While Company Has MD, Non-Executive Director Can’t Be Person In Default: SEBI

The Securities and Exchange Board of India (SEBI) has held that a non-executive director is not an ‘officer who is in default’ and therefore cannot be held liable for refunds under Section 73 of the Companies Act.

The bench of Ananth Narayan G. has observed that no liability could be imposed on a non-executive director in his capacity as ‘officer who is in default’ where a company had a managing director or a whole-time director or manager.

The company, Alchemist Holdings Limited (AHL), issued Redeemable Preference Shares to 4,26,676 investors during the years 2006 to 2009 and raised funds amounting to INR 444.67 crore.

AHL and its directors were held liable for non-compliance with public issue norms under the provisions of the Companies Act, 1956, particularly for the private placement of redeemable preference shares in violation of the provisions of the Companies Act.

SEBI sought to initiate proceedings against certain non-executive directors of AHL and held them responsible for the acts of AHL as officers who are in default’ under Section 5(g) of the Companies Act. It sought a refund of money collected by AHL from investors under Section 73 from the directors.

As per Section 73(2) of the Companies Act, a person must not only have been a director of the company during the relevant period when the public notice took place but also be the officer in default as defined under Section 5 of the Companies Act.

In accordance with the provisions of Section 5, it needs to be first ascertained whether the issuer company has a managing director. If there is a managing director in the company, then he would be an "officer in default". In the absence of any managing director, if the board has specified any particular director, manager, or any other person as an "officer in default", only that specified director, manager, etc. would be an officer in default. Apart from the directors, if any officer has played some role in bringing about the default or has performed the duties assigned to him, he could be penalized as an "officer in default".

The counsel for the non-executive director contended that he was appointed as a non-executive director after the issuance of shares by AHL. No liability could be imposed on a non-executive director in his capacity as ‘officer who is in default’ where a company had a managing director or a whole-time director or manager.

The Board has observed that there are no documents or evidence to suggest that non-executive directors were directors of AHL at the relevant time of the illegal allotment of RPS. Consequently, it is not possible to hold the non-executive director as an officer in default of AHL during the years 2006 to 2009, when AHL issued an RPS. It, therefore, follows that the non-executive director cannot be held liable for making a refund under Section 73(2) of the Companies Act, 1956.

AHL director was represented by Kinshuk Chatterjee, and Utkarsh Mishra with the support of Madhav Rastogi.

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