IN THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No.�� 133/2003
In the matter of:
Coram: ����������� Justice
Kumar Rajaratnam, Presiding Officer ����������� Dr.
B. Samal, Member ����������� N.L.
Lakhanpal, Member Per:� Justice
Kumar Rajaratnam, Presiding Officer
1.
The appeal is taken up with
consent of parties.� The appellants were
directors of a company known as Shalibhadra Securities Ltd.� The said company was the broker member of
NSE.�
2.
The broking company had
three directors namely Shri Hemendra B. Shah & his two children Rahul H.
Shah and Ms. Nimisha H. Shah.� It is
common ground that Hemendra Shah was in charge of the day today management of
the brokerage company.�� The two children
are the appellants before this Tribunal.�
The appellants, as stated earlier, are children and are students.� The brokerage company was in the total
control of the father.�� Both the
children who were the directors of the company have been debarred from the
securities market for a period of one year.�
The father has been debarred from the securities market for three years.� The father has not preferred the appeal and
it is only the children who are the appellants before us.
3.
The facts of the case are
briefly as follows.�� SEBI observed that
there was a spurt in the volume of the scrip of M/s. Zodiac Clothing Company
with NSE.� Investigation was conducted
into trades from July 5th to August 22nd of 2000.� It found one Vivenasri Financial Services
Ltd. was a major net seller and M/s. Harsh Pranav Securities Pvt. Ltd. and M/s.
Newfin Financial Services Pvt. Ltd. were the major buyers during the said
period.� It was the allegation that
during the said period all three above mentioned persons indulged in deals and
cross deals amongst themselves through Shalibhadra� Securities Ltd., the said broker.�� During the period the scrip moved from Rs.
68.60 to a high of Rs. 95/-�
per share.� The pattern can
best be described in a graph which reads as follows: -
4.
From the impugned order it
is clear that the brokerage firm had dealt with these transactions at the
relevant time.��� The father as stated
earlier in the impugned order was debarred from buying, selling or dealing in
securities in any manner for�
a period� of� three�
years.� The two children who were
students were given a lesser period to the effect that they were debarred from
dealing in securities in any manner for a period of one year.� The father did not file an appeal and it is
only the children who are the appellants before us.� In fact the stand of the father was that he
took full responsibility and admitted that he was a victim of all these
transactions and the father put the blame on the Chartered Accountant who had
manipulated these transactions.� It was
further submitted by the father before SEBI that these companies had cheated
him and absconded without making payment. Ultimately the father became bankrupt
and even defaulted at the NSE and the father�s registration was also
suspended.� The father in his defense
stated as follows and requested that no harsh action should be taken against
him. �
Hemendra V. Shah informed
the investigation officer at the time of his personal hearing that he was the
victim of all these transactions.� He had
no option because he was getting his pay-in amount only through these kind of structured deals. �
These people have cheated
the broker and ran away without making payment.�
This loss was beyond their capacity to bear and forced the broker to
default at NSE.� The broker and its
directors have suffered heavy financial loss because of these people. �
It was not the intention of
the broker/directors to fluctuate the price in the market.� Also there was no intention to create false
and misleading appearance of trading in the scrip by them.� Rather they became the victim of the
transactions.� Out of these transactions,
they have not taken any kind of benefit.�
On the contrary, the clients mentioned in the show cause notice did not
make the payment to them and put them in heavy loss.
5.
The only question that
arises for consideration was whether the two college going students, who
admittedly were directors but not in charge of the company could be visited
with any penalty.
6.
The finding of SEBI that
even though the appellants were not involved in the day today management of the
broker entity they are still liable as directors.� SEBI at paragraph 8.5 held as follows. �Even though Shri Rahul H. Shah and Ms. Nimisha H. Shah were not involved in the day today management of the broker entity, they have to own the responsibility for the misdeeds committed by an entity to which they were the directors. However, the quantum of punishment may be different from the person who was in charge of and responsible for the day today management of the company.�
7.
We do not think that
college going students who admittedly were not in charge of the day today
affairs of the company could be held to be liable merely because they were
directors although did not take part in the day to day affairs of the
company.�
8.
Mr. Kumar Desai, learned senior counsel for the respondent submitted
that even non-executive directors shall be made liable.� He submitted that Non-executive directors are
commonly appointed so as to watch and keep a check on the whole time directors,
to provide a view of an impartial outsider to bring the benefit of their
experience to the company, to act as a figure head (particularly in the case of
a non-executive chairman), to add credibility to the company with the public
and shareholders.
9.
He further submitted that
in the facts of the present case there are only 3 directors of the
company.� The father Himanshu Shah is the
Chairman and Managing Director and Rahul Shah and Nimisha Shah are his son and
daughter respectively.� The aforesaid 3
persons are also the major shareholders of the Company.� It was submitted that under the Securities
Contract (Regulation) Rules, 1957 Rule 8(4)(A) and sub-clause (v) inter alia
provides that a company shall be eligible to be elected to be the member of the
stock exchange if not less than 2 director of the company are persons who
possess not less than 2 years experience in dealing in securities �� 10.
Learned counsel for the
respondent further submits that the appellants being promoter directors as also
the majority shareholders of the company are not and cannot be treated as
non-executive non whole time directors.�
They are the owners of the company and as such cannot disown
responsibility for the acts of the company or acts of the managing director
acting for and behalf of the company.� It
was submitted that in any event and without prejudice to the aforesaid, the
rights, duties, obligations and liabilities of the appellants who are the
promoter director of the company must be shown to have been exercised by them
on a conscientious basis before they can claim different treatment for the
whole time director.� In the present case
on the basis of the averments made it is clear that no such case has been made
out and in fact there is a clear abdication of their duties and obligations and
therefore the appellants cannot escape liability for acts of the company or
acts of the managing director acting for an on behalf of the company. 11.
We are not persuaded to
accept the submissions of Mr. Desai, the learned counsel for the
respondent.� If such a proposition is to
be accepted, then the concept of strict liability or vicarious liability will
have to be introduced while exercising the powers under the sweep of Section 11
or 11B of the SEBI Act.� 12.
In this context, we have
perused Section 27 of the Securities & Exchange Board of India Act,
1992.��� Section 27 reads as follows. �27(1)�� Where an offence under this Act has been committed by a company, every person who at the time the offence was committed was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly: Provided that nothing contained in the
sub-section shall render 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. (2)� Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other official shall also be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.� 13.
Section 27 of the Act
states that a person is deemed to be guilty of an offence on condition that he
was in charge and responsible to the company.�
The proviso to Section 27 states that �Provided that nothing contained in the sub-section shall render 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. 14.
It was easily said by Mr.
Desai, the learned counsel for the respondent that Section 27 has no
application for an order under Section 11B read with Regulation 11 of the SEBI
(Prohibition of Fraudulent and Unfair Trade Practices relating to Securities
Market) Regulations, 1995.� 15.
It is not possible for us
to lay down any hard and fast rule as to when a director will be vicariously
responsible for the acts of the directors in charge of the day today affairs of
the company.� It cannot be said as a
sweeping proposition of law that non-executive director who had no role to play
in the day today affairs of the company could be made liable for any penal
consequence under Section 11B.� The
distinction which was sought to be made by SEBI between Section 27 and Section
11B is illusory since the consequence under an order under Section 11B are as
far reaching and pungent as the consequence of prosecution under Section 27.�� It may well be said that the standard of
proof in a criminal case is a higher standard to the extent that the person
cannot be convicted unless he is proved to be guilty beyond reasonable doubt;
while in the case of a civil dispute the standard is that of a preponderance of
probability. 16.
But to hold that we should
not compare Section 27 with Section 11B for the ingredients that all the
misconduct cannot be accepted.� The
finding of the SEBI itself, as extracted earlier, clearly establishes that the
appellants were students and had nothing to do with the day today affairs of
the company.� In fact the father has
taken full responsibility and although he is a victim of a deep-rooted
conspiracy he has chosen not to appeal and in the process has lost his license
to trade as a member of the NSE.� When
the entire responsibility has been accepted by the father and that is also
accepted by SEBI and when it is admitted by SEBI that the appellants who are
children had nothing to do with the day today affairs of the company, any
punishment would cast a stigma on their career as students.�� 17.
A number of judgments were
cited by the learned counsel for the appellant under Section 138 of the
Negotiable Instruments Act.� It may not
be necessary to refer to all of them except some of them which we shall refer
to later.� 18.
However, the principle set
out by the Supreme Court and the spirit of Section 27 of the Act would indicate
that if a finding is given that the appellants have nothing to do with the day
today affairs of the company, they cannot be held guilty of any violation as
there is no such thing as vicarious liability under Section 11B of SEBI Act
read with Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade
Practices relating to Securities Market) Regulations, 1995. 19.
Section 27 of the SEBI Act,
1992 deals with offences by companies.�
Section 27 of SEBI Act is pari material to Section 141 of the Negotiable
Instruments Act and similar provisions are also contained under the Drugs and
Cosmetics Act, Income Tax Act, Essential Commodities Act, Food Adulteration
Act, Environment Protection Act etc.��
Dealing with the directors of the company who did not have anything to
do with the day to day affairs of the company, the Supreme Court in a number of
pronouncements held as follows. v
Municipal Corporation of �vicarious liability being an incident of an offence under the Act.� So far as the Directors are concerned, there is not even a whisper nor a shred of evidence to show, apart from the presumption drawn by the complainant, that there is any act committed by the Directors from which a reasonable inference can be drawn that they could also be vicariously liable.� In these circumstances, therefore, we find ourselves in complete agreement with the argument of the High Court that no case against the Directors (accused 4 to 7) has been made out ex-facie on the allegations made in the compliant and the proceedings against them were rightly quashed.� v
Sham Sunder & Ors. vs.
State of �It is therefore, necessary to add an emphatic note of caution in this regard.� More often it is common that some of the partners of a firm may not even be knowing of what is going on day to day in the firm.� There may be partners, better known as sleeping partners who are not required to take part in the business of the firm.� There may be ladies and minors who were admitted for the benefit of partnership.� They may not know anything about the business of the firm.� It would be a travesty of justice to prosecute all partners and ask them to prove under the proviso to sub-section (1) that the offence was committed without their knowledge.� It is significant to note that the obligation for the accused to prove under the proviso that the offence took place without his knowledge or that 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.� v
State of �It is thus seen that the vicarious liability of a person for being prosecuted for an offence committed under the Act by a company arises if at the material time he was in charge of and was also responsible to the company for the conduct of its business.� Simply because a person is a director of the company it does not necessarily mean that he fulfills both the above requirements so as to make him liable.� Conversely, without being a director, a person can be in charge of and responsible to the company for the conduct of its business.�� From the complaint in question we, however, find that except a bald statement that the respondents were directors of the manufacturers, there is no other allegation to indicate, even prima facie, that they were in charge of the company and also responsible to the company for the conduct of its business.� v
Appeal (Criminal) 850 of
2004 � Monaben Ketanbhai Shah vs. State of �Section 141 does not make all partners liable for the offence.� The criminal liability has been fastened on those who, at the time of the commission of the offence, was in charge of and was responsible to the firm for the conduct of the business of the firm.� These may be sleeping partners who are not required to take any part in the business of the firm; they may be ladies and others who may not know anything about the business of the firm.� The primary responsibility is on the complainant to make necessary averments in the complaint so as to make the accused vicariously liable.� For fastening the criminal liability, there is no presumption that every partner knows about the transaction.� The obligation of the appellants to prove that at the time of offence was committed they were not in charge of and were not responsible to the firm for the conduct of the business of the firm, would arise only when first the Complainant makes necessary averments in the complaints and establishes that fact.� The present case of total absence of requisite averments in the complaint.� v
Nucor Wires Ltd. vs. H.M.T.
International Ltd. � Company cases Vol. 91 �
850 � Kar. �From the above discussion it is abundantly clear that to launch a prosecution against the directors of the company, there must be specific allegation in the complaint as to the part played by them in the transactions.� There must be clear and unambiguous allegations as to how all the partners are in charge of and responsible for the conduct of the business of the company.� There should be clear description and also allegations that the offence was committed with their knowledge and that they had not exercised due diligence to prevent the commission of such offence.� The court should also make attempt to find out whether on the available allegations the offence was committed with the consent or connivance or is attributable to any negligence on the part of the directors or partners or members of any association or a group of persons.� Coming to petitioners No. 4 to 8 there
is absolutely no allegation made against them and they are arraigned as accused
persons only because they are the partners of the first petitioner.� v
Chaitan M. Maniar vs. State
of Maharashtra 2004 ALL MR (Cri) 2027 �It can be by no stretch of imagination, be said that the petitioner was in charge of the Company, or that he was managing the affairs of the said Company.� It is also significant to note that though in the complaint a bald statement is made that the offence contemplated therein is committed with the consent or connivance of, and is committed on account of neglect on the part of the accused 2 to 6 and they are also guilty of the offence and are liable to be proceeded in accordance with law, no particulars of the alleged connivance or neglect is given in the said compliant.� If on the basis of such stereotype statements without there being any other indication in the compliant of actual participation of the director in the affairs of the company, he is roped in, that would be disastrous.� For the acts of some unscrupulous persons, the directors who are not even remotely concerned with the issuance of cheque, who are not concerned with the day to day functioning of the company cannot be held responsible unless the active participation of the director is substantiated in the complaint itself by concrete material or instances or particulars.� Not only that there must be specific averments but there must be description and particulars of the role played by such non-executive directors.� The court issuing process must take care and issue process after examining this aspect because issuance of process is not a light matter.� For the reasons which I have noted above, I am of the considered opinion that issuance of process on the instant compliant indicates non-application of mind.� 20.
The learned counsel for the
appellant has also placed reliance on the judgment of the Supreme Court and
High Court by making reference to the following: v
Ghirdharilal Gupta vs. D.N.
Mehta (AIR 1971 SC 2162) it was held that the words
�in charge of� must mean �in overall control of the day-to-day business of the
company or the firm. v
State of v
In Sunil Kumar Chapparia
vs. Dakka Eshwarraraih (2002) 108 Com Cases 687 (AP) it was held that the consent or connivance of the Director
must be clearly pleaded and cannot be inferred. 21.
There is no doubt in our
minds that there must be some element of lack of due skill and diligence on the
part of the appellants for the respondents to hold that the appellants are in
violation of the Regulation.� It cannot
be over emphasized that the stand of SEBI was that the appellants were college
students and had nothing to do with the day-to-day affairs of the company.� The explanation given by the father that he
was directly responsible for the violations unwittingly was accepted by SEBI
and he was barred from the securities market for a period of three years.� When SEBI itself in its order clearly states
that the appellants were not in charge of the day-to-day affairs of the
company, it cannot be by any stretch of imagination said that the appellants
are guilty and have violated the Regulations.�
However, we do not think that the judgments on the criminal side can be
of much assistance to the appellant since they relate to a higher standard of
proof.� 22.
Therefore, having held that
the appellants have not had anything to do with the day-to-day affairs of the
company, as admitted by SEBI in its impugned order, we do not think that the
appellants can be fastened with any liability.�
23.
Accordingly,� we set aside the
impugned order in so far as the appellants are concerned, and allow the
appeal.� No order as to costs.
Place: Mumbai Date:� 15.9.2004 //sr04914 |
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