TMI Blog2019 (12) TMI 480X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edings were also initiated against the Company and its Directors. The Adjudicating Officer ( AO for convenience) of SEBI passed an order dated September 22, 2015 against the Company and its Directors imposing a penalty of ₹ 7269.49 crores to be paid jointly and severally by the Company and its Directors. The AO found that the said directors were at the helm of the affairs in the collection of the monies under CIS and were also directly involved and instrumental in the implementation of the scheme and collection of the monies. The appellant was not a party in these proceedings. 3. However, a separate show cause notice dated February 11, 2015 was issued to the appellant to show cause as to why penalty should not be imposed for violating the CIS Regulations, 1999 as he was a director for a short period of 50 days from August 10, 1998 to September 29, 1998. The AO after considering the response of the appellant issued an order dated February 02, 2016 imposing a penalty of ₹ 2,31,50,000/-upon the appellant. The appellant being aggrieved by the said order filed an appeal contending vehemently that he was never appointed as a director and thus could not be made liabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appointed as a director though for a brief period from August 10, 1998 to September 29, 1998. 8. The appellant has been penalized a sum of ₹ 1 crore for sponsoring the scheme and for being instrumental in carrying out that scheme without registration under Regulations 3 4 of the CIS Regulations, 1999. Even though a categorical finding has been given that the appellant was a director only for 50 days, the appellant has however been made responsible for sponsoring the scheme and for being instrumental in carrying out the scheme. In our opinion, these findings are perverse and against the material available on record. 9. Before proceeding further, it would be appropriate to refer to the provisions of Section 12 (1B) of the SEBI Act and Regulations 3 4 of the CIS Regulations, 1999 which are extracted hereunder: Section 12(1B) No person shall sponsor or cause to be sponsored or carry on or caused to be carried on any venture capital funds or collective investment schemes including mutual funds, unless he obtains a certificate of registration from the Board in accordance with the regulations: Provided that any person sponsoring or causing to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urety for another. The appellant has not sponsored not pledged any money in advance. There is no evidence to indicate that he had contributed to bear the expenses of the scheme in return for some gain. Section 12(1B) read with Regulations 3 4 further states that no person shall carry on or cause to be carried on any collective investment scheme. There is no specific finding by the AO that the appellant was involved in carrying on the CIS or was involved in the execution of the scheme or was involved in the collection of the money pursuant to the scheme. There is no evidence brought on record to show that the appellant attended any meeting of the Board of Directors nor there is any document to show that the appellant had any role at all in connection with the CIS or sponsoring a CIS or being responsible for the registration of the CIS. In fact, the evidence on the record is writ large, namely, that the scheme was launched/ sponsored and executed by other directors of the company prior to the appointment of the appellant as a director. The AO in its order dated 22.09.2015 while penalizing other directors to a sum of ₹ 7269 crores has given a categorical finding that the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer can also be penalized if his role can be attributed to be an officer in default. If any officer has played some role in bringing about the default or he might have performed the duties assigned to him then he could be penalized as an officer in default. Section 5(g) of the Companies Act thus makes it clear that in the absence of any managing director or any specific order of a board, then by a deeming fiction, all the directors of the company would be officers in default. Thus, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alty of ₹ 1 crore has been imposed which is wholly excessive and against the provision of Section 15D of the SEBI Act. Section 15D which was applicable at the point of time when the appellant was a director is extracted hereunder: 15D.If any person, who is- (a) required under this Act or any rules or regulations made thereunder to obtain a certificate of registration from the Board for sponsoring or carrying on any collective investment scheme, including mutual funds, sponsors or carries on any collective investment scheme, including mutual funds, without obtaining such certificate of registration, he shall be liable to a penalty not exceeding ten thousand rupees for each day during which he carries on any such collective investment scheme including mutual funds, or then lakh rupees whichever is higher. A perusal of the aforesaid provision indicates that a maximum penalty of ₹ 10,000/- for each day could be imposed. The appellant was a director only for 50 days and if a maximum penalty of ₹ 10,000/- per day is taken into consideration then a maximum penalty of ₹ 5 lakhs could be imposed. By no stretch of imagination a penalty of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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