On July 27, 2020 the Supreme Court in the case of Shailendra Swarup vs. The Deputy Director, Enforcement Directorate[1] held that when adjudicating on FERA, 1973, an important criteria to consider before proceeding against a Director of a Company is to check whether the Director was in charge of and was responsible for the activities of the Company or for the business of the Company.
Facts
Modi Xerox Ltd. (MXL), a Company registered under the Companies Act, 1956 made 20 remittances through Standard Chartered Bank. The Reserve Bank of India issued a letter stating that despite reminders, 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 Company amalgamated and merged into Xerox Modicorp Ltd. Thereafter, the Enforcement Directorate (ED) issued a show cause notice for violations under the Foreign Exchange Regulation Act (FERA) against the Directors of the company.
The Appellant(one of the Directors) replied to the show cause notice stating that he is a practicing Advocate of the Supreme Court and was only a part-time, non-executive Director of the Company and he was never in the ‘employment’ of the Company and not had executive role in the functions of the Company. Additionally, he was never in charge of nor ever responsible for the conduct of business of the company. An affidavit was attached as well by the Company Secretary confirming the affirmations of the Appellant. However, the High Court observed that the said affidavit was not produced earlier before the Appellate Tribunal hence, the same was declared to have been submitted as an afterthought.
The ED passed an order imposing a penalty of Rs.1,00,000/- on the appellant for contravention of Section 8(3) r/w 8(4) and Section 68 of FERA, 1973. Thereafter, the Tribunal did not record any finding that appellant was in charge of the affairs of the Company and yet held the Appellant liable, observing that there is nothing on record to show that any restriction was placed on the powers of the Appellants as Directors of the Company with reference to subject transactions.
The Court
Although there were multitude questions before the Court, all of them were dependent on the question of whether the Director/Appellant’s appeal that he was only a part-time, non-exclusive Director not responsible for the conduct of business of the Company at the time of commission of the offence, holds water or not.
The Court observed that the Appellant’s statement/reply should have been duly considered by the Adjudicating Authority who chose to ignore it and imposed the penalty of Rs.1,00,000/- without any substantial proof except the fact that at the time, the appellant was a Director of the said Company.
Further, the Appellate Tribunal made a general observation that management of the Company is to be handled by the Board of Directors, hence, the appellant being Director is held guilty. No finding has been made 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.
Moreover, it relied on the case of S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla and another[2] wherein the court considered the provisions of Section 141 of the Negotiable Instruments Act, 1981 which is pari materia to Section 68 of the FERA, 1973. The conclusion was that 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. Thus, it held that criminal liability arises from being in charge of and responsible for the conduct of the Company at the relevant time.
In National Small Industries Corporation Limited v. Harmeet Singh Paintal and Another[3], the Court held that Directors can be prosecuted only if they were in-charge and responsible for the conduct of the business of the company. The bare reading of Section 68 deals with Offences by companies, “…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 the business of the company as well as the company, shall be deemed to be guilty of the contravention”.
Conclusion
The Supreme Court held that for proceeding against a Director of a company for contravention of provisions of Foreign Exchange Regulation Act, 1973, it would be most relevant to first establish whether at the time of commission of the impugned offence, the Director of the said Company was in fact in charge of and was responsible to the company for the conduct of the business of the company or not. This reiteration is helpful for Directors who are embroiled in company matters which may be beyond their scope of work.
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