TaxTMI 
TaxTMI 
TaxTMI 
2018 (1) TMI 1095
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....2. In all these revision applications, common order dated 6th January 2018 passed by the Special Judge, Securities and Exchange Board of India (SEBI) Special Court, City Civil and Sessions Court, Greater Bombay, is under challenge. Hence the applications are disposed off by a common order. 3. The applicants are arraigned as accused in Securities and Exchange Board of India (SEBI) Special Case No.203 of 2014 pending before the SEBI Special Court. The applicants are prosecuted on the complaint filed by respondent no.2 for the offence under Section 24(2) read with Section 27 of the Securities and Exchange Board of India Act, 1992 (`SEBI Act'). The impugned complaint was filed on 14th January 2013. The Special Court took cognizance of the said complaint on 22nd February 2013. The applicants are arraigned as accused nos.2 to 5 respectively. 4. Brief facts, as alleged in the complaint, are as follows : (a) The complainant is a body corporate established under Section 3 of SEBI Act to protect the interests of investors in securities and to promote the development of and to regulate the securities market and for matters connected therewith or incidental thereto; (b) The accused no.....
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....(2) of SEBI Act. The accused were intentionally avoiding payment of penalty amount. Failure of the accused in making payment of the penalty is clear and deliberate violation of the orders of the adjudicating officer by all the accused; (i) The accused nos.2 to 5 were the directors/officers of accused no.1 company when the offences were committed and therefore they are responsible for the conduct of the business and they are deemed guilty under the provisions of SEBI Act. 5. The Special Court took cognizance of the complaint on 22nd February 2013 and summons was issued. Thereafter the accused appeared before the Special Court. The accused no.5 (applicant in Criminal Revision Application No.32 of 2018) surrendered in pursuant to the warrant and proclamation issued by the Trial Court on 3rd November 2017. The said accused filed an application for bail, which was rejected by the Special Court. The said accused thereafter filed an application before this Court, which was rejected vide order dated 7th December 2017 and the Special Court was directed to decide the case on a day to day basis by giving priority to the case. 6. The applicants filed applications for discharge on 15th Novem....
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....e complaint. In spite of that, the Special Court had taken cognizance of the complaint by passing cryptic order of issuance of summons. Mr. Desai further submitted that the Special Court has formed an erroneous opinion while dealing with the scope of Section 27 of SEBI Act. The Special Court in paragraph 6 of its order has observed that the adjudication order is one of the document wherein the adjudicating officer applied the principle of lifting the corporate veil and held all the applicants responsible being directors of the company. It is submitted that the said observation of the Special Court is erroneous. The principle of lifting of corporate veil has been wrongly invoked by the Special Court. It is submitted that apparently the Special Court had accepted the fact that there was no sufficient averments in the complaint to substantiate the vicarious liability under Section 27 of the SEBI Act, however, the Special Court has drawn the support by relying upon the adjudication order and on the basis of order of the adjudicating authority had applied the principle of lifting corporate veil, which makes the directors responsible and, therefore, in the present proceedings also, the d....
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....ed that taking the averments as it is, the same are not sufficient to hold the applicants vicariously liable for acts of accused no.1 company. The requisite ingredients to invoke Section 27 and prosecute the applicants as directors of accused no.1 company, are missing in the complaint. It is submitted that the adjudication order would not be sufficient to replace the absence of required assertions in the complaint. It is submitted that the Special Court has relied upon the decision of this Court in the case of Radheshyam Surajmal Khandelwal and another Vs. SEBI and another delivered in Criminal Writ Petition No.4223 of 2016, dated 20th April 2017. The Special Court has failed to appreciate that the facts in the said complaint were different and the said decision was wholly inapplicable in the present case. It is submitted that in the complaint which was subject matter of the said decision, there was clear averments to invoke vicarious liability of the directors of the company, as provided under Section 27 of SEBI Act. It is submitted that the impugned order, therefore, deserves to be set aside. 9. Mr. Aabad Ponda, learned counsel representing the applicants in Criminal Revision Ap....
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....onduct of business of the accused no.1 company. It is submitted that the Special Court has no evidence to frame charge under Section 24(2) read with Section 27 of the SEBI Act. The applicants were being prosecuted as directors of applicant no.1 and, therefore, whether it was the stage of issuance of process or the stage of framing of charge, the Court must have an evidence to prosecute the accused on the basis of principle of vicarious liability. It is further submitted that the impugned order is contrary to the settled principles of law. Time and again the Hon'ble Supreme Court as well as this Court have categorically laid down that requisite ingredients to prosecute the accused on the basis of vicarious liability, are required to be spelt out in the complaint, and in the absence of such averments, the prosecution should fail. It is submitted that there cannot be any distinction qua vicarious liability in relation the proceedings under the SEBI Act and Negotiable Instruments Act. The Courts have repeatedly held that the said principle is applicable in the prosecution under all the Acts wherever the accused are prosecuted on the basis of vicarious liability. The Special Court h....
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....2, x Shri S.F.J.Vaz, Manager, M/s.Zuari Industries Ltd. and another Vs. The State of Goa (2013) 4 AIR BOMR 277, xi K.G. Premshanker Vs. Inspector of Police and another (2002) 8 SCC 87, xii V.M. Shah Vs. State of Maharashtra and another (1995) 5 SCC 767, xiii Hardeep Singh Vs. State of Punjab and others (2014) 3 SCC 92 11. The learned counsel for respondent no.2­original complainant Ms.Anubha Rastogi submitted that there is no error apparent in the impugned order. There are sufficient averments in the complaint to invoke vicarious liability. The averments in paragraphs 4, 13 and 14 of the complaint, are sufficient to establish the charge against the applicants by invoking vicarious liability. The complainant must be given an opportunity to lead the evidence and prove that the accused­-applicants are vicariously liable for commission of offences alleged. At the stage of framing of charge, the Special Court is not expected to enter into roving inquiry and a prima facie evidence is required to proceed with framing of charge. It is submitted that merely on the ground that the words "in­charge of" is not spelt out in the complaint, the applicants cannot be exoner....
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....he material on record in the form of documents to arrive at a prima facie finding that a case for framing charge is made out. The documents on record reflect involvement of the applicants and the role is attributed to them. It is further submitted that notice of prosecution was issued to all the applicants along with accused no.1 company wherein it was stated that the applicants are the directors and responsible for the affairs of the company stated therein and liable under Section 27 of the SEBI Act. It is submitted that in pursuant to the aforesaid notice of prosecution dated 3rd July 2008, the accused no.1 company had responded by stating that they refer to the notice issued to them in the matter of dealings in the scrip of M/s.Shonkh Technologies International Limited and that they are desirous of applying for consent order offered by SEBI and requested for keeping in abeyance the prosecution and provide them two weeks time to file consent terms application with SEBI. It is, therefore, submitted that there is sufficient evidence to prosecute the applicants. It was submitted that the applications are devoid of any substance and the same may be dismissed. 12. Ms. Rastogi also re....
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....ctors/officers of accused no.1 company and were directly responsible for the conduct of its business. It is also stated that the accused are intentionally avoiding payment of penalty amount imposed, as mentioned in the complaint. It is further alleged that the accused nos.2 to 5 were the directors/officers of accused no.1 company when the offences were committed and, therefore, they are responsible for the conduct of business of accused no.1 and they are deemed guilty under the provisions of Section 27 of SEBI Act, 1992. 15. The Trial Court had taken cognizance of the complaint on 22nd February 2013. The applicants­accused had not challenged the said order. When the proceedings before the Trial Court were about to commence, the applicants filed applications for discharge, which came to be rejected vide common order dated 6th January 2018. The Special Court has refused to discharge the applicants­accused for the reasons stated in the impugned order. In the averments made in the complaint, the words "in­charge of" are not specifically stated. In view of that, the learned counsel for applicants have vehemently submitted that the complaint does not satisfy the requirement ....
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....or with fine, which may extend to twenty­five crore rupees or with both." 18. Thus, the prosecution has been initiated against the accused on failure to pay the penalty imposed by the adjudicating officer or if they fail to comply with any of his directions or orders. Apparently, the basis for lodging the complaint is the contravention of the order of adjudicating officer. The adjudication conducted by the said officer and the findings given by the said authority, therefore, bears importance. In view of the above, the adjudication order cannot be kept in isolation with the complaint. The cognizance of the complaint was taken on the basis of averments in the complaint as well as the documents on record. Apart from the contents of the complaint, there was additional material before the Court to issue summons to the accused. Similarly, while framing the charge, apart from the contents of the complaint, the documents in the nature of decision taken by the adjudicating officer, which is foundation for the initiation of proceedings, cannot be overlooked. It is not the case of the applicants that there was absolutely no assertion in the complaint qua vicarious liability of the applic....
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....he violations, which are subject matter of the complaint. The averments in paragraph 15 would also indicate that the applicants­accused were the directors when the offences were committed being responsible for the conduct of the business and that they are deemed to be guilty under the provisions of SEBI Act. 20. The adjudicating officer was appointed vide order dated 14th March 2002 and the said officer was directed to hold an inquiry in the manner specified under Rule 4 of SEBI (SAST) Regulations read with Section 2 of Section 15­I of SEBI Act. Along with the appointment order dated 14th March 2002, the adjudicating officer was put to notice that an inquiry is to be conducted in relation to the violations committed by the entities mentioned in the annexure annexed to the appointment order, which mentions the names of companies and the names of directors including the accused nos.1 company and accused nos.2 to 5 (as directors/officers of accused no.1). The adjudicating officer thereafter conducted an inquiry and passed an order on 22nd April 2003. On perusal of the said order, it is apparent that the accused no.1 company was charged with the allegation that the said entity....
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....22nd April 2003. The said order was not complied. An appeal was filed before the Appellate Tribunal, which was dismissed vide order dated 9th January 2007. It was not challenged further before any authority and the said order dated 22nd April 2003 has attained finality. The letter of prosecution was forwarded by the complainant on 3rd July 2008 wherein it was mentioned that for non payment of penalty imposed by the adjudicating officer vide order dated 22nd April 2003, in the scrip of M/s.Shonkh Technologies International Limited, prosecution will be initiated against accused no.1 company and applicants herein under Section 24(2) of SEBI Act. In the said letter it was stated that as per the information available with SEBI, the applicants are the directors and responsible for the affairs of the company and are liable under Section 27 of SEBI Act. However, in spite of the said communication, the penalty was not paid and an attempt was made to make part payment subsequently, which was not accepted by the complainant SEBI. 21. Taking into consideration the aforesaid aspects, it is clear that apart from the assertions in the complaint, there is supportive material available in the form....
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....ra. The address of Triumph Securities and TIFL was common at the relevant time which is Oxfort Centre, 10 Shroff Lane, Colaba, Mumbai. The address of CCL is : 5th Floor, Manik Mahal, 19, Veer Nariman Road, Mumbai. As can be seen from the above details of the directors and the shareholding patterns, these are closely held companies where the shareholding and management is concentrated in the family members and the relatives of Shri Ketan Parikh. Thus, though they are separate and distinct legal entities, CCL, PIL and PFMS are under common management and control for the aforesaid reasons. In terms of Regulation 2(e)(2)(i) of SEBI (SAST) Regulations, they are deemed to be persons acting in concert and nothing contrary is shown. Even otherwise, in view of the acquisition of shares in the preferential allotment as on a common date, it can be concluded that they are persons acting in concert for acquiring the shares of the target company even in terms of Regulation 2(3)(1). The concept persons acting in concert (PAC) is action oriented. What is to be seen is the effect of their actions and whether having regard to the attendant circumstances. It can be reasonably concluded that they ....
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.... liable to discharge the obligations ignoring the concept of corporation as a legal entity. The concept of `Corporate Entity' was evolved to encourage and promote trade and commerce but not to commit illegalities or to defraud people. It was also observed that the corporate veil indisputably can be pierced when the corporate personality is found to be opposed to justice. It is also observed that the adjudicating officer being adjudicating authority as per SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 is entitled to pierce the veil of the corporate entity and to look at the reality of the transaction. From the juristic point of view the company is the legal personality distinct from the members and the company is capable of enjoying rights and being subjected to duties which are not the same as those enjoyed or borne by its members. The adjudicating officer has power to disregard the power of corporate entity (i.e. accused no.1) if it is used for committing violation of Regulation 7(1), 7(2) of SEBI (SAST) Regulations, 1997. 24. The applicants have vehemently criticised the order passed by the Special Court with regards to the o....
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....inal Procedure, 1973 (`Cr.P.C) relates to the provision for discharge. Applications in the proceedings were filed before the Special Court seeking discharge. In the light of the situation, the parameters of Section 227 of Cr.P.C are required to be considered. Section 227 of Cr.P.C reads as follows : "227. Discharge. ­ If, upon consideration of the record of the case and the documents submitted therewith, and after hearing the submissions of the accused and the prosecution in this behalf, the Judge considers that there is not sufficient ground for proceeding against the accused, he shall discharge the accused and record his reasons for so doing." The provision is followed by Section 228 of Cr.P.C, which relates to framing of charge. The said provision contemplates that after consideration and hearing as stipulated under Section 227 of Cr.P.C; if the Court is of the opinion that there is ground for presuming that the accused has committed an offence, the Court shall frame in writing the charge against the accused. While framing the charge, the Court is empowered to look into the documents submitted therewith and after hearing the accused and the prosecution, the Judge considers....
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.... of the accused and the prosecution in this behalf, the Judge considers that there is not sufficient ground for proceeding against the accused, he shall discharge the accused and record his reasons for so doing." 228. Framing of charge.­ (1) If, after such consideration and hearing as aforesaid, the Judge is of opinion that there is ground for presuming that the accused has committed an offence which ­ (a) is not exclusively triable by the Court of Session, he may, frame a charge against the accused and, by order, transfer the case for trial to the Chief Judicial Magistrate, or any other Judicial Magistrate of the First Class and direct the accused to appear before the Chief Judicial Magistrate, or, as the case may be, the Judicial Magistrate of the First Class, on such date as he deems fit, and thereupon such Magistrate shall try the offence in accordance with the procedure for the trial of warrant cases instituted on a police report; (b) is exclusively triable by the Court, he shall frame in writing a charge against the accused. (2) Where the Judge frames any charge under clause (b) of sub­section (1), the charge shall be read and explained to the accused, and t....
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....with a view to find out if the facts emerging therefrom taken at their face value disclose the existence of all the ingredients constituting the alleged offence. For this limited purpose, sift the evidence as it cannot be expected even at that initial stage to accept all that the prosecution states as gospel truth even if it is opposed to common sense or the broad probabilities of the case; (vii) If two views are possible and one of them gives rise to suspicion only, as distinguished from grave suspicion, the trial Judge will be empowered to discharge the accused and at this stage, he is not to see whether the trial will end in conviction or acquittal." 28. In the light of the principles enunciated in the aforesaid decision as well as several other decisions of Hon'ble Supreme Court, the documents, record and averments in the complaint, justify the rejection of the application of discharge of applicants. 29. In the case of Monaben Ketanbhai Shah and another (supra), the Hon'ble Supreme Court has held that the primary responsibility is on the complainant to make necessary averments in the complaint and thereupon the fact that when the offence was committed the accused was....
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....icarious liability and the requirement to prosecute the directors. The Supreme Court held that a person in charge and responsible for the conduct of the affairs of the company means it will be noticed that the word "company" includes a firm or other association and the same test must be applied to a director in charge and a partner of a firm in charge of a business. A person in charge means that the person should be in over all control of the day to day business of the company or the firm. In the case of Municipal Corporation of Delhi (supra), it was observed that the prosecution can at any stage produce evidence which satisfies the Court that other accused or those who have not been arraigned as accused against whom proceedings have been quashes, have also committed an offence. The Court can take cognizance against them and try them along with other accused. The observations were made in connection with Section 319 of Cr.P.C. Relying on the said decision, it was argued by Mr.Ponda that the Court can proceed against the accused, if any evidence is found against them at a latter stage in exercise of powers u/s 319 of Cr.P.C, however, presently there is no evidence to proceed agains....
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....vant if conditions of Sections 40 and 42 of the Indian Evidence Act are satisfied but it cannot be said that same would be conclusive except, as provided in Section 41 of Evidence Act. If the order of Civil Court is relevant, as provided under sections 40 and 42, the Court has to decide to what extent it is binding. The said decision is not adverse to the present prosecution. As stated hereinabove the prosecution was launched against the accused for not complying the order of adjudicating officer, which has resulted in commission of offence under Section 24(2) of the SEBI Act. The said document forms part of the complaint and certainly can be looked into by the Court. In V.M. Shah (supra), the Supreme Court has held that in case of conflicting findings of Civil and Criminal Courts, the findings recorded by the Civil Court prevails, unless reversed by the appellate Court after duly considering the same and weighing the evidence afresh. For the reasons stated above, even this decision cannot be used against the prosecution. 33. In another decision relied upon by Mr.Ponda in case of Hardeep Singh Vs. State of Punjab and others (supra), the Supreme Court has observed that there are s....
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....ability relied upon by learned counsel for applicants were dealing with the scope of vicarious liability qua Section 141 of Negotiable Instruments Act as well as under other Acts, wherein the Court had issued process against the directors of the company in the absence of requisite averments in the complaint to invoke vicarious liability. The Courts in the said decisions were not dealing with the situation qua Sections 227 and 228 of Cr.P.C.. The language of Sections 227 and 228 of Cr.P.C permits the Trial Court to look into the documents and in the present case the adjudication order was part of the complaint and the basis of the complaint, violation of which has resulted into prosecution and commission of offence u/s 24(2) of SEBI Act. The said order depicts role of the applicants which was inquired into along with accused no.1 company and, therefore, there was sufficient grounds to proceed against the applicants and no case for discharge was made out. Apart from that, the Supreme Court and this Court in the aforesaid decisions had considered the fact that there was no basic averments in the complaint constituting the vicarious liability and in the absence of the basic averments, ....
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....ion would not render any person liable to be punished if he proves that the offence was committed without his knowledge or that he had exercised due diligence to prevent the commission of offence. 39. In the case of N.Ranghachari Vs. Bharat Sanchar Nigam Limited (2007)5-SCC-108, the Hon'ble Supreme Court has considered the scope of Section 141 of Negotiable Instruments Act. In paragraph 26 it was observed that it is not proper to split hairs in reading the complaint so as to come to the conclusion that the allegations, as a whole, are not sufficient to show that at the relevant point of time, the accused are not alleged to be the persons in­charge of the affairs of the company. In the case of K.P.G. Nair Vs. Jindal Menthol India Limited (2001) 10-SCC-218, in paragraph 9, it was observed that the words of Section 141(1) of Negotiable Instruments Act need not be incorporated in a complaint as magic words, but it cannot also be disputed that substance of the allegations read as a whole, should answer and fulfil the requirements of the ingredients of the said provision for being proceeded against for an offence which he is alleged to have committed. 40. Learned counsel for r....