Bombay High Court
Kartik Kirtikumar Parekh vs The State Of Maharashtra And Anr on 15 January, 2018
Bench: Prakash Deu Naik
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
CRIMINAL APPELLATE JURISDICTION
CRIMINAL REVISION APPLICATION NO.29 OF 2018
Kartik Kirtikumar Parikh,
Age Major, Occ. Service,
R/o.103/5, Blackie House, 3rd Floor,
Opp.GPO, Fort, Mumbai. Applicant
versus
1. The State of Maharashtra.
2. The Securities and Exchange Board of India,
Office at SEBI Bhavan, Plot No.C4-A Block,
BKC, Bandra (East), Mumbai. Respondents
WITH
CRIMINAL REVISION APPLICATION NO.30 OF 2018
Navinchandra Narbheram Parekh,
Age 83 years, Occ. Service,
R/o.At Fortune, 3rd floor, 568,
Lady Jahangir Road, Five Gardens, Matunga,
Mumbai. Applicant
versus
1. The State of Maharashtra.
2. The Securities and Exchange Board of India,
Office at SEBI Bhavan, Plot No.C4-A Block,
BKC, Bandra (East), Mumbai. Respondents
WITH
CRIMINAL REVISION APPLICATION NO.31 OF 2018
Kirtikumar Narbheram Parekh,
Age 81 years, Occ. Service,
R/o.103/5, Blackie House, 3rd Floor,
Opp.GPO, Fort, Mumbai. Applicant
versus
1. The State of Maharashtra.
2. The Securities and Exchange Board of India,
Office at SEBI Bhavan, Plot No.C4-A Block,
BKC, Bandra (East), Mumbai. Respondents
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WITH
CRIMINAL REVISION APPLICATION NO.32 OF 2018
Ketan Parekh, Age major,
R/o.19/B, Zaver Mahal, N.S.Marg,
66, Marine Drive, Mumbai, presently at
Arthour Road Jail. Applicant
versus
1. The State of Maharashtra.
2. The Securities and Exchange Board of India,
Office at SEBI Bhavan, Plot No.C4-A Block,
BKC, Bandra (East), Mumbai. Respondents
Mr.Amit Desai, Senior Advocate, Mr.Nilesh Tribhuvan and Mr.Pranav
Badeka i/by Mr.Pradnyesh Sabnis, Mr.B.Bharucha, Asna Patel and
Mr.Prashant Pawar, Advocates, for Applicant in Revn.Appln.29/2018.
Mr.Aabad Ponda and Mr.Nilesh Tribhuvan i/by Ashish Agarkar and
Ms.Prerana Sharma, Advocates, for Applicant in Revn.Appln.30/2018
and 31/2018.
Mr.Ashok Mundargi, Senior Advocate, Mr.Nilesh Tribhuvan i/by
Mr.B.Bharucha, Ms.Alisha Pinto and Mr.Satyam Nimbalkar,
Advocates, for Applicant in Revn.Appln.32/2018.
Ms.Anubha Rastogi, Advocate for Respondent no.2-SEBI with
Mr.Sachin Sonawane, Officer of SEBI.
CORAM : PRAKASH D. NAIK, J.
DATE : 15th December 2017
JUDGMENT :
1. Heard. With the consent of parties, the applications were
heard for final disposal at the stage of admission.
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2. In all these revision applications, common order dated 6 th
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 14 th January 2013. The Special Court took
cognizance of the said complaint on 22 nd 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.1 viz. M/s.Panther Fincap and
Management Services Limited is a company incorporated under the
Companies Act. The accused nos.2 to 5 were the directors/officers of
the accused no.1 company and were directly responsible for the
conduct of its business;
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(c) Investigation was conducted by SEBI in respect of
acquisition of shares of a company namely M/s.Shonkh Technologies
International Limited by certain entities in excess of the threshold
limits prescribed under Regulations 7 and 10 of SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997 (`SEBI SAST
Regulations, 1997). The acquisition of shares of accused no.1
company was found to be in violation of the aforesaid regulations;
(d) In exercise of powers under Section 15-I of SEBI Act
read with Rule 3 of SEBI (Procedure for holding inquiry and
imposing penalties by Adjudicating Officer), adjudicating officer was
appointed to conduct the inquiry;
(e) The adjudicating officer conducted the adjudication
proceedings in terms of provisions of the adjudication rules and
ensuring the principles of natural justice and after considering the
facts and circumstances of the case, and vide order dated 22 nd April
2003 imposed a penalty of Rs.5,00,000/- on the accused. The said
penalty was imposed for violation of Regulation 10 of SEBI (SAST)
Regulations, 1997 read with Section 15-H(ii) of SEBI Act. A second
penalty of Rs.1,50,000/- was imposed for violation of Regulation
7(1) and (2) of SEBI SAST Regulations, 1997 and Section 15-A(b) of
SEBI Act. The accused were directed to pay the penalty amounts;
(f) An appeal was filed by accused no.1 company against
the adjudication order. The said appeal was dismissed by Securities
Appellate Tribunal, Mumbai vide order dated 9 th January 2007. The
accused no.1 company by letter dated 26 th February 2007 sent part
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payment of the penalty amount. However, the complainant returned
the demand drafts vide letter dated 18th April 2007;
(g) The complainant vide letter dated 3 rd July 2008
intimated about the prosecution proceedings being initiated against
all the accused for non payment of penalty amount. The notice was
replied by the accused on 21 st July 2008. The accused opted for
consent process which was rejected by the complainant;
(h) The accused no.1 failed to make payment of the penalty
amount and thereby committed the offence under Section 24(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
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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
November 2017. The applicants placed reliance on several decisions
of Hon'ble Supreme Court as well as this Court in support of the
prayer for discharge. The relief sought by the applicants was refused
vide order dated 6th January 2018. Hence, the applicants had filed
present revision applications assailing the said order.
7. Mr.Amit Desai, learned Senior Advocate, appearing for the
applicant in Criminal Revision Application No.29 of 2018 submitted
that the Trial Court has committed an error in passing the impugned
order. It is submitted that the applicants cannot be held vicariously
liable for the alleged default committed by accused no.1 company in
the absence of any evidence on record. Learned counsel submitted
that the show cause notice was issued in the year 2002 pertaining to
alleged violations of SEBI Regulations. The said notice was issued to
accused no.1 company and not to its directors/officers as they were
not in-charge and responsible for the day to day affairs of accused
no.1 company. It is submitted that with a view to cause harassment
to the applicants, they were implicated as accused by invoking
Section 24(2) of SEBI Act. It is further submitted that the demand
draft making part payment towards penalty was forwarded to the
complainant on account of financial constraints and the inclination
was shown by the accused no.1 company to make payment towards
penalty. In spite of that, the show cause notice for prosecution was
initiated by the complainant. It is submitted that the accused had
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also filed an application before the Trial Court for compounding the
offence, which is pending. The accused no.1 is willing to make
payment towards penalty at this stage. It is further submitted that
accused no.1 vide letter dated 21 st July 2008 had intimated to the
prosecution division of the complainant stating that the accused no.1
is desirous of applying for consent order offered by SEBI and the
complainant was requested to keep in abeyance the matter of
prosecution and provide further two weeks time to file the consent
terms application with SEBI. Learned counsel further submitted that
the Special Court has failed to appreciate the fact that there was no
sufficient averments in the complaint for invoking vicarious liability
as per Section 27 of SEBI Act. The requirements of Section 27 of
SEBI Act to implead the directors of the company, are absent in the
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
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principle of lifting corporate veil, which makes the directors
responsible and, therefore, in the present proceedings also, the
directors are responsible. It is submitted that in the absence of clear
assertions in the complaint with regards to the involvement of the
applicants/directors as in-charge and responsible to the company for
conduct of business of the company as well as company, the
applicants cannot be prosecuted for the said offences. Merely being
directors of a company, is not sufficient to hold the directors
vicariously liable for the act of company. The learned Senior
Advocate also pointed out observations of the Special Court in
paragraph 9 of the impugned order and submitted that the Special
Court has committed an error in law by observing that the provisions
under Negotiable Instruments Act and those under SEBI Act, are not
analogous or synonymous. It is submitted that Section 27 of SEBI
Act and Section 141 of Negotiable Instruments Act, are pari materia
and there was no question of distinguishing the provisions on the
basis of scope and object of the Act. It is further submitted that the
complaint was filed after a period of about five years. There was no
reason for initiating the prosecution belatedly. Mr.Desai places
reliance on the decisions of Hon'ble Supreme Court in the case of
Monaben Ketanbhai Shah and another Vs. State of Gujarat and
others1.
8. Mr.Mundargi, learned Senior Advocate, appearing for
applicant in Criminal Revision Application No.32 of 2018 reiterated
the submissions advanced by Mr.Amit Desai. In addition to the said
submissions, Mr.Mundargi submitted that the Special Court had
committed an error while passing the impugned order. The Special
Court has failed to appreciate the distinction between the
1 (2004)7-SCC-15
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adjudication proceedings and criminal prosecution. In the absence
of requisite assertions in the complaint to invoke vicarious liability,
the Special Court has taken shelter of the adjudication order and
observed that the adjudicating officer has lifted the corporate veil
wherein the liability of directors was apparent and, therefore, on the
basis of the said principle, it was held that the applicants being the
directors, are liable to be prosecuted. It is submitted that both were
independent proceedings and to frame a charge under Section 227 of
Cr.P.C; there has to be material before the Court against the accused.
The learned counsel harped upon the averments reflected in
paragraphs 4, 13 and 15 of the complaint and submitted 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 20 th 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.
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9. Mr.Aabad Ponda, learned counsel representing the applicants
in Criminal Revision Application Nos.30 of 2018 and 31 of 2018,
submitted that the question which arises for consideration is whether
there is sufficient evidence to frame a charge against the applicants
for offence under Section 24(2) of SEBI Act by invoking vicarious
liability under Section 27 of the SEBI Act. There was no such
material and, therefore, the Special Court has committed an error in
passing the impugned order. It is submitted that the Court has
drawn an erroneous distinction between the stage of issuance of
process and the stage under Section 227 of Cr.P.C to consider the
scope of Section 27 of SEBI Act. The concept of lifting of veil
resorted to by the Special Court, is not applicable in the present
proceedings. Learned counsel further submitted that there is no
specific averment to indicate that the applicants-accused were in-
charge of and responsible for the conduct of the business of accused
no.1 company, as well as the company. This averment is an essential
requirement and must be reflected in the complaint. Without the
said averment in the complaint, the requirement of Section 24 read
with Section 27 of SEBI Act, cannot be said to be satisfied. It is
submitted that merely stating that the accused nos.2 to 5 were the
directors/ officers of the accused no.1 company and were directly
responsible for the conduct of the business, is not sufficient. It is
submitted that there are twin requirements to satisfy the invocation
of Section 27 of the SEBI Act. The person should be in-charge of and
responsible to the company. It is submitted that paragraph 4 indicate
that the applicants-accused were the directors/officers of accused
no.1 company. The averments are reflected in the past tense. What
is required is that the directors were in-charge and responsible at the
11 of 44 REVN.29,30,31,32.2018
time of offence was committed. It is further submitted that
paragraphs 13 and 15 of the complaint are also not sufficient to
substantiate the charge of being vicariously liable to the acts of
accused no.1 company. Paragraph 15 alleges that the accused nos.2
to 5 were the directors/officers of accused no.1 company when the
offences were committed, therefore, they are responsible for the
conduct of the business. It is submitted that the assertion cannot be
based on inferences and conjectures. There has to be a positive
assertion that the directors are in-charge of and are responsible for
the conduct 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 has,
therefore, committed an error by observing that the scope and object
of the SEBI Act differs from the object of Negotiable Instruments Act.
12 of 44 REVN.29,30,31,32.2018
The Special Court failed to consider that under various enactments,
there are provisions relating to vicarious liability of the officers or the
directors and the judicial pronouncements enunciated by the Courts
are applicable to all the Acts and there cannot be any distinction qua
the prosecution under SEBI Act. The Special Court has committed an
error in observing that the provisions of SEBI Act are not analogous
with the provisions of Negotiable Instruments Act. It is submitted
that the provisions of both Acts are pari materia and the law does not
make any distinction. It is further submitted that the Special Court
has committed an error in drawing an inference on the basis of
adjudication order. When the complaint itself does not satisfy the
requirement of law for invoking vicarious liability, there was no
question of resorting to adjudication order. In any case, according to
Mr.Ponda, the adjudication order does not determine that the
applicants being directors, were in-charge and responsible for the
acts of accused no.1 company at the time of commission of offences,
and are deemed to be guilty for the said offences. It is also
submitted that the Special Court in its order has ultimately not given
any finding relating to criminal liability of the applicant.
10. Mr.Ponda relied upon following decisions :
i. S.M.S.Pharmaceuticals Ltd. Vs. Neeta Bhalla and
another2, AND S.M.S.Pharmaceuticals Ltd. Vs.
Neet Bhalla and another
ii N.K.Wahi Vs. Shekhar Singh and others3,
iii Mrs.Pooja Ravinder Devidasani Vs. State of
Maharashtra and another4,
2 (2005)8-SCC-89 AND (2007)4-SCC-70
3 (2007)9-SCC-481
4 Writ Petition No.614 of 2010 with Criminal Writ Petition No.615 to 620 of 2010, decided on 6th
October 2010 by learned Single Judge of Bombay High Court.
13 of 44 REVN.29,30,31,32.2018
iv Pooja Ravinder Devidasani Vs. State of
Maharashtra5,
v Parag Bhikhalal Tejani Vs. State of Maharashtra
and another6,
vi Girdhari Lal Gupta Vs. D.H.Mehta and another7,
vii State of Karnataka Vs. Pratap Chand and others8,
viii Municipal Corporation of Delhi Vs. Ram Kishan
Rohtagi and others9,
ix Sarabjit Singh and another Vs. State of Punjab
and another10,
x Shri S.F.J.Vaz, Manager, M/s.Zuari Industries Ltd.
and another Vs. The State of Goa11,
xi K.G.Premshanker Vs. Inspector of Police and
another12,
xii V.M.Shah Vs. State of Maharashtra and another13,
xiii Hardeep Singh Vs. State of Punjab and others14
11. The learned counsel for respondent no.2-original 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
5 AIR-2015-SC-675
6 (2012)1-Mh.L.J.-804
7 1971(30-SCC-189
8 (1981)2-SCC-335
9 (1983)1-SCC-1
10 AIR-2009-SC-2792
11 (2013)4-AIR-BOM-R-277
12 (2002)8-SCC-87
13 (1995)5-SCC-767
14 (2014)3-SCC-92
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required to proceed with framing of charge. It is submitted that
merely on the ground that the words "in-charge of" is not spelt out in
the complaint, the applicants cannot be exonerated of the
prosecution, as there is sufficient material to prosecute them. It is
submitted that the Special Court was at the stage of Sections 226 and
227 of Cr.P.C.. The Court is required to see the complaint and all the
documents relied upon by the complainant to come to the conclusion
that the charge is required tobe framed. It is submitted that the
annexures to the complaint were sufficient to frame the charge and,
therefore, there is no error in the order passed by the Special Court.
It is submitted that the accused were tried for offence under Section
24(2) of SEBI Act for not complying with the order of the
Adjudicating Authority. The investigation conducted by the
adjudicating authority shows the involvement of applicants, which
order can be looked into being a part of the complaint and,
therefore, the Special Court has rightly relied upon the said order.
The order of adjudicating officer clearly indicate that there was
concerted attempts on the part of the accused to commit the said
offence and, therefore, the material on record substantiated the fact
that the accused were in-charge of and responsible for the business
of the accused no.1 company. The complainant, therefore, must be
given an opportunity to establish its case by leading requisite
evidence and the applicants shall not be discharged at this stage.
Learned counsel submitted that the adjudicating officer was
appointed to conduct an inquiry in accordance with Section 15-I of
SEBI Act and was directed to hold the inquiry in accordance with
Rule 4 of SEBI Act. The inquiry was directed in respect to the
irregularities committed by various companies and their directors.
The order dated 14th March 2002 was accompanied with the
15 of 44 REVN.29,30,31,32.2018
annexures with regards to the inquiries to be conducted in relation to
the companies and their directors, wherein the reference of the
applicants herein was made being directors of M/s.Panther Fincap
and Management Services Limited. The adjudication officer
thereafter conducted the inquiry and imposed the penalty. The order
of penalty was challenged before the appellate authority, which
appeal was dismissed and thereafter the said order has attained
finality. It is submitted that a distinction will have to be drawn
between the stage of taking cognizance of the complaint and the
stage of framing of charge. At the latter stage, the Court is
empowered to look into the 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.
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12. Ms.Rastogi also relied upon following decisions :
(i) Standard Chartered Bank Vs. State of Maharashtra and
others15;
(ii) Radheshyam Surajmal Khandelwal and another Vs.
SEBI and another16;
(iii) N.Narayanan Vs. Adjudicating Officer, SEBI17
13. Perused the complaint, it's annexures, the impugned order and
other documents which are part of the record. The complaint is filed
by respondent no.2 SEBI alleging offences under Section 26 read
with Sections 24(2) and 27 of SEBI Act. The applicants are
impleaded as accused. The accused no.1 is the company and
applicants in all these applications are its directors. The Court had
taken cognizance of the complaint. Presently the proceedings are
pending before the Special Court constituted under SEBI Act. The
primary submission advanced by learned counsel representing the
applicants, is that the applicants cannot be held vicariously liable by
invoking Section 27 of SEBI Act in the absence of requisite averments
in the complaint and/or evidence in that regard. Learned counsel
representing the applicants have relied upon several decisions of
Hon'ble Supreme Court as well as this Court, which are referred to
hereinabove in support of their submissions.
14. To deal with the contentions of the applicants, the averments
made in the complaint will have to be considered. It would be
appropriate to reproduce the relevant paragraphs which are as
follows :
15 (2016)6-SCC-62
16 Criminal Writ Petition No.4223/2016, decided on 20th April 2017 by Bombay High Court
17 Civil Appeal Nos.4112-4113 of 2013 decided on 26th April 2013 by Supreme Court of India
17 of 44 REVN.29,30,31,32.2018
"4. The complainant state that the Accused no.1 is a
company incorporated under the Companies Act, 1956.
Accused no.2 to 5 were the Directors/Officers of the
Accused no.1 company and were directly responsible for
the conduct of its business.
13. In view of the above facts, it is charged that the
Accused persons are intentionally avoiding payment of
penalty amount imposed as herein before mentioned in
this complaint.
15. The Accused nos.2 to 5 were the Directors/Officers
of the Accused no.1 company when the offences were
committed and therefore they are responsible for the
conduct of the business. Therefore, they are deemed
guilty under the provisions of Section 27 of the SEBI Act,
1992."
On analysing the aforesaid averments, it is implicit that the
complaint states that the accused nos.2 to 5 were directors/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 22 nd
February 2013. The applicants-accused 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 6 th January 2018. The
18 of 44 REVN.29,30,31,32.2018
Special Court has refused to discharge the applicants-accused for the
reasons stated in the impugned order. In the averments made in the
complaint, the words "in-charge 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 of
Section 27 of SEBI Act. Section 27 of SEBI Act reads as follows :
"27. Offences by companies.- (1) Where an offence
under this Act has been committed by a company, every
person who at the time the offence was in charge of, and
was responsible to, the company for the conduct of the
business of the company, as well as the company, shall be
deemed to be guilty of the offence and shall be liable to be
proceeded against and punished accordingly :
Provided that nothing contained in this sub-section
shall render any such person liable to any punishment
provided in this Act, if he proves that the offence was
committed without his knowledge or that he had
exercised all due diligence to prevent the commission of
such offence.
(2) Notwithstanding anything contained in sub-section
(1), where an offence under this Act has been committed
by a company and it is proved that the offence has been
committed with the consent or connivance of, or is
attributable to any neglect on the part of, any director,
manager, secretary or other officer of the company, such
director, manager, secretary or other officer shall also be
deemed to be guilty of the offence and shall be liable to be
proceeded against and punished accordingly.
Explanation.- For the purpose of this section,-
(a) "company" means any body corporate and includes
a firm or other association of individuals; and
(b) "director", in relation to a firm, means a partner in
the firm."
19 of 44 REVN.29,30,31,32.2018
16. Although it is not specifically averred in paragraphs 4 and 15
of the complaint that the applicants being directors, are in-charge of
"the company", the complainant has asserted that they are directly
responsible for the conduct of the business of accused no.1 company.
It is also stated that the accused nos.2 to 5 were the directors of the
company and they are responsible for the conduct of the business
and deemed to be guilty under the provisions of SEBI Act. It would
be pertinent to note that the complaint is filed alleging offence under
Section 24(2) of SEBI Act.
17. Section 24(2) of SEBI Act reads as under :
"24. Offences :-
(1) ... ... ...
(2) If any person fails to pay the penalty imposed by
the adjudicating officer or fails to comply with any of
his directions or orders, he shall be punishable with
imprisonment for a term which shall not be less than
one month but which may extend to ten years or with
fine, which may extend to twenty-five 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
20 of 44 REVN.29,30,31,32.2018
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 applicants-accused. The complaint will
have to be read as a whole and in conjunction with the adjudication
order. In the complaint it was stated that the accused nos.2 to 5
were the directors/officers of accused no.1 company and were
directly responsible for the conduct of its business. It is also
pertinent to note that in paragraph 13 it has been stated that the
accused are intentionally avoiding payment of penalty amount
imposed on them as stated in the complaint. Paragraph 14 of the
complaint also states that failure of the accused in making payment
of the penalty amount, is a clear and deliberate violation of the
orders of adjudicating officer by all accused persons, who deserve to
be punished in accordance with Section 24(2) of SEBI Act. The
complaint, therefore, attributes overt act to the applicants-accused.
The complaint was initiated for violating the order of adjudication
officer and malice is attributed to the applicants-accused that there is
deliberate violation of the order of the adjudicating officer. Thus, the
averments in the complaint as a whole and in addition the
adjudication order, prima facie, makes out a case under Section
24(2) of the SEBI Act. Merely on account of the fact that the
complaint does not incorporate the words "in charge of", the
prosecution does not stand vitiated.
21 of 44 REVN.29,30,31,32.2018
19. The judicial pronouncements which are relied upon by the
applicant were dealing with the issue relating to vicarious liability
under Section 141 of Negotiable Instruments Act and under the
provisions of other Enactments where there are analogous
provisions. It is true that Section 27 of SEBI Act is pari materia with
Section 141 of Negotiable Instruments Act. However, in the
decisions placed on record in support of the submissions by the
applicants, the Courts have repeatedly held that it is necessary to
incorporate the averments enshrined under the Enactments relating
to vicarious liability. In all those decisions the Hon'ble Supreme
Court and this Court have observed that to invoke vicarious liability,
the basic averments are required to be incorporated in the complaint.
In the present case, although the words "in charge of" are missing,
the other averments are there and which are to be considered in
conjunction with other averments in complaint, and the order passed
by the adjudicating officer, which shows the involvement of the
applicants in the violations, which are subject matter of the
complaint. The averments in paragraph 15 would also indicate that
the applicants-accused 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 14 th
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 15-I 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
22 of 44 REVN.29,30,31,32.2018
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 is acting in concert with other entities.
It was further observed that the allegation against the entities are
with regards to violation of Regulation 7(1) and Regulation 10 of
SEBI (SAST) Regulations 1997 and that the entities have been
treated as the persons acting in concert for the purposes of
acquisition of shares of the target company as per show cause notice.
The gravamen of the inquiry indicates that accused no.1 company
had acquired 7 lakh shares of the target company in the preferential
allotment. The names of the directors of accused no.1 company
(applicants herein) are also reflected in the adjudicating order which
clearly indicate the involvement of the accused no.1 company and its
directors was being inquired. In the adjudication order it is observed
that as can be seen from the details of the directors and the share
holding patterns, the entities are closely held companies where the
shareholding and management is concentrated in the family
members and the the relatives of Mr.Ketan Parikh (applicant in
Revision Application No.32 of 2018). Thus, though the companies
referred in the order are separate and distinct legal entities, they are
in common management and control of the applicants herein for the
reasons stated therein. In terms of Regulation 2(e)(1) of SEBI
(SAST) Regulations, 1997, they are deemed to be the persons acting
in concert and nothing contrary is shown. Even otherwise, after
23 of 44 REVN.29,30,31,32.2018
acquisition of the shares in the preferential allotment as a common
date, it can be concluded that they are the persons acting in concert
for acquiring the shares of the target company even in terms of
Regulation 2(e)(1) of SEBI (SAST) Regulations, 1997. 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 are
acting in concert for common objective. The adjudication order also
refers to the share holders of accused no.1 company which includes
the applicants in Revision Application nos.29/2018, 30/2018,
31/2018 and 32/2018. In the concluding finding of the order passed
by the adjudicating officer, it has been observed that the entities
mentioned therein, together with the persons acting in concert, had
acquired more than 5% of the paid up capital of the target company.
The adjudicating officer thereby imposed a penalty on the accused
no.1 company vide order dated 22 nd 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 3 rd 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
24 of 44 REVN.29,30,31,32.2018
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 of adjudication order passed by the
adjudicating officer, which is the basis of complaint u/s 24(2) of SEBI
Act. It is true that the provisions u/s 141 of Negotiable Instruments
Act and Section 27 of SEBI Act are pari materia, however, as stated
above, there were averments in the complaint which attributes the
liability to the applicants-accused being responsible to the conduct of
company and intentions/malice is also attributed to the applicants-
accused and reading the averments in the complaint together with
document in the form of adjudication order, it cannot be said that the
applicants cannot be prosecuted by invoking Section 27 of SEBI Act.
22. Careful reading of the adjudication order dated 22nd April 2003
indicates as follows :
"Names of the Directors of accused no.1 :
1. Mr.Navinchandra N. Parekh;
2. Mr.Kirtikumar N. Parekh;
3. Mr.Kartik K. Parekh;
4. Mr.Ketan Parekh;
5. Vipul D. Parekh (resigned on 5th March 2001);
6. Mr.Jayant N. Parekh (resigned on 5th March 2001)
Shareholders of accused no.1 are as under :
1. Mr.Navinchandra N. Parekh/Mrs.Vinodini N.
Parekh;
2. Mr.Kirtikumar N. Parekh/Mrs.Pramoda K. Parekh;
3. Mr.Kartik K. Parekh/Mrs.Ami K. Parekh;
4. Mrs.Mamta Parekh and Mr.Ketan V. Parekh;
5...... to 9.
25 of 44 REVN.29,30,31,32.2018
In all other companies which were investigated and
adjudicated by the SEBI and were the part and parcel of
adjudication order dated 22nd April 2003, the above
persons (present applicants) were found the
directors/shareholders of the respective companies. Their
role is elaborately discussed in para/page 11 of the
adjudication order is reproduced as follows :
"In Luminant Investments, the directors are Shri Ketan
Parikh and Shri Arun J. Shah. Goldfish Computers have
the same address as that of CCL and Shri Ketan Parekh
along with Shri Kaushik C. Shah are in the management
control of the same company. Chitrakut Computers are
NH Securities have the same address as that of PFMS
which is 9, Bhupen Chambers, Dalal Street, Fort,
Mumbai. Shri Ketan V. Parikh along with Kirit N. Parikh
are in the managerial control of Chitrakut Computers.
The Directors of NH Securities are Shri Vinay Chandra
Parikh, Navin Chandr Parikh, Kirit Kumar Parikh,
Nakshatra and Luminant have a common address as that
of PIL as under :
Radha Bhavan, 121, Nagindas Master Road, Fort,
Mumbai.
Shri Ketan Parikh and Shri Kaushik C. Shah are the
directors of Nakshatra.
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 closelyheld
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
26 of 44 REVN.29,30,31,32.2018
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 are acting in concert for a common objective.
Acting in concert is something about which actual
evidence is normally difficult to come. The Hon'ble
Supreme Court in the case of CIT Vs. East Coast
Commercial Co. Ltd. AIR-1967-SC-768 (Kedia Family
case) had dealt with the question in the context of Section
23A of the Indian Income Tax Act, 1922 wherein the
question was whether Kedia Family had acted in concert
to control the affairs of the concerned company. In
thefacts of that case, there was no evidence of any overt
act showing that they were acting in concert and thereby
constituted and acted as a block. In para 14 of the
judgment, the SC observed as follows :
`If the members of the Kedia family form a block
and had more than 75 per cent of the voting power, it
was not necessary to prove that they actually exercised
controlling interest. It is the holding in aggregate of a
majority of the shares issued by a person or persons
acting in concert in relation to the affairs of the company
which establishes the existence of a block. It is sufficient,
if having regard to their relation etc. their conduct and
their common interest, that it may be inferred that they
must be acting together, evidence of actual concerted
acting is normally difficult to obtain, and is not insisted
upon."
23. The Special Court while rejecting the application for discharge
has observed that the adjudicating officer had applied the principle
of lifting corporate veil and held the applicants as directors of
accused no.1 M/s.Panther Fincap and Management Services Limited.
Lifting the corporate veil means disregarding the corporate
27 of 44 REVN.29,30,31,32.2018
personality and looking behind the real persons who are in the
control of the company. It is further observed that where a
fraudulent and dishonest use is made of the legal entity, the
individuals concerned will not be allowed to take shelter behind the
corporate personality. In this regard, the Court has to break through
the corporate veil. It is further observed that piercing the corporate
veil is the judicial act of imposing liability on otherwise immune
corporate officers, directors and shareholders for the corporation's
wrongful acts, is the meaning of the doctrine of lifting the corporate
veil. When the principle of lifting the corporate veil is involved, it is
permissible to show that the individual hiding behind the
corporation is 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.
28 of 44 REVN.29,30,31,32.2018
24. The applicants have vehemently criticised the order passed by
the Special Court with regards to the observations vis-a-vis lifting of
corporate veil, as stated hereinabove. It was argued that the concept
of lifting of corporate veil has been erroneously applied by the
Special Court in the present case. In paragraph 15, however, the
Special Court has observed that the principle of lifting corporate veil
is referred to because in the adjudication order, the applicants were
mentioned as directors of accused no.1. They are family members
and formed many companies and also acted as directors of those
companies, as observed in the adjudication order. Analysing the
observations made by the Special Court in relation to lifting of
corporate veil, it is apparent what the Special Court has considered is
that apart from the averments in the complaint, the order passed by
the adjudicating officer, which denotes the involvement of the
applicants being directors of the accused no.1 company on account
of their reference in the said order and they being the subject matter
of the inquiry, the applicants cannot escape the liability and are
vicariously liable for the acts of accused no.1 company. It would be
relevant to note that the adjudication order is one of the material
ingredient to constitute the offence under Section 24(2) of SEBI Act,
1992. The reference does not mean that the order has binding effect
on civil or criminal Courts. The adjudication order is the material
documentary evidence in the trial and the complainant will be
entitled to use the said evidence during trial. Presently the said
order can be considered as an evidence for a limited purpose of
finding out whether or not a prima face case against the applicants
has been made out or not. Failure to comply the order of
adjudication officer, is sine-qua-non for initiating the proceedings
29 of 44 REVN.29,30,31,32.2018
under Section 24(2) of SEBI Act. The said order has attained finality
after dismissal of the appeal filed by the accused no.1 company.
Section 24(2) also stipulates that failure to pay the penalty by any
person, imposed by the adjudicating officer, or failure to comply with
any of the directions or orders of the adjudication officer, invite
punishment under the said penalty provision. Thus, the adjudication
of order has to be read with the averments in the complaint which
establishes a prima facie case to prosecute the applicants and the
case for discharge is not made out.
25. Section 227 of the Code of Criminal 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
30 of 44 REVN.29,30,31,32.2018
therewith and after hearing the accused and the prosecution, the
Judge considers that there is no sufficient ground for proceeding
against the accused, he shall discharge the accused and record his
reasons for the same. The adjudication order dated 22 nd April 2003
can be looked into while considering the application for discharge
and it would be within the parameters of Section 227 of Cr.P.C to do
so. The Special Court has, therefore, considered the adjudication
order, the findings given in the said order and thereafter came to the
conclusion that there is sufficient ground for proceeding against the
accused and thereby rightly refused to discharge the accused. I do
not find any illegality in the impugned order. There is sufficient
material on record to frame the charge and the Court was not
precluded from looking into the said document. The submissions
advanced by learned counsel for applicants that on the basis of the
averments in the complaint, which according to them are deficient to
justify the vicarious liability initiated u/s 27 of SEBI Act, is devoid of
merits.
26. The adjudication order is the documentary evidence in support
of the complaint. It is an admitted fact that the penalty was imposed
by the adjudication order which was not paid and, therefore, for non
compliance of the said order, the prosecution was initiated u/s 24(2)
of SEBI Act. The Special Court has rightly observed that in order to
frame charge, material placed before the Court, broad probabilities
of the case, the total effect of the evidence and documents produced
before the Court, are the prima facie considerations and relevant
factors u/s 227 of Cr.P.C.. It is not in dispute that the applicants were
the directors of the accused no.1 company. The order of adjudication
officer has attained finality. The applicants being the directors, was a
31 of 44 REVN.29,30,31,32.2018
factor which was considered by the adjudication officer, who has
imposed the penalty.
27. The Hon'ble Supreme Court in the case of Sajjan Kumar Vs.
Central Bureau of Investigation18 had laid down the principles
relating to scope of Sections 227 and 228 of Cr.P.C. In paragraph 10
of the said decision, it is observed as follows :
"10. Before considering the claim of the parties, it is
useful to refer to Sections 227 and 228 of Cr.P.C which
are reproduced below :
"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."
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.
18 (2010)9-SCC-368
32 of 44 REVN.29,30,31,32.2018
(2) Where the Judge frames any charge under clause
(b) of sub-section (1), the charge shall be read and
explained to the accused, and the accused shall be asked
whether he pleads guilty of the offence charged or claims
to be tried."
After analysing the provisions of Sections 227 and 228 of Cr.P.C, it
was observed that if the Court is of the opinion that there is ground
for presuming that the accused has committed an offfice, is free to
direct the accused to appear and try the offence in accordance with
the procedure after framing of charge in writing. In paragraph 21 of
the said judgment, the Supreme Court has summarised the principles
which emerge qua the scope of Sections 227 and 228 of Cr.P.C.
Paragraph 21 of the said decision reads as follows :
"21. On consideration of the authorities about the scope
of Sections 227 and 228 of the Code, the following
principles emerge :
(i) The Judge while considering the question of
framing the charges under Section 227 CrPC has the
undoubted power to sift and weigh the evidence for the
limited purpose of finding out whether or not a prima
facie case against the accused has been made out. The
test to determine prima facie case would depend upon the
facts of each case;
(ii) Where the materials placed before the Court
disclose grave suspicion against the accused which has
not been properly explained, the Court will be fully
justified in framing a charge and proceeding with the
trial;
(iii) The Court cannot act merely as a post office
or a mouthpiece of the prosecution but has to consider
the broad probabilities of the case, the total effect of the
evidence and the documents produced before the Court,
33 of 44 REVN.29,30,31,32.2018
any basic infirmities etc. However, at this stage, there
cannot be a roving enquiry into the pros and cons of the
matter and weigh the evidence as if he was conducting a
trial;
(iv) If on the basis of the material on record, the
Court could form an opinion that the accused might have
committed offence, it can frame the charge, though for
conviction the conclusion is required to be proved beyond
reasonable doubt that the accused has committed the
offence;
(v) At the time of framing of charges, the
probative value of the material on record cannot be gone
into but before framing a charge the Court must apply its
judicial mind on the material placed on record and l
must be satisfied that the commission of offence by the
accused was possible;
(vi) At the stage of Sections 227 and 228, the
Court is required to evaluate the material and documents
on record 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.
34 of 44 REVN.29,30,31,32.2018
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 in charge and responsible for the
conduct of business. The obligation of the accused to prove the
contrary arises thereafter. In the case of S.M.S.Pharmaceuticals
Limited (supra), it was observed by Supreme Court that in a case of
dishonour of cheque u/s 138 of Negotiable Instruments Act, in case
of offence by a company, it is necessary to aver that at the time when
the offence was committed, the person accused was in charge of and
responsible for the conduct of the business of company. When this
averment being made in the complaint, the requirement of Section
141 of the said Act cannot be said to be satisfied. Section 203 of the
Cr.P.C empowers the Magistrate to dismiss the complaint without
even issuing the process. It is also observed that the words sufficient
grounds for proceeding suggest that the grounds should be made out
in the complaint for proceeding against the accused. At the time of
issuance of process the Magistrate is required to see only the
allegations in the complaint and where allegations in the complaint
or the charge sheet do not constitute an offence against a person, the
complaint is liable to be dismissed. The same view was reiterated in
the same decision after a larger Bench had answered the reference
and the matter was listed before the two Judges Bench of Supreme
Court.
30. Similarly, in the case of N.K.Wahi (supra), the Supreme Court
has held that in an offence of dishonour of cheque, the liability lies
35 of 44 REVN.29,30,31,32.2018
on such person who at the time of commission of an offence, was in
charge and responsible for the company for the conduct of the
business of the company as well as company. The averment which
was made in the complaint was that the directors therein were
responsible officers of the company and the requisite averment
contemplated u/s 141 of Negotiable Instruments Act was missing.
In the case of Mrs.Pooja Ravinder Devidasani (supra), which
was decided by this Court in Criminal Writ Petition Nos.614 of 2010
and 615 to 620 of 2010, the petition was dismissed on the ground
that there was sufficient averment in the complaint. The said
decision was challenged before the Apex Court wherein it was held
that the specific role played by the director of the company for
fastening the vicarious liability, must be reflected in the complaint.
In the case of Girdhari Lal Gupta (supra), the Hon'ble
Supreme Court has considered the scope of vicarious 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
36 of 44 REVN.29,30,31,32.2018
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 against the
accused.
31. In the case of State of Karnataka (supra), the Hon'ble
Supreme Court observed that a partner of a firm is liable to be
convicted for an offence committed by the firm if he was in charge of
and was responsible to the firm for the conduct of the business of the
firm.
In the decision of this Court in case of Shri S.F.J.Vaz, Manager
of M/s.Zuari Industries Limited (supra), heavily relied upon by
learned counsel for the applicants, the Court had considered the
scope of Section 207 of Cr.P.C. The Court had distinguished between
the complaint u/s 2(d) of Cr.P.C and a first information report. The
documents annexed to the complaint u/s 2(d) of Cr.P.C do not
constitute part of the complaint and hence cannot be looked into for
making out the offence alleged in the complaint. The complaint
must state necessary factual allegations to make out the case. It was
further observed that the accused cannot be made to answer vague
charge and verification statement is recorded with an object to test
whether the allegations make out prima facie case to enable the
Magistrate to issue the process. The complainant cannot be
37 of 44 REVN.29,30,31,32.2018
permitted to improve upon his complaint or to remove any lacuna or
defects. The Trial Court at the time of issuance of process and the
Sessions Court while considering the revision filed by the accused
against the order of process, failed to appreciate the fatal defect in
the complaint and did not notice that the complaint must state
necessary particulars of the offence. In the absence, no other
document can be looked into for the purpose in a criminal case. Any
document that is relied upon or even annexed to such a complaint,
would only be evidence to support the allegations made in the
complaint. The learned counsel for the applicants relied upon the
said decision and strenuously argued that the averments in the
complaint do not make out a case to prosecute the applicants and
other than the complaint no reliance can be placed on any other
documents. The submission deserves to be rejected. The
observations were made in the peculiar facts of the said case. The
Court was not considering the scope of Section 227 of Cr.P.C.. The
scope of Section 227 of Cr.P.C envisages that the Court can look into
the documents submitted therewith.
32. In the case of K.G.Premshankar (supra), it was observed that
the decision of the Civil Court would be relevant 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
38 of 44 REVN.29,30,31,32.2018
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 series of cases wherein
this Court while dealing with the provisions of Sections 227, 228,
239, 240, 241 and 242 of Cr.P.C has consistently held that the Court
at the stage of framing of charge has to apply its mind to the
question whether or not there is any ground for presuming the
commission of an offence by the accused. The Court has to see as to
whether the material brought on record reasonably connects the
accused with the offence. Nothing more is required to be inquired
into. In the same decision, however, the Supreme Court has also
observed that while dealing with the aforesaid provision, the test of
prima facie case is to be applied. The Court has to find out whether
the material offered by the prosecution to be adduced as evidence, is
sufficient to proceed against the accused. The Court also referred to
the decision in the case of Union of India Vs. Prafulla Kumar
Samal (1979)3-SCC-4 wherein it was observed that the Court has to
consider the broad probabilities of the case, the total effect of the
evidence and the documents produced before the Court, but the
39 of 44 REVN.29,30,31,32.2018
Court should not make a roving inquiry into the pros and cons of the
matter and weigh the evidence as if it is conducting a trial.
34. Applying the test laid down in the said decision, it is required
to be held that there is sufficient material against the applicants to
proceed against and the Special Court is not expected to conduct a
roving inquiry at the stage of Sections 227 and 228 of Cr.P.C.
35. In the case of Sarabjit Singh and another (supra), similar
observations were made by the Supreme Court wherein it is
observed that the test of prima facie case may be sufficient for taking
cognizance of an offence. The Court must be satisfied with existence
of strong suspicion. While framing charge in terms of Section 227 of
Cr.P.C, the Court must consider the entire material on record to form
an opinion that the evidence, if unrebutted, would lead to a
judgment of conviction.
In the decision in the case of Parag Bhikhalal Tejani (supra),
this Court has considered the scope of Section 141 of the Negotiable
Instruments Act after relying upon several decisions of Hon'ble
Supreme Court. This Court observed that the person sought to be
made liable should be in-charge of the act responsible for the
conduct of the business of the company.
36. The decisions relating to the vicarious liability 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
40 of 44 REVN.29,30,31,32.2018
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, the
Court ought not to have issued process against the accused. In the
present case, it is noted that the words "in charge of" are missing in
the complaint, however, reading the existing averments in the
complaint read with adjudication order, prima facie makes out a case
against the applicants and they are not entitled for the discharge. It
is also pertinent to note that in paragraph 13 of the complaint it is
submitted that the accused are intentionally avoiding payment of
penalty amount. The said allegation is attributed to all the accused
including the applicants. The offence under Section 24(2) of SEBI
Act stipulates that if any person fails to pay the penalty amount
imposed by the adjudicating officer or fails to comply with any of the
directions or orders, he shall be punishable with imprisonment.
Thus, I find that there is no substance in the submissions advanced
by the applicants.
41 of 44 REVN.29,30,31,32.2018
37. In the case of Standard Chartered Bank Vs. State of
Maharashtra and others (supra), relied upon learned counsel for
respondent no.2 SEBI, the Hon'ble Supreme Court was dealing with
the provisions of Sections 138 and 141 of Negotiable Instruments Act
and after considering several decisions, it was observed that in the
complaint under challenge it was stated that the accused therein
were in-charge of day to day affairs of the company and, therefore,
the High Court has fallen into grave error by coming to the
conclusion that there was no sufficient averment in the complaint for
issuance of summons. From the said decision it is also evident that
the basic averment is required to be incorporated in complaint
within the wording of the provisions relating to vicarious liability
enshrined under the Act.
38. In the case of Radheshyam Surajmal Khandelwal and
another (supra), this Court had considered the issue relating to
vicarious liability while dealing with Sections 27 and 28 of SEBI Act.
In the complaint under challenge there was an assertion that the
accused who are directors, were in-charge and responsible to the
conduct of business and were liable for violations under Section 27
of SEBI Act. The Court has observed that it would not be open to the
Court to interpret the mandatory deeming provision in the statute.
The presumptions are rebuttable and the same can be rebutted at the
time of recording of evidence. By virtue of being directors, the
statutory provision 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.
42 of 44 REVN.29,30,31,32.2018
39. In the case of N.Ranghachari Vs. Bharat Sanchar Nigam
Limited19, 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 in-charge of the affairs of the
company.
In the case of K.P.G.Nair Vs. Jindal Menthol India Limited20,
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 respondent no.2-SEBI had relied upon the
decision in case of N.Narayanan (supra) of Hon'ble Supreme Court,
which deals with the scope and object of SEBI Act. It was observed
that the obligations of the directors in listed companies are
particularly onerous especially when the Board of Directors makes
itself accountable for the performance of the company to
shareholders and also for the production of its accounts and financial
statements especially when the company is a listed company. The
directors of the company or the person in-charge directly or
19 (2007)5-SCC-108
20 (2001)10-SCC-218
43 of 44 REVN.29,30,31,32.2018
indirectly use or employ in connection with the issue, purchase or
sale of any securities listed in stock exchange, any manipulative or
deceptive device or contrivance in contravention of SEBI Act or the
Regulations made thereunder, have necessarily to be dealt with in
accordance with the provisions of SEBI Act and the Regulations
which is absolutely necessary for the investors' protection and to
avoid market abuse. In paragraph 33 of the said decision, it is
observed that the company, though a legal entity, cannot act by itself,
it can act only through its directors. The directors are expected to
exercise their power on behalf of the company with utmost care, skill
and diligence.
41. For the reasons stated hereinabove, I find that there is no merit
in the contentions of the applicants and, therefore, the applications
are required to be rejected. Hence, I pass following order :
ORDER
(i) All Revision Applications are dismissed;
42. At this stage, learned counsel appearing for the applicants
submit that the applicants would consider challenging the order
passed by this Court before the Apex Court. It is submitted that in
case the charge is framed, the relief which is sought by the applicants
would become infructuous. It is, therefore, prayed that interim order
passed by this Court which, will operate till 17 th January, 2018, may
be extended for a period of one week thereafter.
43. Learned counsel for the SEBI opposes the prayer on the
ground that the trial has been expedited by this Court.
44 of 44 REVN.29,30,31,32.2018
44. Considering the fact that the applicants want to decide as to
whether they should approach the Apex Court, an opportunity is
required to be given to them. Hence, interim order passed by this
Court is extended for a period of one week from 17th January, 2018.
45. It is clarified that the observations made in this judgment are
only for considering the present applications and the Trial Court
shall not be influenced by the same at the time of trial.
(PRAKASH D. NAIK, J.)
MST
