A Director of a Company who is completely uninvolved in the activities of the Company will not be liable to repay its creditors: Securities Appellate Tribunal

A complaint was lodged with the Securities and Exchange Board of India (SEBI) against Silicon Projects India Limited (SPIL) in respect of issue of Secured Redeemable Non-Convertible Debentures (NCDs). SPIL had issued Secured Redeemable Non-Convertible Debentures (NCDs) worth Rs.18 crores to the public illegally. On investigation it was found that SPIL had made an offer of NCDs and raised an amount of Rs. 18.03 crore from 406 allottees. This offer was found to be in violation of the provisions of SEBI Act, 1992, the Companies Act, 1956 and SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (ILDS) Regulations). Accordingly, SEBI passed an order dated March 3, 2016 and issued certain directions which included debarment of its Directors and refund to the investors. Since the directions were not complied with, SEBI initiated recovery proceedings against the Company and its Directors.

Ms. Sayanti Sen, Shri. Shib Narayan Das and Ms. Antara Mukherjee were the past directors of SPIL. The Whole Time Member (WTM) of the SEBI held that since Shri Shib Narayan Das was the key person of the Company, the recovery of the amount will be made from his assets of in the first instance and thereafter from the other Directors.

Sayanti Sen (appellant), one of the banned ex-Director of SPIL challenged the decision of SEBI with the Securities Appellate Tribunal, Mumbai contending that she had nothing to do with the issuance of NCDs.

A show cause notice was issued as to why action should not be taken against her and the other two Directors under Section 11 and 11B of the SEBI Act read with Section 73(2) of the Companies Act and Section 27(2) of the SEBI Act.

The appellant contended that she was appointed as a receptionist in the year 2009 on a salary of Rs. 3000/- which was increased to Rs. 4000/- in the year 2010. On March 2011, she was made a Director of the Company and her salary was increased to Rs. 5000/- per month. She further contended that she tendered her resignation as a Director on December 1, 2011 and Form 32 was filed before the Registrar of Companies. She further stated that she had never attended any meeting of the Board of Directors nor was signatory to any Resolution in relation to the issuance of NCDs nor was involved in any activity of the Company.

The Tribunal noted that as per Section 73(2) of the Companies Act, the Company is liable to repay the monies received from the investors and if the Company fails to repay the amount then the amount shall be recovered jointly and severally from every Director of the Company who is an officer in default.

The Tribunal citing the case of Smt. G. Vijaylakshmi & Ors. vs. SEBI (2000) 100 Comp Cases 726 (AP) held that if the Director proves to the court that he had no role to play in the alleged default or that he did not perform his duties assigned to him under the agreement of his appointment, the presumption of guilt and penalty cannot be fastened upon him.

According to the tribunal, the mere fact that a person is a Director would not make him automatically responsible for refund of money under Section 73(2) of the Companies Act. The WTM had given a categorical finding that Shri Shib Narayan Das was responsible for the affairs of the Company and therefore, it was not open for the WTM to pass further orders on the other Directors, namely, the appellant especially when there was no finding to indicate that she was also responsible for the affairs of the Company. Thus, the direction of the WTM against the appellant that she is also liable to refund the monies collected by the Company during the respective period of Directorship of the appellant along with interest could not be sustained.

The Tribunal concluded that liability depends on the role one plays in the affairs of a company and not on designation or status. The Securities Appellate Tribunal thus allowed the appeal.

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