JUDGMENT
Kumar Rajaratnam, J. (Presiding Officer)
1. The appeal is taken up for disposal with consent of both sides.
2. The appellant was a non-executive director of Enbee Plantations Ltd. (hereinafter referred to as the “company”) that had cheated many innocent investors. A regulation known as Securities & Exchange Board of India (Collective Investment Schemes) Regulation, 1999 (hereinafter referred to as “the Regulation”) was introduced in the year 1999 by Securities & Exchange Board of India.
3. The Regulation came to be notified on 5.10.99. According to the Regulation 5 any person who is operating a scheme prior to commencement of the Regulation must make an application to the Securities & Exchange Board of India and get a certificate of registration in respect of new schemes. The laudable object of the Regulation was to control and identify fly by night operators who collect deposits from the public offering enormous rate of interest and ultimately do not pay back the depositors. The Regulation was meant to bring discipline and control to collective investment schemes. As stated earlier the Regulation was notified on 5th October 1999. It appears that the company had first desired to cooperate with the Securities & Exchange Board of India and sought for provisional registration under the Regulation. However, subsequently the company had not applied for grant of registration with Securities & Exchange Board of India in terms of the Regulation.
4. The company, it appears, had also opted for complying with the scheme of repayment as formulated with the approval of the investors. It also appears that winding up petitions were also pending in the High Court of Madhya Pradesh.
5. The respondent herein ultimately took control of the situation and issued notice to the company and ultimately exercising powers under Section 11B read with Section 4(3) of the Securities & Exchange Board of India Act, 1992 and Regulation 65 of Securities & Exchange Board of India (Collective Investment Schemes) Regulation 1999 passed an order dated 14.2.2003 directing the company to refund the money collected under the Collective Investment Schemes within a period of one month failing which SEBI was at liberty to take action. The operative portion of the order of SEBI of 14.2.2003 reads as follows.
“Therefore in exercise of the powers conferred upon me under Section 11B read with Section 4(3) of the SEBI Act, 1992 and Regulation 65 of SEBI (Collective Investment Schemes) Regulations, 1999. I, hereby direct the company to refund the money collected under its Collective Investment Schemes with returns which is due to the investors as per the terms of the offer within a period of one month from the date of this Order failing which the actions as permitted under SEBI Act, 1992 and SEBI (Collective Investment Schemes) Regulations, 1999 would be adopted.” (Italics by the Court)
This order dated 14.2.2003 is not impugned in this appeal since it is an order directing the company to repay the amount due to the investors within a period of one month.
6. Although, this order was directed against the company, the order clearly implied that action would be taken against the company and the officers of the company who are in charge of the company if the money which is due to the investors is not repaid within one month. Nobody can have any grievance with this order and the order is not subject to any challenge.
7. Another order was passed dated 29.3.2003. Although this order is also not impugned in this appeal by the appellant, it is necessary to make a reference to this order. This order was passed by the respondent consequent to the company failing to refund the money collected under the Collective Investment Schemes within a time specified in the earlier order. The respondent exercising powers under certain provisions of the Act and Regulation debarred the company, its promoters, directors and persons in-charge of the business of the scheme from operating in the capital market and from accessing the capital market for a period of 5 years. Since the respondent passed a blanket order against those persons who are in-charge of the business of the scheme without mentioning their names, the respondent also gave an opportunity for those persons who are not responsible for the conduct of the business to delete their name from the order dated 29.3.2003. It would be necessary at this stage to extract the operative portion of the order dated 29.3.2003.
“Therefore, in exercise of the powers conferred upon me under Section 11B read with Section 4(3) of the SEBI Act, 1992 and Regulation 65 of SEBI (Collective Investment Schemes) Regulations, 1999, I, hereby debar the company/its promoters/its directors/its managers/persons in charge of business of its schemes (whose names and addresses are mentioned in the Annexure herewith) from operating in the capital market and from accessing the capital market for a period of 5 years from the date of this order.
In case, however, any aggrieved person, whose name is mentioned in the enclosed Annexure, was not aware of the previous order and the warning issued vide said order and was not responsible for the conduct of the business of the company, he may apply in writing, within 15 days from the date of order, with all the supporting documents, to SEBI. This is without prejudice to SEBI’s right to take any other action as it may deem fit.” (Italics by Court)
The appellant coming to know of this order sought to delete his name from the order dated 29.3.2003 since he was not connected with the company.
8. The appellant wrote to the respondent. He stated that he was never looking after the day today business of the company and was never responsible for formulating any scheme of the company. It was further stated in his letter dated 11.8.2003 that even on 20.11.1998 the appellant had resigned from the company and the company filed Form 32 with Registrar of Companies on 24.2.1998 bringing on record his resignation. The appellant also enclosed a copy of the said Form 32 for the perusal of the respondent. The appellant further stated that in the Annual Report the company had stated that the appellant had resigned in February 1998. The appellant further stated that although the appellant had resigned in February 1998 and was not connected with the company, the respondent passed the order on 29.5.2003 only on the basis that the appellant was a director of the company.
9. It was therefore prayed by the appellant to delete his name from the order passed by the respondent dated 29.3.2003.
10. The respondent without adverting to any of the points raised in the letter passed the impugned order which reads as follows.
“This has reference to your letter dated 11/8/03 requesting SEBI to delete your name from the order under Section 11B of SEBI Act, 1992 passed on May 29, 2003 in the matter of M/s. Enbee Plantations Ltd.
As per the information furnished by M/s Enbee Plantations Ltd. earlier, it has mobilized money from the investors during your tenure as a director in the said company. In view of the same, your request cannot be acceded to.”
It is this order dated 26.8.2003 which is impugned in this appeal.
11. The Learned Senior counsel for the appellant Mr. I.M. Chagla vehemently submitted that the appellant ceased to be a director of the company even in February 1998. The appellant was only a non-executive director at that time and was never in charge of the company even while he was a director.
12. It was further submitted that even in the order dated 29.3.2003 it was clearly stated that those persons who are not responsible for the conduct of the business may apply in writing to delete their name from the embargo imposed by the respondent in having access to capital market for a period of 5 years. It was submitted that the last paragraph of the impugned order dated 29.3.2003 clearly gives a right to any person to have his name deleted, if he was not responsible for the conduct of the business of the company. It was further submitted that the appellant could not be brought under the scheme since the scheme itself came into force on 15.10.1999, and by that time, the appellant had resigned.
13. The Learned Counsel for the respondent Mr. Subhash Jha vehemently submitted that the allegation against the appellant was not that he was a director at the time when the scheme came into being but the appellant was a director when the public were invited to deposit money in the company. It was further submitted that at the relevant time when the scheme under the Regulations came into force the appellant was not a director. The Learned Counsel however was not able to justify the impugned order dated 26.8.2003 since the impugned order was not a speaking order and submitted that the matter may be remanded to the respondent for fresh disposal in accordance with law by setting aside the impugned order. The Learned Counsel for the respondent relied on a judgment of the Supreme Court in Raj Laxmi Mills vs. Shakti Bhakoo reported in 2002 (8) SCC 236. That however has no application to the facts of the present case since it deals with quashing at the preliminary stage.
14. We have carefully considered the submissions of the Learned Counsel for the appellant and the Counsel for the respondent.
15. There are two question that arise for consideration. The first question that arises is whether the appellant was a director when the Regulation dealing with the collective investment scheme came into force. The second question is whether the appellant was in charge of the day today affairs of the company and whether the impugned order makes out a prima facie case.
16. The Securities & Exchange Board of India (Collective Investment Schemes) came into force on 15.10.1999. It is this Regulation which gave power to the respondent to have monitory control over the affairs of the company where money have been collected under the Collective Investment Scheme. There is no doubt that after the company coming into the scope of the Regulation, all those persons who are in charge of the affairs of the company would be subject to control and direction by Securities & Exchange Board of India. On the date when the Regulations came into force, the appellant was not a director of the company, he was a non-executive director from 22.1.1996 to 20.2.1998. The Regulations came into force only in October 1999. Therefore whatever action that may be taken against the appellant certainly cannot be under the provisions of the Regulations. The Regulations cannot be said to be retrospective to rope in persons who are non-executive directors prior to the Regulations coming into force. The Regulations did not, in our view, contemplate any acts, omissions or commissions prior to the company coming within the purview of this Regulations. It is perfectly possible that any acts of misconduct whether civil or criminal, could be proceeded with in accordance with the law at that time in force. But certainly if an action is to be taken under the provisions of the Regulation it must relate to persons who are in charge of the affairs of the company after the Regulations came into force. That is why the earlier order dated 29.3.2003 made it clear that any aggrieved person who is not responsible for the conduct of the company was at liberty to have his name deleted. The operative portion of the order reads as follows:
“Therefore, in exercise of the powers conferred upon me under Section 11B read with Section 4(3) of the SEBI Act, 1992 and Regulation 65 of SEBI (Collective Investment Schemes) Regulations, 1999, I, hereby debar the company/its promoters/its directors/its managers/persons in charge of business of its schemes (whose names and addresses are mentioned in the Annexure herewith) from operating in the capital market and from accessing the capital market for a period of 5 years from the date of this order.
In case, however, any aggrieved person, whose name is mentioned in the enclosed Annexure, was not aware of the previous order and the warning issued vide said order and was not responsible for the conduct of the business of the company, he may apply in writing, within 15 days from the date of order, with all the supporting documents, to SEBI. This is without prejudice to SEBI’s right to take any other action as it may deem fit.”
17. We have extracted the operative portion only to show that Securities & Exchange Board of India had in its mind only those persons who are responsible for the conduct of the business under the scheme. In fact this order dated 29.3.2003 has been so carefully worded that it gives an opportunity for a person to have his name deleted from the embargo if he was not responsible for the conduct of the business of the company at the relevant time.
18. It is only in these circumstances, the appellant submitted his reply stating that he ceased to be a director in February 1998, much before the Regulations came into force and that even when he was a director he was a non-executive director. The respondent in its reply dated 28.8.2003 took up a new stand stating that the appellant was responsible for mobilizing money from the investors during his tenure as a director in the said company. This was never the stand in the earlier order dated 29.3.2003. The earlier order indicated that only those persons who were responsible for the conduct of the business of the company will be held liable under the scheme and others have the right to have their name deleted. It cannot be said that the power under the Regulations can be exercised with respect of non-executive directors who had resigned before the scheme came into force.
19. The Supreme Court in a number of pronouncements had held that there must be specific allegation against the person that the person was responsible for the conduct of the business of the company. If no allegation is there to that extent, the person cannot be made liable for any misconduct. The Learned Counsel relied on the judgments of the Supreme Court in Katta Sujatha vs. Fertilizers & Chemicals Travancore Ltd. & Anr. reported in (2002) 7 SCC 655, State of Haryana vs. Brij Lal Mittal & Ors. reported in (1998) 5 SCC 343 and R. Banerjee & Ors. vs. H.D. Dubey & Ors. reported in (1992) 2 SCC 522.
20. The Supreme Court in AIR 1971 SC at page 2162 in the Girdhari Lal Gupta vs. D.N. Mehta & Anr. defined a person in charge at paragraph 5 and 6. The Supreme Court while dealing with the Foreign Exchange Regulation Act explained what the person in charge means.
“5. It seems to us quite clear that S.23C (1) is a highly penal section as it makes a person who was in-charge and responsible to the company for the conduct of its business vicariously liable for an offence committed by the company. Therefore in accordance with well-settled principles this section should be construed strictly.
6. What then does the expression “a person in charge and responsible for the conduct of the affairs of a company mean”? It will be noticed that the word ‘company’ includes a firm or other association, and the same test must apply to a director-in-charge of a business. It seem to us that in the context a person ‘in-charge’ must mean that the person should be in over all control of the day to day business of the company or firm. This inference follows from the wording of S. 23C(2).”
21. Although these judgments relates to criminal matters, it is a clear pronouncement of law that no person who is not in charge at the relevant time can be brought under the scheme.
22. By no stretch of imagination can it be said that the appellant comes within the scheme as a person “who is responsible for the conduct of the business” when it is clear that the appellant as a non-executive director resigned much before the scheme came into force. Whether the appellant was responsible for lending his name for mobilization of fund for the company is not the issue before the court. Such Acts may have civil or criminal consequence elsewhere if such conduct at the relevant time makes out a prima facie case for being proceeded against at the time of mobilization of fund but it certainly cannot be a subject matter of a direction under the scheme when the appellant was not even a director or had nothing to do with the company after the scheme came into force. Accordingly we hold that
1) a person who is not a director at the time when the Regulations was introduced cannot be held liable
2) a director who resigned long before the scheme came into force cannot be a subject matter of any order under the scheme
3) SEBI itself acknowledges the fact that only persons who are responsible for the conduct of the business of the company can be liable and not others. The impugned order of SEBI refers to mobilization of fund which is not the subject matter of the scheme. Admittedly, the appellant cannot be held to be responsible for the scheme when he had resigned even before the scheme was brought into effect.
23. In that view of the matter, we have no hesitation to set aside the impugned order and direct the respondent to delete the name of the appellant in the order dated 29.3.2003.
24. This will not preclude the respondent or any other person from taking action against the appellant if in accordance with law civil or criminal if a prima facie case is made out against the appellant that he was instrumental for mobilizing the fund with the intention to cheat the public.
25. Appeal is disposed of accordingly. No costs.