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TMI Blog2019 (8) TMI 1441X X X X Extracts X X X X X X X X Extracts X X X X ..... for refund of monies under Section 73(2) of the Companies Act. WTM has given a categorical finding that Shri Shib Narayan Das was responsible for the affairs of the Company. It was not open for the WTM to pass further orders on the other Directors, namely, the appellant especially when there is no finding nor there is a shred of any evidence to indicate that the appellant was also responsible for the affairs of the Company. Thus, the direction of the WTM against the appellant that she is also liable to refund the monies collected by the Company during the respective period of Directorship of the appellant along with interest cannot be sustained. The impugned order to that extent cannot be sustained and is quashed. - Appeal No. 163 of 2018 - - - Dated:- 9-8-2019 - Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member Mr. Vinay Chauhan, Advocate with Mr. K.C. Jacob, Advocate i/b Corporate Law Chambers India for the Appellant. Mr. Mustafa Doctor, Senior Advocate with Mr. Anubhav Ghosh, Ms. Rashi Dalmia and Mr. Abhishek Mishra, Advocates i/b The Law Point for the Respondent. JUDGMENT Tarun Agarwala, 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to why action should not be taken under Section 11 and 11B of the SEBI Act read with Section 73(2) of the Companies Act and Section 27(2) of the SEBI Act and why the appellant and two others should not be jointly and severally be directed to refund the money collected though the offer of NCDs along with interest and why they should be restrained from accessing the securities market etc. 4. In response to the interim order-cum-show cause notice the appellant filed a reply contending that she was appointed as a receptionist in the year 2009 on a salary of ₹ 3000/- which was increased to ₹ 4000/- in the year 2010 and, on March 2011, she was made a Director of the Company and her salary was increased to ₹ 5000/- per month. The appellant contended that she tendered her resignation as a Director on December 1, 2011 and Form 32 was filed before the Registrar of Companies. It was contended that the appellant had nothing to do with the issuance of NCDs and had never attended any meeting of the Board of Directors nor was signatory to any Resolution in relation to the issuance of NCDs. It was also stated that she was never involved in any activity of the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies Act there was no material brought on record to show that any of the officers set out in Clauses (a) to (c) of Section 5 of the Companies Act or any specified Director of the SPIL were entrusted to discharge the obligation contained in Section 73 of the Companies Act and consequently all the past and present Directors of the SPIL, as officer in default under Section 5(g) of the Companies act were liable to make refund jointly and severally along with interest. 9. In our view the order of the WTM is patently erroneous and against the provisions of Section 73(2) read with Section 5(g) of the Companies Act. The WTM has proceeded with the assumption that in the absence of any officer being nominated as an officer in default then all the Directors were liable under Section 5(g) of the Companies Act. The approach adopted by the WTM ignoring the evidence that has come on record makes the impugned order illegal and unsustainable. 10. Before proceeding further it would be essential to extract a few provisions of the Companies Act. For facility, Section 5 and Section 73 of the Companies Act is extracted hereunder:- Section 5 Meaning of officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s : Provided that where an appeal against the decision of any recognized stock exchange refusing permission for the shares or debentures to be dealt in on that stock 22 exchange has been preferred under section 22 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), such allotment shall not be void until the dismissal of the appeal. (2) Where the permission has not been applied under sub-section (1) or, such permission having been applied for, has not been granted as aforesaid, the company shall forthwith repay without interest all moneys received from applicants in pursuance of the prospectus, and, if any such money is not repaid within eight days after the company becomes liable to repay it, the company and every director of the company who is an officer-in-default shall, on and from the expiry of the eighth day, be jointly and severally liable to repay that money with interest at such rate, not less than four per cent and not more than fifteen per cent, as may be prescribed, having regard to the length of the period of delay in making the repayment of such money. 11. From a perusal of Section 73(2) of the Companies Act it is apparently ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In Agritech Hatcheries Food Ltd. vs Valuable Steels India Pvt. Ltd., (1999) 96 Com Cases 534 (Mad), it has been held that where there is a managing or whole time director or a manager, it would be an abuse of the process of the court if proceedings are launched against the ordinary directors without examining their role in default. Similar view was also reiterated in Smt. G. Vijaylakshmi Ors. vs. SEBI (2000) 100 Comp Cases 726 (AP)]. The reason is not far to see. It is not necessary that every director is required to be penalized merely because he is a director on the ground that he is 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 did not perform his duties assigned to him under the agreement of his appointment, the presumption of guilt and thereafter penalty cannot be fastened upon him. 16. The Supreme Court in Sunil Bharti Mittal vs. Central Bureau of Investigation Ors. in Criminal Appeal No. 35 of 2015 (arising out of Special Leave Petition (Crl.) No. 3161 of 2013) held that a Director can only be prosecuted if there was sufficient evidence of his active role or where the st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as in charge and responsible to the company. The proviso to Section 27 states that: Provided that nothing contained in this subsection shall render any such person liable to any punishment provided in this Act, if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence. 19. In our view it is not possible to lay down any hard and fast rule as to when a Director would be vicariously responsible for the acts of the Directors in charge of day today affairs of the Company. In a given case a Director who had no role to play in the day today affairs of the Company could still be made liable for any penal consequences under Section 11B but when there is an order debarring a Director under Section 11B, in that case the principles evolved under Section 27 of the SEBI Act or the ingredients mentioned therein are required to be considered, since the consequences under an order under Section 11B is far reaching and similar to the consequences of an order under Section 27 of the SEBI Act. The spirit of Section 27 of the SEBI Act would indicate that if a finding is given that the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he exercised all due diligence to prevent such offence arises only when the prosecution establishes that the requisite condition mentioned in sub-section (1) is established. The requisite condition is that the partner was responsible for carrying on the business and was during the relevant time in charge of the business. In the absence of any such proof, no partner could be convicted. We therefore, reject the contention urged by counsel for the State. 21. In this regard the Ministry of Corporate Affairs while initiating prosecution against the Directors under the Companies Act came across a lot of hurdles as to who was an officer in default and whether any Director could be prosecuted without there being evidence with regard to being responsible for the affairs of the Company. In this regard, the Ministry of Corporate Affairs issued a Master Circular dated 29th July, 2011 on prosecution of Directors and clarified that the prosecution should be filed primarily against the Managing Director and against such Directors who were in charge and responsible for the affairs of the Company. It was clarified that extra care should be taken in examining such cases and no such Direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 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. 26. In the light of the aforesaid the WTM has held that the Company has violated provisions of Section 73(2) of the Companies Act and has therefore in the same breadth has booked all the Directors to be responsible for the day today affairs of the Company. This approach as stated earlier was wholly incorrect. Section 73(2) of the Companies Act makes it apparently clear that if in the first instance it was the Company which was liable to repay the monies received from the investors and if the Company failed to repay the amount then the amount would be recovered jointly and severally from every Director of the Company as an officer in default. Therefore, where the Company is the offender vicarious liability of the Directors cannot be imputed automatically. 27. Thus, the WTM was require ..... X X X X Extracts X X X X X X X X Extracts X X X X
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