SEBI | Liability under S. 73(2) of Companies Act, 1956, lies on the company along with the director who is ‘officer in default’ as per S. 5 of Companies Act, 1956

Securities and Exchange Board of India (SEBI): Anant Barua (Whole-time member) passed the order in exercise of his powers under Sections 11 and 11B read with Section 19 of the Securities and Exchange Board of India Act, 1992.

The facts in the instant case are such that the company PDS Agro Industries Ltd. i.e. PAIL was incorporated on 20-04-2010 and noticee 3 (subject of this order) was signatory to the Memorandum of Association of the company having subscribed to 4000 shares and was thus a promoter of PAIL. Noticee 3 was also the non-executive director in the Company from April 20, 2010, to July 30, 2010. PAIL had raised Rs 50,29,300 during the financial years 2010-11 and Rs 2,53,200 during the financial year 2011-12, from the public through issue of RPS, in violation of the provisions of the Companies Act, 1956. Hence SEBI passed an ex parte interim order dated 26-04-2018 against the company PDS Agro Industries Ltd. and its directors for a violation under Sections 56, 60(1) and 73(1) of Companies Act, 1956 thereby

  1. Restraining / prohibiting the access to the securities market or buy, sell or otherwise deal in the securities market, either directly or indirectly, or associate themselves with any listed company or company intending to raise money from the public;
  2. Prohibiting /retraining to dispose of, alienate or encumber any of its /their assets nor divert any funds raised from public through the offer and allotment of Redeemable Preference Shares;
  3. Cooperating with SEBI and shall furnish all information/documents in connection with the offer and allotment of Redeemable Preference Shares sought vide letters dated February 13, 2017.

The interim order also called for show cause by PAIL and its directors, promoters by filing a reply within 21 days to show cause or seek opportunity of hearing related to reasons why suitable directions/ prohibitions under Sections 11, 11(4), and 11B of the SEBI Act, 1992 should not be issued/ imposed along with certain prohibitory directions failing which the interim order will deemed to be considered as final and absolute.

Noticee 3 i.e. Sumana Ghosh Roy being the only one who served a reply dated 20-06-2018 and accepted the opportunity of hearing. Counsel submitted that Noticee 3 does not in any manner is involved in the running of the respondent-company and they have nothing to do so as far the present case is concerned.

The Court relying on the judgment titled Pritha Bag v. SEBI (Appeal no. 291 of 2017) observed that the liability for refund under Section 73(2) of the Companies Act, 1956, lies on the company along with the director who is ‘officer in default’ as per Section 5 of the Companies Act, 1956.

In view of the observations above, the Court held that Noticee 3 was appointed as a non-executive director in PAIL on April 20, 2010 and remained so till July 30, 2010 whereas during the same period Mr. Prabir Roy (Noticee 4 to the interim order) was the Managing Director of PAIL. Hence Noticee 3 was not the ‘officer in default’ in terms of Section 5 of the Companies Act, 1956. The Court further held that Noticee 3 to not be liable for refund in terms of Section 73(2) of the Companies Act, 1956. However, the violations under Sections 56 and 60 of the Companies Act, 1956, has prejudicially affected the interest of investors and the securities market which has not been denied/ raised contention by Noticee 3. Therefore, Noticee 3 may not be liable for refund but was found liable for directions under SEBI Act, 1992.

The Court while disposing off the petition held that Noticee 3 be refrained/prohibited from accessing the securities market by issue of prospectus/ offer document/ advertisement or otherwise in any manner whatsoever, and shall be refrained/prohibited from buying, selling or otherwise dealing in securities in any manner whatsoever, directly or indirectly, for a period of 3 years.[PDS Agro Industries Ltd., In Re.,  WTM/AB/ERO/ERO/9380/2020-21, decided on 07-10-2020]


Arunima Bose, Editorial Assistant has put this story together

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