Directors with Oversight Roles Can Be Held Vicariously Liable: Prima Facie Case Established: Calcutta High Court

Calcutta High Court dismissed a revision application challenging the refusal to discharge the petitioner, an executive director of Amrit Projects Ltd., from criminal proceedings initiated by SEBI. The case concerns allegations of fraudulent fund mobilization through Deep Discount Bonds and violations of securities regulations.

The Securities and Exchange Board of India (SEBI) initiated proceedings against Amrit Projects Ltd., its managing director, executive director (the petitioner), and others for alleged fraudulent practices involving the mobilization of public funds through Deep Discount Bonds without regulatory compliance.

The petitioner, Kali Kishore Bagchi, served as an executive director of Amrit Projects Ltd. from 2004 to 2013 and claimed his role was limited to technical projects, denying involvement in financial or operational matters. He argued for discharge, contending he was not responsible for the alleged violations under the SEBI Act and the Companies Act.

SEBI alleged that Amrit Projects Ltd. raised funds from the public through Deep Discount Bonds without complying with securities laws, including Sections 55A, 56, 67, 68, 70, and 73 of the Companies Act, 1956, and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003.

The prosecution contended that the petitioner, as a director during the relevant period (2007–2011), was responsible for the company's operations and liable for violations under Sections 24(1), 26(1), and 27 of the SEBI Act, 1992.

In 2020, SEBI directed the company and its managing director to refund investors’ money with interest and prohibited them from accessing the securities market. A prima facie case was also established against the petitioner for his role as a director during the period of violations.

Legal Issues

Can a director be held criminally liable for corporate violations if they claim no involvement in daily operations?

Is the petitioner entitled to discharge in light of his role as an executive director and member of the Board of Directors?

Does interference by the High Court in the ongoing trial amount to abuse of process?

The Court referred to precedents on corporate liability, particularly the principles laid down in S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla [(2005) 8 SCC 89], which emphasized that criminal liability for corporate offenses extends to those in charge of and responsible for the company's business at the relevant time.

“The liability arises from being in charge of and responsible for the conduct of business of the company at the relevant time when the offence was committed and not merely from holding a designation or office in a company. Liability depends on the role one plays in the affairs of a company and not on designation or status.”

The Court noted that the petitioner served as an executive director and member of the Board of Directors during the period of alleged violations (2007–2011). The trial court had correctly inferred that:

“The petitioner, by virtue of his long tenure as director, cannot prima facie claim ignorance of the company’s activities, particularly when it concerns fund mobilization over several years.”

The Court rejected the petitioner’s claim that his role was limited to technical operations, emphasizing that his position and responsibility as a director created a presumption of knowledge and involvement unless proven otherwise during trial.

Addressing the petitioner’s contention that the proceedings were an abuse of process, the Court observed:

“Considering the prima facie case against the petitioner, it will be a clear abuse of the process of law if this Court interferes in the proceedings before the trial court at this stage.”

The Court emphasized that quashing the proceedings would undermine SEBI's regulatory actions and obstruct the trial, which had already commenced with the examination of witnesses.

The Court upheld the trial court’s reasoning in denying the discharge application, stating:

“The learned Judge rightly held that whether there was consent, connivance, or negligence on the part of the petitioner is a mixed question of law and fact, which must be determined through evidence during trial.”

S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla [(2005) 8 SCC 89]:

Liability under Section 141 of the Negotiable Instruments Act requires the accused to be in charge of and responsible for the conduct of the company’s business at the time of the offense.

K.K. Ahuja v. V.K. Vora [(2009) 10 SCC 48]:

A director’s liability depends on their actual role in the company’s affairs, not merely their designation.

Pooja Ravinder Devidasani v. State of Maharashtra [(2014) 16 SCC 1]:

Non-executive directors are not liable unless specific evidence establishes their involvement in the company’s operations or negligence in oversight.

National Small Industries Corp. Ltd. v. Harmeet Singh Paintal [(2010) 3 SCC 330]:

A bald statement in a complaint that a director was responsible for the company’s business is insufficient without particulars.

The Court dismissed the petitioner’s criminal revision application (CRR 3638 of 2022) and upheld the trial court’s order refusing to discharge the petitioner.

The High Court directed the trial court to:

Proceed expeditiously with the trial.

Ensure compliance with SEBI’s directions to secure investor interests.

This ruling reinforces the principle that directors, regardless of their designation, can be held vicariously liable for corporate offenses if their role indicates oversight or involvement in the company’s affairs. The judgment serves as a reminder to corporate officers about the significance of their fiduciary and legal responsibilities.

Date of Decision: November 12, 2024