Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Appellate Tribunal (SAT): Tarun Agarwala, J. (Presiding Officer) and Dr C. K. G. Nair, Member quashed an order passed by the Securities and Exchange Board of India (‘SEBI’) which imposed a ban on auditing firm, however, upheld the punitive damages awarded for wrongful gain.

In the present case, the appellants being the auditing firm, Price Waterhouse Coopers (‘PWC’) had challenged an order passed by the SEBI wherein a two-year ban was imposed on the firm from auditing any listed company due to its involvement in the 2009 Satyam Scam. The auditing firm had been the auditor of the Satyam Computers Services Limited (‘Satyam’) during the period 2000-2009 and in the year 2009, the Chairman of Satyam stated that the books of accounts of Satyam were not true and the company was involved in large scale financial irregularities and misappropriation of funds. SEBI, upon an investigation of the books of Satyam, found out that PWC was the statutory auditor of the company and there were fabrication, falsification and misrepresentation in the books of account and financial statements of Satyam.

The senior counsels representing the appellants, Janak Dwarkadas along with Mukul Rohatgi questioned the jurisdiction of SEBI in banning an audit firm and submitted that the impugned order deals with the roles of an auditor and its contravention which are prescribed by Institute of Chartered Accountants of India (‘ICAI’) and thus, having the jurisdiction to deal with matter relating to contravention by audit firms. It was contended that as on the date of the impugned order there were new partners who were not partners of the firms during the period 2000 to 2009 and thus, banning them from doing audit work of listed Company merely because those are presently partners in PWC firms is wholly arbitrary and illegal.

The senior advocates representing the respondents, Ravi Kadam being assisted by Kevic Setalvad, submitted that the impugned order does not suffer from any illegality since the Satyam scam had a direct and adverse effect on the securities market. They also urged that failure to comply with the basic auditing standards constituted fraud and thus it was ideal to impose a ban on the auditing firm.

The Appellate Tribunal upon perusal of facts and circumstances of the case stated that it was true that the network of firms under PWC alleged to have been involved in the scam was not under the PWC hence had no stake and vicarious liability of a chartered accountant cannot be extended to a firm. The Appellate Tribunal stated that “in the absence of any finding of connivance or collusion or intention or knowledge on the part of the ten firms in the audit of Satyam Computers, and in view of the clear cut directions of the Bombay High Court, no directions could have been issued by the Whole Time Member against the ten firms.” Dealing with the issue of jurisdiction the Tribunal said SEBI did not have any authority to look into the quality of audit and auditing services and it can only take remedial and preventative action. The direction issued is neither remedial nor preventive, but punitive in nature and thereby quashing the order passed by the SEBI. However, the Appellate Tribunal upheld SEBI’s direction on disgorgement of Rs 13 crore from the auditor along with interest of 12% since 2007 for the wrongful gain.[Price Waterhouse & Co. v. Securities and Exchange Board of India, 2019 SCC OnLine SAT 165, decided on 09-09-2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal (SAT): Coram of Justice Tarun Agarwala (Presiding Officer), Dr C.K.G. Nair (Member), and Justice M.T. Joshi (Judicial Member), quashed an order by the WTM who held the appellant vicariously liable for an act of the Company she worked in.

SEBI received a complaint against Silicon Projects India Limited (SPIL) in respect of the issue of Secured Redeemable Non-Convertible Debentures (NCDs) and consequently made an investigation as to whether SPIL made any public issue of securities without complying with the provisions of the Companies Act, 1956. On investigation, it was found that SPIL had made an offer of NCDs in the financial years 2009-10, 2010-11, 2011-12 and raised an amount of Rs 18.03 crore from 406 allottees. This offer was found to be in violation of the provisions of SEBI Act, 1992, the Companies Act, 1956 and SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (ILDS Regulations). Accordingly, SEBI passed an order on 03-03-2016 for their debarment and refund to the investors against SPIL and its Directors. Since the directions were not complied with, SEBI initiated recovery proceedings against the Company and its Directors.

Along with the appellant, Shib Narayan Das and Antara Mukherjee were also Directors of SPIL during the issuance of the NCDs and were also engaged in fund mobilizing activity. SEBI issued an interim order on 07-03-2016 restraining them from accessing the securities market and further prohibited from buying, selling or dealing in the securities market and asked them to provide a full inventory of all their assets and properties.

By the same interim order, the appellant and the other Directors were directed to show cause as to why action should not be taken under Section 11 and 11-B of the SEBI Act to refund the money collected with interest.

The appellant filed a reply contending that she was appointed as a receptionist in 2009 on a salary of Rs 3000 and in March 2011, she was made a Director of the Company and her salary was increased to Rs 5000 per month. She gave her resignation as a Director on 01-12-2011. She contended that she had nothing to do with the issuance of NCDs and had never attended any meeting of the Board of Directors nor was a signatory to any Resolution in relation to the issuance of NCDs. Instead, Shib Narayan Das in his capacity of Chairman and Director of the Company used to sign all the necessary documents. Further, she was never involved in any activity of the Company. When CBI investigated the case against the Company in 2016, all the Directors including Shib Narayan Das was arrested but the appellant was not.

The WTM passed an order holding that the appellant is jointly and severally liable to refund the money collected by SPIL as she was a Director in the Company and cannot plead ignorance of the affairs of the Company. The appellant was aggrieved by this order and filed an appeal to challenge this order.

The Tribunal held that the said order was patently erroneous and against the provisions of Section 73(2) of the Companies Act as it was made on the assumption that in the absence of any officer being nominated as an officer in default then all the Directors were liable under Section 5(g) of the Companies Act. The WTM did not rely on any evidence on record and therefore, their order was illegal and unsustainable.

Usually, when an offence is committed by a company, the liability is not imposed on all the officers of the company en bloc. The Companies Act makes a departure from this pattern. It gives an opportunity to the board of directors to distribute the work as between the members of the board or to appoint a managerial person. If nothing of this sort is done, only then the whole board is liable to be prosecuted. In this case, it was not possible to hold one Director vicariously responsible for the acts of the Directors in charge of day-to-day affairs of the Company. The spirit of Section 27 of the SEBI Act indicates that an appellant who has nothing to do with the day-to-day affairs of the Company cannot be held guilty of any violation as there is no such thing as vicarious liability under Section 11-B of the SEBI Act. The order was quashed and the appeal was allowed.[Sayanti Sen v. Securities & Exchange Board of India, 2019 SCC OnLine SAT 132, decided on 09-08-2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Consumer Dispute Redressal Commission (NCDRC): A Coram of R.K. Agrawal (President), J. and M. Shreesha (Member) allowed an appeal against the order of State Consumer Dispute Redressal Commission, Punjab that directed a doctor to compensate an aggrieved couple for the death of their three year old daughter caused by gross negligence.

Respondent herein was the father of a three-year-old girl who was diagnosed with blood cancer. The child was admitted to appellant-hospital where Dr Raman Arora (appellant 3 herein) prepared a written protocol of the treatment detailing that the patient was to be given four cycles of chemotherapy for which injections of Vincristine were to be given intravenously and injections of Methotrexate were to be administered intrathecally. Dr Vandana Bhambri and Dr Harjit Singh Kohli assisted him. The patient was given three cycles of chemotherapy, and then her bone marrow test was conducted which showed that her condition had improved. The requisite injections for the fourth cycle were handed over to Dr Harjit Singh Kohli in a sealed packet where it was clearly written that the medicine Vincristine was to be administered intravenously only. However, Dr Kohli administered the injection intrathecally, which led to the depletion in the health of the patient and ultimately she died. The aggrieved parents of child (respondents herein) filed a complaint before the State Consumer Dispute Redressal Commission which held that the doctors and hospital (vicariously) committed gross negligence. The present appeal was filed by the hospital and doctors challenging the said order.

Learned counsel for appellants Y. Rajagopala Rao, contended that the injection Vincristine was not administered on the given date, and the State Commission had erred in giving a finding that Vincristine was administered by an anesthetist i.e. Dr Kohli. Furthermore, he stated that the Histopathology report and the chemical examination report read together with the post-mortem report did not state that the death was due to Vincristine injection. Moreover, the State Commission had failed to consider the expert report which opined that the cause of death in the present case was Toxaemia of Acute Lymphoid Leukaemia, which is a natural cause in case of cancer patients. Also, he argued that Dr Raman Arora is not liable as he did not administer the medicine.

Learned counsel for respondents, Prashant Sareen, contended that the injection was given by Dr Kohli who had testified that he, along with the help of Dr Vandana, had administered the injection intrathecally and later on acquired the knowledge that such administration was fatal. Moreover, he accused Dr. Arora for being negligent as he did not even read the ordinary precautions for treatment.

The Commission relied on S.K. Jhunjhunwala v. Dhanwanti Kumari, (2019) 2 SCC 282, and applied the principle of Bolam Test that gives grounds to hold a professional liable for negligence; and ruled that the doctors were negligent in their conduct. It was held that that admittedly the entire standard protocol was given by Dr Raman Arora and the entire treatment was rendered under his care. Therefore, he was liable for any acts/ commission or omissions done by his team or the assistants who assisted him in rendering treatment to the patient.

The National Commission remarked that the State Commission had rightly relied on the expert opinion given by the Indian Medical Association, Ludhiana which held the doctors responsible for gross negligence.

Placing reliance on Achutrao Haribhau Khodwa v. State of Maharashtra, (1996) 2 SCC 634, it was held that the hospital was vicariously liable for the negligent acts of its doctors.[Mohan Dai Oswal Cancer Treatment & Research Foundation v. Prashant Sareen, 2019 SCC OnLine NCDRC 75, decided on 24-05-2019]

Case BriefsHigh Courts

Delhi High Court: The Bench of R.K. Gauba, J. interfered with the impugned order passed by Metropolitan Magistrate and quashed the summon issued against petitioner.

Petitioner was a Non-Executive Nominee Director of Vasan Health Care (P) Ltd. A complaint was filed against certain persons including petitioner under Section 138 of the Negotiable Instruments Act, 1881 for dishonour of cheque which was issued on the account of Vasan Health Care. In regard to the same, summoning orders were issued against the petitioner.

Sushil Bajaj and Shalin Arthwan, Advocates for the petitioner contended that proceedings against him were an abuse of the process of law as his position in the company was only that of aNon-Executive Nominee Director and he had no role to play in day-to-day affairs of the company.

The High Court served notice of the petition on the respondent but they did not file any reply and nor did they appear before the Court. As such, the Court accepted as indisputable the documents filed by the petitioner confirming his position in the company as claimed by him. Relying on Pooja Ravinder Devidasini v. State of Maharashtra, (2014) 16 SCC 1, the Court held that since at the relevant time, the petitioner could not be said to be at helm of the affairs of the company, therefore no vicarious liability could be fastened on him. As such, the summoning order issued against the petitioner was quashed. [Bhardwaj Thirvenkata Venkatavaraghavan v. PVR Ltd., 2019 SCC OnLine Del 6774, dated 29-01-2019]

Case BriefsForeign Courts

Supreme Court of Sri Lanka: The Supreme Court affirmed the High Court’s award of Rs. 3,500,000/- as damages to the plaintiff in a case of accident caused due to the negligence of gatekeepers appointed by the Sri Lankan Government.

The plaintiff is the wife of the deceased who was killed in an accident while he was driving his car through a level crossing. An unscheduled train passed through the crossing at the time which hit the plaintiff’s car, fatally injuring him. The fact being argued upon was whether leaving the gates of the level crossing by the gatekeepers amounted to negligence.

The Court affirmed with the judgment of the High Court and the District Court that it was the all important duty of the gatekeepers to shut the gates of the crossing before the arrival of the train. Failure to do so amounted to negligence on the part of the gatekeepers. Any person, who sees that the gates are open, can rightfully assume that there are no trains arriving at that time and hence he can safely cross. This is exactly what happened with the deceased and hence there was no contributory negligence on his part. Since the defendants were employed as gatekeepers by Sri Lankan Railways and the negligence was within the scope of employment, therefore Sri Lankan Railways shall also be made vicariously liable. The liability of the Sri Lankan Railways also arises out of the fact that they never informed the gatekeeper defendants about the arrival of an unscheduled train. The appeal was dismissed on these grounds. [Bhadra De Silva Rajakaruna v. General Manager of Railways, SC Appeal No. 62/2013, decided on 01.08.2017]