SAT : Sayanti Sen vs. Securities and Exchange Board of India

Director can only be prosecuted if there was sufficient evidence of his active role or where the statutory regime attracts the doctrine of vicarious liability.

The Ministry of Corporate Affairs while initiating prosecution against the Directors under the Companies Act came across a lot of hurdles as to who was an officer in default and whether any Director could be prosecuted without there being evidence with regard to being responsible for the affairs of the Company. In this regard, the Ministry of Corporate Affairs issued a Master Circular dated 29th July, 2011 on prosecution of Directors and clarified that the prosecution should be filed primarily against the Managing Director and against such Directors who were in charge and responsible for the affairs of the Company. It was clarified that extra care should be taken in examining such cases and no such Director should be held liable for any act of omission or commission by the Company which would constitute a breach or violation of any provisions of the Companies Act which had occurred without his knowledge or consent or where he had acted diligently in the Board process.

When the Company is the offender, vicarious liability of the Directors cannot be imputed automatically. It is the cardinal principle that there can be no vicarious liability unless the statutes specifically provides for it.

The Supreme Court in Sunil Bharti Mittal vs. Central Bureau of Investigation & Ors. in Criminal Appeal No. 35 of 2015 (arising out of Special Leave Petition (Crl.) No. 3161 of 2013) held that a Director can only be prosecuted if there was sufficient evidence of his active role or where the statutory regime attracts the doctrine of vicarious liability.

In the instant case, the power under Section 11 or 11B of the SEBI Act has been exercised by Whole time Member (‘WTM’) debarring the appellant from accessing the securities market on the ground that the appellant was responsible for the acts of the Company and thereby in an indirect manner has introduced the concept of strict liability of vicarious liability under Section 11 or 11B of the SEBI Act.

In view of the Tribunal, it is not possible to lay down any hard and fast rule as to when a Director would be vicariously responsible for the acts of the Directors in charge of day today affairs of the Company. In a given case the Appellant, being the Director, had no role to play in the day today affairs of the Company could still be made liable for any penal consequences under Section 11B but when there is an order debarring a Appellant under Section 11B, in that case the principles evolved under Section 27 of the SEBI Act or the ingredients mentioned therein are required to be considered, since the consequences under an order under Section 11B is far reaching and similar to the consequences of an order under Section 27 of the SEBI Act. The spirit of Section 27 of the SEBI Act would indicate that if a finding is given that the appellants have nothing to do with the day today affairs of the Company then they cannot be held guilty of any violation as there is no such thing as vicarious liability under Section 11B of the SEBI Act.

Section 73(2) of the Old Companies Act makes it apparently clear that if in the first instance it was the Company which was liable to repay the monies received from the investors and if the Company failed to repay the amount then the amount would be recovered jointly and severally from every Director of the Company as an officer in default. Therefore, where the Company is the offender vicarious liability of the Directors cannot be imputed automatically. It was not open for the WTM to pass further orders on the other Directors, namely, the Appellant especially when there is no finding nor there is shred of any evidence to indicate that the appellant was also responsible for the affairs of the Company.

(Link : http://sat.gov.in/english/pdf/E2019_JO2018163.PDF)