Analysis of SAT Judgement in Yogesh G. Gemawat & Ors. vs. SEBI

A director either full time or part time, either elected or appointed or nominated is bound to discharge the functions of a director and should have taken all the diligent steps and taken care in the affairs of the company. In case of any proceedings for negligence, default, breach of duty, misfeasance or breach of trust or violation of any statutory provisions of the Act, the Directors being “officer is default” are liable for penal actions.

Aggrieved by the order of Whole Time Member (for short ‘WTM’) of Securities and Exchange Board of India (for short ‘SEBI’) dated June 2, 2016 holding the present appellants jointly and severally liable for contravention of the provisions of Sections 56, 60, 73, 117C of the Companies Act, 1956 (hereinafter referred to as, Companies Act) and Regulations in respect of offer and issue of the Non-Convertible Debentures (NCDs) by the Neesa Technologies Ltd. (hereinafter referred to as, ‘NTL’) without complying with the listing provisions, all the present appellants allegedly being directors, the present appeals are preferred.

The thrust of the submissions from the side of all the appellants is that none of them is liable. In fact, each director has blamed the other director. On the other hand, Mr. Mustafa Doctor, the learned senior counsel for the respondent submitted that in view of the provisions of Section 5 and 73(2) of the Companies Act read with Section 27 of the SEBI Act, the present appellants cannot escape the liability.

Relying on the Judgement of High Court of Madras in the matter of Madhavan Nambiar vs. Registrar of Companies (2001 108 Comp Cas 1 Mad), the Appellate Tribunal dismissed the appeal highlighting the following points:

“13. It may be that the petitioner may not be a whole-time director, but that does not mean he is exonerated of the statutory obligations which are imposed under the Act and the rules and he cannot contend that he is an ex officio director and, therefore, he cannot be held responsible. There is substance in the contention advanced by Mr. Sridhar, learned counsel since the petitioner a member of the Indian Administrative Service and in the cadre of Secretary to Government when appointed as a director on the orders of the Government to a Government company or a joint venture company, he is expected not only to discharge his usual functions, but also take such diligent care as a director of the company as it is expected of him not only to take care of the interest of the Government, but also to see that the company complies with the provisions of the Companies Act and the rules framed thereunder. Therefore, the second contention that the petitioner cannot be proceeded against at all as he is only a nominee or appointed director by the State Government, cannot be sustained in law. A director either full time or part time, either elected or appointed or nominated is bound to discharge the functions of a director and should have taken all the diligent steps and taken care in the affairs of the company.

14. In the matter of proceedings for negligence, default, breach of duty, misfeasance or breach of trust or violation of the statutory provisions of the Act and the rules, there is no difference or distinction between the whole-time or part time director or nominated or co-opted director and the liability for such acts or commission or omission is equal. So also the treatment for such violations as stipulated in the Companies Act.

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Judgement link : http://sat.gov.in/english/pdf/E2019_JO2017159.PDF

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