint it is submitted that the accused are intentionally avoiding payment of penalty amount. The said allegation is attributed to all the accused including the applicants. The offence under Section 24(2) of SEBI Act stipulates that if any person fails to pay the penalty amount imposed by the adjudicating officer or fails to comply with any of the directions or orders, he shall be punishable with imprisonment. Thus, find that there is no substance in the submissions advanced by the applicants. The obligations of the directors in listed companies are particularly onerous especially when the Board of Directors makes itself accountable for the performance of the company to shareholders and also for the production of its accounts and financial statements especially when the company is a listed company. The directors of the company or the person in charge directly or indirectly use or employ in connection with the issue, purchase or sale of any securities listed in stock exchange, any manipulative or deceptive device or contrivance in contravention of SEBI Act or the Regulations made thereunder, have necessarily to be dealt with in accordance with the provisions of SEBI Act and the Regulations which is absolutely necessary for the investors protection and to avoid market abuse. In paragraph 33 of the said decision, it is observed that the company, though a legal entity, cannot act by itself, it can act only through its directors. The directors are expected to exercise their power on behalf of the company with utmost care, skill and diligence. For the reasons stated hereinabove, find that there is no merit in the contentions of the applicants and, therefore, the applications are required to be rejected.
Issues Involved:
1. Vicarious liability of directors under Section 27 of the SEBI Act. 2. Adequacy of the complaint's averments to invoke vicarious liability. 3. Applicability of the principle of lifting the corporate veil. 4. Validity of the adjudication order as a basis for prosecution under Section 24(2) of the SEBI Act. 5. Scope of Sections 227 and 228 of the Cr.P.C. in the context of framing charges. Detailed Analysis: 1. Vicarious Liability of Directors under Section 27 of the SEBI Act The primary contention was whether the applicants, as directors, could be held vicariously liable for the company's offenses under Section 27 of the SEBI Act. The complaint stated that the directors were "directly responsible for the conduct of its business" and were in charge when the offenses were committed, making them "deemed guilty" under Section 27. The court found these averments sufficient to establish a prima facie case for vicarious liability, despite the absence of the specific phrase "in charge of." 2. Adequacy of the Complaint's Averments The applicants argued that the complaint lacked specific averments required to invoke vicarious liability. They contended that the complaint did not explicitly state that the directors were "in charge of" and responsible for the company's business at the time of the offense. The court, however, held that the complaint's overall content, when read in conjunction with the adjudication order, sufficiently indicated the directors' involvement and responsibility, thus meeting the requirements of Section 27. 3. Applicability of the Principle of Lifting the Corporate Veil The applicants challenged the Special Court's application of the principle of lifting the corporate veil. The court noted that the adjudicating officer had applied this principle to hold the directors responsible, as the companies involved were closely held and managed by family members, indicating common control and management. The court upheld this approach, stating that it was permissible to pierce the corporate veil to hold individuals liable for the company's wrongful acts when the corporate entity was used to commit violations. 4. Validity of the Adjudication Order as a Basis for Prosecution The adjudication order, which imposed penalties on the company and its directors for violating SEBI regulations, was a crucial document in the prosecution. The court emphasized that the order, which had attained finality, formed the basis of the complaint under Section 24(2) of the SEBI Act. The court found that the adjudication order, along with the complaint, provided sufficient material to proceed with the prosecution, as it demonstrated the directors' involvement in the violations. 5. Scope of Sections 227 and 228 of the Cr.P.C. in Framing Charges The applicants sought discharge under Section 227 of the Cr.P.C., arguing that there was insufficient ground for proceeding against them. The court, however, held that at the stage of framing charges, it is only necessary to establish a prima facie case. The court found that the complaint and the adjudication order together provided enough material to presume that the applicants might have committed the offense, thus justifying the framing of charges under Section 228 of the Cr.P.C. Conclusion The court dismissed the revision applications, upholding the Special Court's decision to proceed with the prosecution. The court found that the complaint, supported by the adjudication order, sufficiently established a prima facie case for vicarious liability under Section 27 of the SEBI Act. The principle of lifting the corporate veil was appropriately applied to hold the directors accountable for the company's violations. The court also clarified that its observations were limited to the present applications and should not influence the trial court during the trial.
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