Director not liable for company's NCD refunds without active involvement

The tribunal overturned the order holding a director liable for refunding funds collected by the company through NCDs, emphasizing the need for evidence of active involvement in the company's affairs to establish liability. The appellant, who had a nominal role and lacked involvement in the issuance of NCDs, was found not responsible for the company's default. The tribunal quashed the order, allowing the appeal with no costs imposed.

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Issues Involved:
1. Compliance with the provisions of the Companies Act, 1956 concerning the issuance of Secured Redeemable Non-Convertible Debentures (NCDs).
2. The liability of directors for the company's failure to comply with the SEBI Act, Companies Act, and ILDS Regulations.
3. The concept of vicarious liability of directors under Section 73(2) of the Companies Act and Section 27 of the SEBI Act.
4. The role and responsibility of individual directors in the company's default.

Detailed Analysis:

Compliance with the Companies Act, 1956:
SEBI received a complaint against Silicon Projects India Limited (SPIL) regarding the issuance of Secured Redeemable Non-Convertible Debentures (NCDs) without complying with the provisions of the Companies Act, 1956. Upon investigation, it was found that SPIL had raised Rs. 18.03 crore from 406 allottees through NCDs during the financial years 2009-10, 2010-11, and 2011-12, violating the SEBI Act, Companies Act, and ILDS Regulations. Consequently, SEBI issued an order on March 3, 2016, directing SPIL and its directors to debar and refund the investors.

Liability of Directors:
SEBI identified that certain individuals, including the appellant, were directors of SPIL during the issuance of NCDs and engaged in fund mobilizing activities in violation of the SEBI Act, Companies Act, and ILDS Regulations. An interim order dated March 7, 2016, prohibited these past directors from issuing prospectuses or soliciting money from the public and restrained them from dealing in the securities market. They were also directed to provide a full inventory of their assets and properties.

Vicarious Liability of Directors:
The WTM held the appellant jointly and severally liable to refund the money collected by SPIL, stating that as a director, she was responsible for the prospectus and compliance with Sections 56(1), 56(3), and 56(4) of the Companies Act. The WTM concluded that all past and present directors of SPIL were officers in default under Section 5(g) of the Companies Act and liable to make refunds jointly and severally.

However, the appellate tribunal found this approach erroneous. Section 73(2) of the Companies Act clarifies that the company is primarily liable to repay the monies received from investors, and if the company fails, the directors can be held liable only if they are officers in default. Vicarious liability cannot be automatically imputed to directors unless the statute specifically provides for it.

Role and Responsibility of Individual Directors:
The tribunal emphasized that the managing director, whole-time director, or any person authorized by the board are considered officers in default under Section 5 of the Companies Act. In the absence of any such officers, all directors are deemed officers in default. However, liability depends on the role played in the company's affairs, not merely holding a designation.

In this case, the tribunal noted that the appellant was appointed as a receptionist and later made a director with a nominal salary increase. She contended that she had no involvement in issuing NCDs or attending board meetings related to it. The tribunal found no evidence indicating her responsibility for the company's affairs. The WTM's finding that Shri Shib Narayan Das was the key person responsible for the company's affairs further supported the appellant's lack of involvement.

Conclusion:
The tribunal concluded that the WTM's order holding the appellant liable for refunding the monies collected by SPIL was unsustainable. The appellant could not be held responsible for the company's default without evidence of her active role in the company's affairs. Therefore, the impugned order was quashed, and the appeal was allowed with no order as to costs.

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