2022 (6) TMI 991 - HC - SEBI

High Court Upholds Decision Against Accused Directors in Illegal Fund Case

The High Court upheld the trial court's decision, dismissing the revisional applications challenging the rejection of discharge applications by accused ... Contravention of provisions of the SEBI Act - accused company had raised a huge amount of money from general public in contravention of legal provisions and without obtaining approval or clearance from ROC, MCA and SEBI as required under the Companies Act, 1956 and the SEBI Act, 1992 - Liability of directors in alleged offence - accused company did not take any steps for winding up of the scheme or repayment to the investors, nor did it take any steps to comply with the directions of the SEBI issue and has not the refunded money to the investors and caused huge pecuniary damage - acccused no. 2 to 13 in the complaint are the directors/promoters/key management/personnel and persons in charge of and responsible to the Accused No. 1/Company for the conduct of the business and are liable for the violations of sections 56, 60 and 70 read with section 55A and 67 of the Companies Act, 1956. HELD THAT:- In the instant case the petitioners were directors and not mere name lenders to the company. Two of them had invested Rs. 5.5 lakhs each at the time of incorporation of the company. In the impugned order it has been stated that on the basis of submissions made by accused Kanwal Prakash Singh, Gajendra Pal Singh and Virendra Kumar, the Adjudicating Officer of SEBI found that during the tenure of the petitioners as directors the company issued redeemable preference shares to 3558 persons and collected an amount of Rs. 11,42,63,000/- in the financial years froms 2010-2013 without complying with public issue norms as mandated under sections 56, 60 and 73 of the Companies Act, 1956, read with the Companies Act, 2013. The Adjudicating Officer of SEBI directed the accused persons to refund the money collected by the company to the investors with interest of 15% per annum, compounded at half yearly intervals from the date when the repayments became due till the date of actual payment along with other compliance to be made. It is therefore apparent that the accused petitioners were fully aware and had knowledge about the activity of the company and also the contraventions of law made by it. The onus therefore shifts upon the petitioners under proviso to section 27(1) of SEBI Act that they had no knowledge about the contravention of the provisions of law committed by the Company in mobilizing such huge amount of funds from public shares. Order dated 13.10.2015 passed by SEBI reveals that M/s Just-Reliable Projects India Limited has mobilized fund of Rs. 11.43 crores by floating of shares in the market. This Act of the company was not done furtively and surreptitiously. Therefore, the plea of the petitioners that they had no knowledge about the activity of the company is also prima facie unacceptable at this stage. Gajendra Pal Singh and Kanwal Prakash Singh admitted before the SEBI authorities that they had sent a notice dated 18.6.2010 and 22.6.2010 to Swarup Dutta regarding alleged unilateral decisions taken by him to open bank account, increase share capitals of the company without holding Annual General Meeting and also change in the address of the registered office of the company. The aforesaid acts alleged to have been carried out by Swarup Dutta requires prior Board Resolution of the company. The petitioners who claim to be unaware about the activity of the company are well informed about opening of bank accounts, change of Registered address of the company as well as mobilization of fund to the credit of the company. The petitioners did not hand over the company documents to SEBI as directed in order dated 13.10.2015. Therefore, documentary evidence when produced in course of trial would reveal if the concerned authorities have allowed such course of activity without any Board Meeting of the company and also of the fact if the petitioners really had no knowledge about the mode and manner of functioning of the company. The petitioners having issued the notice to Swarup Dutta continued to be directors and did not resign from their office. The illegal activity of the company continued while petitioners were fully aware about such activity till 29.07.2011 and Virendra Kumar till 29.3.2012, their respective dates of resignation. As it is salutary to refer to the decision in the case of Gunmala Sales Pvt. Ltd Vs Anu Mehta and Ors [ 2014 (12) TMI 1116 - SUPREME COURT] wherein it is held that a complaint cannot be quashed merely on the ground that apart from the basic averment no particulars are given in the complaint about his role, because ordinarily the basic averment would be sufficient to send him to trail and it could be argued that his further role could be brought out in the trial. It therefore emerge from the available facts and circumstances and the position of law that there is material averment in the petition of Complaint to disclose that the directors of the accused company were responsible for the conduct of its business. Since the petitioners were adequately notified before the enquiry proceedings were held by the Whole Time Member of SEBI and that they did not comply the order thereafter, learned Judge Special Court, has committed no error in holding that there is a prima facie case against the petitioners to constitute charge against them and thereby the prayer for discharge was rejected. In view of my foregoing discussion find and the impugned order suffers from no illegality, impropriety or irregularity and calls for no interference. Both the revisional applications filed by the petitioners are accordingly dismissed on contest. Issues Involved:1. Legality and propriety of the order dated 20.08.2018 rejecting the discharge applications.2. Alleged illegal fund mobilization by the accused company.3. Compliance with SEBI regulations and Companies Act.4. Responsibility and liability of the directors.5. Prima facie case against the accused directors.6. Validity of the trial court's decision to frame charges.Detailed Analysis:1. Legality and Propriety of the Order Dated 20.08.2018:The revisional applications challenge the impugned order dated 20.08.2018, which rejected the discharge applications filed by the petitioners under Section 245 of Cr. P.C. The petitioners argued that they should not be held liable as they were merely directors without knowledge or involvement in the company's day-to-day operations. However, the trial court found a prima facie case against them, leading to the rejection of their discharge applications.2. Alleged Illegal Fund Mobilization:The accused company, M/s Just Reliable Projects India Limited, raised Rs.11.426 Crores through redeemable preference shares issued to 3,558 entities during the financial years 2010-2013 without complying with public issue norms, violating Sections 56, 60, and 73 of the Companies Act, 1956, and SEBI regulations. SEBI conducted an enquiry and found these violations, leading to the issuance of an order on 13.10.2015 directing the company to comply with regulations and make repayments to investors.3. Compliance with SEBI Regulations and Companies Act:The accused company issued public shares without filing offer documents, violating Section 56 of the Companies Act, 1956. It also failed to apply for listing the shares in stock exchanges, violating Section 73. The company did not comply with SEBI's order directing repayment to investors, leading to a complaint case being filed under Sections 24 and 27 of the SEBI Act, 1992.4. Responsibility and Liability of the Directors:The petitioners, as directors, were found to have been involved in the company's operations during the relevant period. They were held responsible for the company's actions, including the issuance of shares without regulatory compliance. The SEBI order dated 13.10.2015 found that the directors could not claim ignorance of the company's operations. The petitioners argued that they were not consulted on the company's decisions and had sent representations to another director, Swarup Dutta, which were returned undelivered. However, the trial court found that their lack of action despite being aware of the company's activities made them liable.5. Prima Facie Case Against the Accused Directors:The trial court found a prima facie case against the petitioners for violating the provisions of the Companies Act and SEBI regulations. The court observed that the petitioners' claim of not having knowledge about the company's acts could not be adjudicated at the time of framing charges and should be addressed during the trial. The court relied on the principle that if there is no ground for presuming that the accused committed an offense, the charges must be considered groundless, as established in Century Spinning and Manufacturing Company Limited v. State of Maharashtra.6. Validity of the Trial Court's Decision to Frame Charges:The trial court's decision to frame charges was based on the materials on record, which indicated a prima facie case against the petitioners. The court held that the defense of the accused could not be considered at the stage of framing charges, as it would amount to a mini-trial. The court also noted that the burden of proof would shift to the accused to prove that the contravention was committed without their knowledge or that they exercised due diligence to prevent it, as per Section 27 of the SEBI Act.Conclusion:The High Court upheld the trial court's decision, finding no illegality, impropriety, or irregularity in the impugned order. The court dismissed the revisional applications and directed the trial court to proceed with the case expeditiously. The petitioners' arguments were found insufficient to warrant their discharge at this stage, and the matter was deemed appropriate for trial to determine their liability.