SAT on the Non-Liability of a Company Secretary for Incorrect Disclosures

On 1 November 2022, the Securities Appellate Tribunal (SAT) in V. Shankar v. Securities and Exchange Board of India exonerated the company secretary of Deccan Chronicle Holdings Limited (DCHL) from liability for certain misstatements and incorrect disclosures made by the company.

Background and Decision

The Securities and Exchange Board of India (SEBI) had conducted investigation for certain forms of irregularity allegedly committed by DCHL. These included understating the outstanding loans and interest in the annual reports from 2008 to 2011 and for undertaking a buyback of shares without having adequate free reserves. An adjudicating officer (AO) of SEBI found that the company secretary of DCHL (in addition to its directors and promoters) had violated sections 68 and 77A of the Companies Act, 1956. In particular, the company secretary had signed the public announcement of the buyback which contained incorrect disclosures. Accordingly, SEBI imposed a penalty of INR ten lakhs (one million) on the company secretary, who in turn appealed before the SAT.

The SAT began by examining the statutory framework under the companies’ legislation of 1956, which applied to this case. Section 68 thereof imposed penalty on ‘any person’ who knowingly or recklessly makes a false, deceptive or misleading statement that induces persons to invest money. Section 77A set out the detailed stipulations a company buying back its securities must comply with, failing which the company as well as ‘any officer of the company who is in default’ are subject to liability.

Within such a framework, the essential question before the SAT was whether the company secretary can be said to have induced investors knowingly or recklessly by signing the public announcement for the buyback or otherwise committed a default under section 77A. The SAT also drew attention to section 215 of the Companies Act, 1956, which provides for the manner in which the financial statements of the company are to be authenticated once approved by the board, which includes that the balance sheet must be signed by a manager or secretary.

The essence of the issue before SAT was whether the company secretary bears the obligation of verifying the details of the financial statements and disclosures before affixing her signature or whether she simply performs ministerial acts once the board has made the substantive decision. The liability of the company secretary would turn squarely on the answer to this question. The SAT was clear in its finding that there is no requirement for the company secretary to check the veracity of the buyback offer before authenticating such document. It noted:

“Once the offer document and the balance sheet is approved by the Board of Directors the Company Secretary, as part of his duty and responsibility, is only to authenticate the contents indicated in the balance sheet or in the offer document and is not required to go into the veracity of the buyback offer document and its legal compliances before authenticating such document. Such duty is not part of the responsibility of the appellant as a Company Secretary.”

The SAT also asserted that merely because a person (such as a company secretary) falls within the definition of an ‘officer in default’ under section 5 of the Companies Act, 1956, it does not make her automatically liable for a default under section 77A of that legislation. For these reasons, the SAT overturned the order of the SEBI AO.

Some Observations

At the outset, it is necessary to note that the SAT arrived at its decision largely based on first principles. While it did make reference to the appropriate statutory provisions, it did not engage in any jurisprudential analysis of the roles, responsibilities and liabilities of the company secretary. In that sense, the ruling appears to be specific to the facts and circumstances of the case.

This ruling may be insufficient for the company secretarial community to heave a sigh of relief, as it does not deal extensively with the relevant case law, including by both the SAT as well as other adjudicatory bodies such as the National Company Law Tribunal, which seem to impose a more onerous standard for discharge of disclosure and compliance obligations by the company secretary. To obtain a flavour for alternative approaches adopted to deal with secretarial liabilities, please see here and here.

Finally, the SAT’s ruling was premised on the text of the Companies Act, 1956. The revamped Companies Act, 2013 is not only more compliance-focused compared to its predecessor, but it also delineates the role of the company secretary in section 205 of the legislation and the accompanying Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. Hence, one can expect the reasoning, if not outcome, under the newer legislation to be dissimilar to that rendered by SAT in the instant case.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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