Proceeding against Company Director for FERA contravention – Necessary ingredients

Proceeding against Company Director for FERA contravention. Necessary ingredients are similar to section 141 of Negotiable Instrument Act – SC

ABCAUS Case Law Citation:
ABCAUS 3343 (2020) (07) SC

Important case law relied upon by the parties:
S. M. S. Pharmaceuticals Ltd. Vs. Neeta Bhalla and another, (2005) 8 SCC 89
N. Rangachari vs. Bharat Sanchar Nigam Ltd. 2007)5 SCC 108
National Small Industries Corporation Limited Vs. Harmeet Singh Paintal and Another, (2010)3 SCC 330

A Company registered under the Companies Act had made several bank remittances to foreign countries.

The RBI issued a letter to the company stating that despite reminder issued by the Authorised Dealer, the company had not submitted the Exchange Control copy of the custom bills of Entry/Postal Wrappers as evidence of import of goods into India.

The Enforcement Directorate (ED) also asked the company to supply invoices and purchase orders.  

The company provided records for few transactions and for the remaining remittances, it furnished Chartered Accountant’s Certificates for which its Bankers were unable to trace old records.

Later the company amalgamated and merged into another company (resultant company).

ED started Proceedings u/s 51 of Foreign Exchange Regulation Act, 1973 (FERA) for alleged contravention and notices were sent to the amalgamated company and its Directors, including the appellant.

The appellant replied that he was a practicing Advocate of the Supreme Court and was only a part-time, non-executive Director and he was never in the employment of the Company nor had executive role in the day to day functions of the Company.

However, the ED passed an order imposing a penalty of Rs. 1,00,000/-on the appellant for contravention of Section 8(3) read with 8(4) and Section 68 of FERA, 1973.

The Appellate Tribunal for Foreign Exchange (The Tribunal) dismissed the appeal of the appellant and also the Delhi High by the impugned judgment dismissed the appeal of the appellant. The High Court rejected the plea that the appellant was a part-time, non-executive Director not responsible for the conduct of business of the Company at the relevant period on the ground that the above plea was an afterthought since in reply given by the company Secretary to show cause notice no such plea was taken.

The Hon’ble Supreme Court noted that the reply to the earlier notice of ED was sent only by the Company through Acting Company Secretary.

The Hon’ble Supreme Court pointed out that since, under Section 51 it was obligatory for the adjudicating officer to hold an inquiry after giving the person a reasonable opportunity for making a representation in the matter. Therefore, representation submitted by the appellant in response to adjudication notice was the plea taken first time by the and could not have been termed either as afterthought or denied consideration.

The Hon’ble Supreme Court stated that What is said by a person who is called for personal hearing even though given in the form of written representation required  to  be  considered  by  the adjudicating officer otherwise the personal hearing shall become an empty formality and meaningless and in the given case specially, when what was said by the appellant in his representation in no manner contradicted the reply sent  by  the  Company  Secretary.

The Hon’ble Supreme Court noted that the adjudicating officer had dropped penalty on many nominee directors of FIs on the ground that they were not responsible for day to day activities of the company and were not the Directors during the relevant period. However, in his order he had not consideration the pleas of the appellant.

The Adjudicating Officer had not even held that the pleas taken by the appellant were untenable. Thus, the penalty had been imposed without returning a finding that it was the appellant who was liable for contravention of the provisions. The order was unsustainable on the above ground also.

Similarly, no finding had been returned by the Appellate Tribunal that the appellant was not a part-time, non-executive Director and was responsible for the conduct of business of the Company at the relevant time.

The Hon’ble Supreme Court noted that it had an occasion to consider the similar provisions of Section 141 of the Negotiable Instruments Act and it was held that the criminal liability arises from being incharge of and responsible for the conduct of the Company at the relevant time. The liability arises on account of conduct, act or omission on the part of a person and not merely on account of holding an office or a position in a company.

The Hon’ble Supreme Court noted that provisions of Section 68 of FERA, 1973  which deals with “Offences by companies” creates a legal  fiction, i.e., “shall be deemed to be  guilty”. The legal fiction triggers on fulfilment of conditions as contained in the section. The words “every person who, at the time of the contravention was committed, was in charge of, and was responsible to, the company for the conduct of business” has to be given some meaning and purpose. The provision cannot be read to mean that whosoever was a Director of a company at the relevant time when contravention took place, shall be deemed to be guilty of the contravention.

The Hon’ble Supreme Court observed that Section 141 of the Negotiable Instruments Act contains the same conditions for a person to be proceeded with and punished for offence as contained in Section 68 of FERA, 1973. Therefore, the ratio of its judgments on Section 141 of Negotiable Instruments Act are also clearly relevant while interpreting Section 68 of FERA Act.

Necessary ingredients for Proceeding against Company Director for FERA contravention

The Hon’ble Supreme Court held that for proceeding against a Director of a company for contravention of provisions of FERA, 1973, the necessary ingredient for proceeding shall be that at the time offence was  committed, the Director was  in charge of and was responsible to the company for the conduct of the business of the company. The liability to be proceeded with for offence under Section 68 of FERA, 1973 depends on the role one plays in the affairs of the company and not on mere designation or status.

The Hon’ble Supreme Court pointed out that no finding was returned by any of the authorities that it was the appellant who was responsible for the conduct of business of the Company at the relevant time. Thus, the liability had been fastened without there being necessary basis for any such conclusion.

Accordingly, the Hon’ble Supreme Court allowed the appeal and set aside the judgments of the High Court/ Tribunal and the adjudicating officer.

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