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2022 (6) TMI 522 - HC - SEBIMaintainability of writ petition - alternative and efficacious mechanism - Inordinate delay in issue of Show cause notice (around 16 years) - Issuance of Global Depository Receipts ('GDRs') by the 4th respondent - As argued petitioners were non-executive directors of the said company between 1998 and 2005 and that in the said capacity of non-executive director, the petitioners were not involved in the day-to-day management and affairs of the said company In the year 2009, the said company amalgamated with the 4th respondent and is no longer in existence. It is the further case of the petitioners that over the past 14 years, they are in no way connected with the company or had any dealings with the company - HELD THAT - There is no controversy about the fact that the petitioners are non-executive directors. Non-executive directors cannot be held vicariously liable for any act committed by the company unless they have any interest in the affairs of the company or they have involved themselves in the day to-day affairs of the company. However, it is the stand of the respondents that the petitioners were the Chairman/Member of the audit team, which is one of the very crucial teams in the whole of the organisational setup and without whose knowledge and concurrence financial transactions of the nature as pointed out in the show cause notice would not have taken place. However, the said fact is disputed by the learned counsel for the petitioners. Such being the case, this being a disputed question of fact, this Court cannot adjudicate the same in a petition under Article 226 of the Constitution. Therefore, this Court refrains itself from deciding the issue in exercise of its inherent jurisdiction, as this Court is precluded from deciding such disputed questions pertaining to the status of the petitioners as non-executive directors. In the case on hand, the GDRs pertain to the period 2002, whereas, action has been taken on the petitioners only in the year 2018, after a delay of 16 years. However, it is the case of respondents 1 and 2 that while the respondents were investigating certain other transactions pertaining to other companies, it came to light from the submissions made by Banco Efisa, with whom the company had the Credit Charge Agreement, that similar transaction of this nature has been done by the company in the year 2002, which fact was not within the knowledge of respondents 1 and 2 at any earlier point of time. Though it is pointed out that permission of SEBI is not required for floating GDRs, however, for finalising the process, certain procedural aspects codified by the Reserve Bank of India have to be followed of which one is information to be shared with SEBI. However, the petitioners dispute the said fact. The fact remains that respondents 1 and 2 have come out with explanation as to the reason for the delay in issuing the show cause notice. True it is that the delay is enormous, but coupled with the reason assigned for the delay in issuing the notice, this Court is of the considered view that the stand of respondents 1 and 2 with regard to the reason for the delay cannot be brushed aside and has to be taken into consideration holistically. In the case on hand, admittedly, as against the show cause notice issued by respondents 1 and 2, an alternative and efficacious remedy is available to the petitioners before SAT. The said fact is also not disputed by the petitioners. The only claim of the petitioners is that the show cause notice has been issued after an inordinate delay of about 16 years and that the petitioners being non-executive directors, vicarious liability cannot be fastened on them and, therefore, on those grounds, this Court, exercising its inherent jurisdiction could very well quash the show cause notice. As already pointed out above, Courts shall normally refrain from quashing the show cause notice at the initial stage, unless the said show cause notice has been issued without authority or that the same is patently illegal. In the case on hand, the show cause notice has been issued by the authority, who is competent to issue the same and that there is no illegality in the said show cause notice and, therefore, the ratio laid down by the Hon'ble Supreme Court in Mohd. Ghulam Ghouse case 2004 (1) TMI 378 - SUPREME COURT stands squarely attracted to the case of the petitioner and, hence, it is incumbent on the petitioners to submit their explanation to the show cause notice and it would not be right on the part of this Court to assume the robes of the adjudicating authority at the initial stage of show cause notice. SAT is fully competent to decide the issue, including appreciation of disputed facts and the petitioners can place both oral and documentary evidence before SAT, which can go in-depth into the issue to render a finding. This Court, in any way, going into the issues, as raised above, would be nothing but usurping the powers of SAT, which has been vested in it on the basis of a statute. Therefore, the submission of respondents 1 and 2 that the petitioners should ventilate their grievances first before SAT deserves acceptance. One aspect, which lingers in the mind of this Court is the fact concerning inordinate delay in issuing the show cause notice. Though respondents 1 and 2 have placed certain reasons before this Court, which are the cause for the delay, however, this Court cannot brush aside the fact that the delay is so enormous that the reason assigned by respondents 1 and 2 could be taken merely at face value, without putting it through proper appreciation in the manner known to law. Therefore, this Court, in the interest of justice, feels that the interest of both the parties to the lis requires to be safeguarded. This Court while disposes of the writ petitions, is inclined to issue the following directions - i) The show cause notice issued to the petitioners by respondents 1 and 2 is kept in abeyance for a period of twelve weeks from today. In the meantime, the petitioners are directed to file appropriate petitions/applications before SAT with regard to the issues raised before this Court. ii) On such application/petition being filed by the petitioners, the period of limitation, if any, shall be computed excluding the period when the matter was sub judice before this Court. iii) Further, on such application/petition being filed by the petitioners, SAT shall take up the matters and consider the same on merits and accordance with law and pass orders as expeditiously as possible. iv) Till the time granted by this Court for the petitioners to file petition/application before SAT, no coercive action shall be taken by the respondents 1 and 2 against the petitioners. v) The petitioners are permitted to canvass all the points that have been raised before this Court in the petition/application that may be filed before SAT.
Issues Involved:
1. Maintainability of the writ petition challenging the show cause notice. 2. Vicarious liability of non-executive directors. 3. Inordinate delay in issuing the show cause notice. Issue-wise Detailed Analysis: 1. Maintainability of the Writ Petition Challenging the Show Cause Notice: The court emphasized that generally, courts do not interfere with show cause notices unless they are issued without authority or are patently illegal. In this case, the petitioners did not argue that the show cause notice was issued without authority or was patently illegal. The court referenced the Supreme Court decision in *Mohd. Ghulam Ghouse*, which states that writ petitions should not be entertained merely for questioning the legality of show cause notices unless there is a clear lack of jurisdiction. The court concluded that the show cause notice was issued within the legal framework of the SEBI Act and thus did not warrant interference. 2. Vicarious Liability of Non-Executive Directors: The petitioners argued that as non-executive directors, they should not be held vicariously liable for the company's actions. The court referred to the Supreme Court's decision in *Srinivasa Raju*, which established that non-executive directors, who are not involved in the day-to-day affairs of the company, cannot be held vicariously liable. However, the respondents contended that the petitioners were members of the audit committee, implicating them in the financial transactions. The court recognized this as a disputed question of fact, unsuitable for resolution under Article 226 of the Constitution, and refrained from adjudicating it. 3. Inordinate Delay in Issuing the Show Cause Notice: The petitioners highlighted the 16-year delay in issuing the show cause notice, arguing it rendered the notice unsustainable. The court acknowledged the principle that powers must be exercised within a reasonable period, even if no specific limitation period is prescribed, as established in *Narsing Rao*. However, the respondents explained that the delay was due to the discovery of the GDR issue during investigations of other companies. The court found the respondents' explanation for the delay reasonable, noting that the delay was substantial but justified by the circumstances. Conclusion and Directions: The court concluded that the issues raised by the petitioners should be adjudicated by the Securities Appellate Tribunal (SAT) rather than the High Court. The court directed that: 1. The show cause notice is kept in abeyance for twelve weeks to allow the petitioners to file appropriate petitions/applications before SAT. 2. The period of limitation for filing before SAT will exclude the time the matter was sub judice before the High Court. 3. SAT should consider the petitions on merits and pass orders expeditiously. 4. No coercive action should be taken against the petitioners during the twelve-week period. 5. The petitioners are allowed to raise all points before SAT that were raised before the High Court. The writ petitions were disposed of with these directions, and the connected miscellaneous petitions were closed without any order as to costs.
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