2019 (2) TMI 1742 - AT - SEBI

Tribunal overturns SEBI's fund restraint orders, ruling appellant not liable for refund

Pritha Bag Versus Securities and Exchange Board of India

The Tribunal set aside SEBI's orders restraining fund mobilizing activities and directing refund with interest, ruling in favor of the appellant. The ... Fund mobilizing activities through the issuance of RPS - appellant responsible jointly and severally for making the refund alongwith interest under Section 73(2) of the Companies Act - “officer who is in default” - HELD THAT:- WTM has failed to consider the provisions of Section 5 of the Companies Act and has mechanically held that the appellant was responsible jointly and severally for making the refund alongwith interest under Section 73(2) of the Companies Act. Unless and until a finding is given that the appellant is an officer in default, the mandate provided under Section 73(2) cannot be invoked against the appellant. In the instant case, the appellant has annexed documents to indicate that the company had a managing director, namely, Mr. Indranath Daw and, therefore, as per the provisions of Section 5 the managing director would be an officer in default. We also find that there is no finding given by the WTM that the appellant was the managing director or whole time director or was a person charged by the Board with the responsibility of compliance with the provisions of the Companies Act and, consequently, could not be made responsible for refunding the amount under Section 73(2). The Tribunal in the case of Manoj Agarwal [2017 (7) TMI 1104 - SECURITIES AND EXCHANGE BOARD OF INDIA MUMBAI] found that there was no material to show that any of the officers set out in clauses (a) to (c) of Section 5 or any specified director of the said company was entrusted to discharge the application contained in Section 73 of the Companies Act. In the instant case, there is sufficient material on record to show that there was a managing director and in the absence of any finding that the appellant was entrusted to discharge the application contained in Section 73 of the Companies Act, the direction to refund the amount alongwith interest from the appellant is wholly illegal. Appeal is allowed. The impugned order in so far as it relates to the appellant is quashed. Issues:- Violation of provisions of Companies Act by offering Redeemable Preference Shares (RPS) to the public.- SEBI's interim and final orders restraining fund mobilizing activities and directing refund.- Appeal against SEBI's orders and grounds for challenging the liability for refund.- Interpretation of the term 'officer in default' under Section 73(2) of the Companies Act.- Examination of the appellant's role and liability regarding the RPS issuance.- Analysis of relevant provisions of the Companies Act and previous judgments.- Decision on the appellant's responsibility for refund and setting aside the impugned order.Detailed Analysis:1. The Securities and Exchange Board of India (SEBI) conducted an investigation against a company for offering Redeemable Preference Shares (RPS) to the public in violation of the Companies Act. SEBI issued interim and final orders restraining fund mobilizing activities and directing refund with interest.2. The appellant filed an appeal challenging SEBI's orders, arguing that she was not an 'officer in default' under Section 73(2) of the Companies Act and should not be held responsible for the company's actions.3. The appellant contended that she was not involved in the company's management, did not attend board meetings, and did not benefit financially during her tenure as a director.4. The provisions of Section 73 of the Companies Act were examined, emphasizing the liability of directors who are officers in default to repay amounts received from public share subscriptions.5. The definition of 'officer in default' under Section 5 of the Companies Act was crucial in determining the appellant's liability, which includes managing directors, whole-time directors, managers, and others responsible for compliance.6. The Tribunal found that the appellant was not designated as an officer in default and had not been entrusted with the responsibilities specified in Section 73 of the Companies Act.7. Previous judgments were cited to distinguish the appellant's case from instances where officers were held liable, highlighting the absence of evidence linking the appellant to the non-compliance.8. Consequently, the Tribunal allowed the appeal, quashing the order holding the appellant liable for refund, as there was no finding that she was an officer in default or responsible for the company's actions. No costs were awarded in this decision.