Supreme Court quashes penalty against part-time director under FERA: Shailendra Swarup vs. Enforcement Directorate (27 July 2020)

Date of the Judgment: 27 July 2020

Citation: 2020 INSC 541

Judges: Ashok Bhushan, J., R. Subhash Reddy, J.

Can a director of a company be held liable for violations of the Foreign Exchange Regulation Act (FERA), 1973, even if they were not actively involved in the day-to-day operations of the company? The Supreme Court of India recently addressed this crucial question in a case involving a part-time, non-executive director who was penalized for alleged FERA violations by his company. The court examined whether the director could be held liable without any specific finding that he was in charge of and responsible for the conduct of the company’s business. The judgment was delivered by a two-judge bench comprising Justices Ashok Bhushan and R. Subhash Reddy, with Justice Ashok Bhushan authoring the opinion.

Case Background

Modi Xerox Ltd. (MXL) made 20 remittances between June 12, 1985, and November 21, 1985, through Standard Chartered Bank. The Reserve Bank of India (RBI) noted that MXL had not submitted the required customs documents as proof of import. The Enforcement Directorate (ED) requested invoices and purchase orders from MXL between 1991 and 1993. MXL provided documents for four transactions and Chartered Accountant’s Certificates for the remaining sixteen, for which their bankers could not trace records. MXL merged into Xerox Modicorp Ltd. (XMC) on January 10, 2000. The Deputy Director of the ED issued a show cause notice on February 19, 2001, to MXL and its directors, including the appellant, Shailendra Swarup, for alleged violations of the Foreign Exchange Regulation Act, 1973. XMC replied to the notice on March 26, 2001. The ED initiated proceedings under Section 51 of FERA, 1973, and scheduled a hearing for October 22, 2003. A notice was sent on October 8, 2003, to MXL and its directors. Shailendra Swarup replied on October 29, 2003, stating he was a part-time, non-executive director and not responsible for the company’s daily operations. The Deputy Director, ED, imposed a penalty of ₹1,00,000 on Shailendra Swarup on March 31, 2004, for contravening Sections 8(3), 8(4), and 68 of FERA, 1973.

Timeline

Course of Proceedings

Shailendra Swarup filed Appeal No. 622 of 2004 before the Appellate Tribunal for Foreign Exchange, challenging the penalty imposed by the Deputy Director, Enforcement Directorate. The Appellate Tribunal dismissed the appeal on March 26, 2008. Subsequently, Shailendra Swarup filed Criminal Appeal No. 575 of 2008 in the Delhi High Court, which was also dismissed on November 18, 2009. The High Court had stayed the order of penalty during the pendency of the appeal. The Supreme Court also stayed the penalty order on February 19, 2010, while issuing notice in the present appeal.

Legal Framework

The case revolves around the interpretation and application of the following sections of the Foreign Exchange Regulation Act, 1973:

• Section 8(3) of FERA, 1973: This section mandates that no person shall, except with the general or special permission of the Reserve Bank, import or export any goods or payment for import or export of goods.
• Section 8(4) of FERA, 1973: This section states that the Reserve Bank may, for the purpose of ensuring the due compliance with the provisions of this section, require any person making any import or export of goods to furnish to it or to any other authority specified by it, such information or documents as it may deem necessary.
• Section 68 of FERA, 1973: This section deals with “Offences by companies.” It states that if a company contravenes any provision of the Act, every person who, at the time of the contravention, was in charge of and responsible for the conduct of the company’s business, along with the company, shall be deemed guilty of the contravention. However, it provides a defense if the person proves the contravention occurred without their knowledge or that they exercised due diligence to prevent it.
  
  “Section 68. Offences by companies.—
  (1) Where a person committing a contravention of any of the provisions of this Act or of any rule, direction or order made thereunder is a company, 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 of the company as well as the company, shall be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly:
  Provided that nothing contained in this sub-section shall render any such person liable to punishment if he proves that the contravention took place without his knowledge or that he exercised all due diligence to prevent such contravention.
  (2) Notwithstanding anything contained in sub-section (1), where a contravention of any of the provisions of this Act or of any rule, direction or order made thereunder has been committed by a company and it is proved that the contravention has taken place with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly.
  Explanation. —For the purposes of this section —
  (I) “company” means any body corporate and includes a firm or other association of individuals; and
  (ii) “director”, in relation to a firm, means a partner in the firm.”
• Section 51 of FERA, 1973: This section outlines the power to adjudicate. It states that for the purpose of adjudging under section 50 whether any person has committed a contravention of any of the provisions of this Act (other than those referred to in that section) or of any rule, direction or order made thereunder, the adjudicating officer shall hold an inquiry in the prescribed manner after giving that person a reasonable opportunity for making a representation in the matter.
  
  “Section 51. Power to adjudicate. —For the purpose of adjudging under section 50 whether any person has committed a contravention of any of the provisions of this Act (other than those referred to in that section) or of any rule, direction or order made thereunder, the adjudicating officer shall hold an inquiry in the prescribed manner after giving that person a reasonable opportunity for making a representation in the matter and if, on such inquiry, he is satisfied that the person has committed the contravention, he may impose such penalty as he thinks fit in accordance with the provisions of that section.”

Arguments

Appellant’s Arguments:

• Shri C.A. Sundaram, the learned senior counsel for the appellant, argued that the High Court erred in dismissing the appeal by considering the appellant’s plea of being a part-time director as an afterthought.
• The appellant contended that there was no material or specific case by the Enforcement Directorate (ED) to prove that he was in charge of and responsible for the conduct of the company’s business.
• He stated that merely being named as a director in the company’s reply to the notice did not imply that all directors were responsible for the company’s conduct.
• The appellant argued that he could only be prosecuted and punished for FERA violations if it was proven that he was responsible for the company’s conduct during the relevant period when the remittances were made.
• He emphasized that the Appellate Tribunal did not record any finding that he was in charge of the company’s affairs.
• The appellant highlighted that in a subsequent transaction, similar proceedings against him were dropped after accepting his plea that he was a part-time, non-executive director with no executive role in the company.
• The appellant submitted that the adjudicating authority imposed the penalty without finding that he was the director responsible for the working of MXL, relying only on a letter from the company secretary listing board members.

Respondent’s Arguments:

• Shri K.M. Nataraj, the learned Additional Solicitor General, argued that the penalty was rightly imposed on the appellant, as he was a director during the relevant period.
• He submitted that the appellant did not disprove the allegations made against him in the show cause notice.
• The respondent argued that in FERA proceedings, unlike under the Negotiable Instruments Act, no specific complaint is required.
• The respondent contended that the burden was on the appellant to prove that he had no role to play on behalf of the company.

Submissions

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for determination:

1. Whether the plea taken by the appellant in his reply dated 29.10.2003, that he was a part-time, non-executive director and not responsible for the company’s business, was an afterthought.
2. Whether the appellant failed to bring material on record to prove that he was a part-time, non-executive director not responsible for the conduct of the company’s business.
3. Whether the Adjudicating Authority, Appellate Tribunal, and High Court erred in holding the appellant in contravention of Sections 8(3), 8(4), and 68 of FERA, 1973, without any material that the appellant was responsible for the conduct of the company’s business and without recording any specific findings to that effect.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• S.M.S. Pharmaceuticals Ltd. Vs. Neeta Bhalla and another, (2005) 8 SCC 89: The Supreme Court discussed Section 141 of the Negotiable Instruments Act, 1881, which is similar to Section 68 of FERA, 1973. The court held that criminal liability arises from being in charge of and responsible for the conduct of the company at the relevant time, not merely from holding a designation.
  Ratio: Liability under Section 141 arises from being in charge and responsible for the conduct of the business of the company at the relevant time, and not merely on the basis of holding a designation or office in a company. (Supreme Court of India)
• N.K. Wahi vs. Shekhar Singh and others, (2007) 9 SCC 481: This case reiterated the principles laid down in S.M.S. Pharmaceuticals Ltd. (Supreme Court of India)
• National Small Industries Corporation Limited vs. Harmeet Singh Paintal and another, (2010) 3 SCC 330: The court reiterated that directors can be prosecuted only if they were in charge and responsible for the conduct of the business of the company. (Supreme Court of India)
• Pooja Ravinder Devidasani vs. State of Maharashtra and another, (2014) 16 SCC 1: This case also reiterated the principles laid down in S.M.S. Pharmaceuticals Ltd. (Supreme Court of India)
• N. Rangachari vs. Bharat Sanchar Nigam Ltd., (2007) 5 SCC 108: The court held that there must be specific averments against a director showing how they were responsible for the conduct of the company’s business. (Supreme Court of India)

Legal Provisions:

• Section 141 of the Negotiable Instruments Act, 1881: This section deals with offences by companies and is considered pari materia to Section 68 of FERA, 1973. It states that every person who, at the time the offence was committed, was in charge of and responsible to the company for the conduct of the business of the company, shall be deemed to be guilty of the offence.
• Section 291 of the Companies Act: This section states that the Board of Directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorized to exercise and do.

Treatment of Authorities

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Supreme Court relied on several key authorities to reach its decision:

• S.M.S. Pharmaceuticals Ltd. Vs. Neeta Bhalla and another, (2005) 8 SCC 89:* The court followed this judgment, emphasizing that liability arises from being in charge and responsible for the conduct of the business, not merely from holding a position in the company.
• N.K. Wahi vs. Shekhar Singh and others, (2007) 9 SCC 481:* This case was used to reiterate the principles laid down in S.M.S. Pharmaceuticals Ltd.
• National Small Industries Corporation Limited vs. Harmeet Singh Paintal and another, (2010) 3 SCC 330:* The court used this case to reiterate that directors can be prosecuted only if they were in charge and responsible for the conduct of the business of the company.
• Pooja Ravinder Devidasani vs. State of Maharashtra and another, (2014) 16 SCC 1:* This case was also used to reiterate the principles laid down in S.M.S. Pharmaceuticals Ltd.
• N. Rangachari vs. Bharat Sanchar Nigam Ltd., (2007) 5 SCC 108:* The court used this case to emphasize that specific averments are needed to show how a director was responsible for the conduct of the company’s business.
• Section 141 of the Negotiable Instruments Act, 1881:* The court compared this section with Section 68 of FERA, 1973, noting that both deal with offences by companies in a similar manner.
• Section 291 of the Companies Act:* The court cited this section to show that while the Board of Directors is responsible for the company’s affairs, not all directors are liable for offences.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following points:

• The court emphasized that the appellant’s plea of being a part-time, non-executive director was not an afterthought and was made at the first opportunity during the adjudication proceedings.
• The court noted that the adjudicating authority did not provide any specific finding that the appellant was responsible for the conduct of the company’s business.
• The court highlighted that the authorities failed to establish that the appellant was in charge of and responsible for the conduct of the company’s business at the relevant time.
• The court relied on the principles established in S.M.S. Pharmaceuticals Ltd. and other similar cases, which clarified that liability under Section 68 of FERA, 1973, arises from being in charge and responsible for the conduct of the company’s business, not merely from holding a position as a director.
• The court also considered the fact that in a subsequent transaction, the adjudicating authority had accepted the appellant’s plea of being a part-time, non-executive director.

Ranking of Sentiment Analysis of Reasons

Fact:Law

Fact: The court considered the factual aspects of the case, such as the appellant’s role as a part-time director, the absence of evidence linking him to the company’s daily operations, and the lack of specific findings by the lower authorities. These factual considerations accounted for 35% of the court’s decision-making process.

Law: The court heavily relied on the legal principles established in previous judgments, particularly S.M.S. Pharmaceuticals Ltd., and the interpretation of Section 68 of FERA, 1973, and Section 141 of Negotiable Instruments Act, 1881. These legal considerations formed 65% of the court’s decision-making process.

Logical Reasoning

The court considered the arguments and evidence presented by both sides, and determined that the lower authorities had erred in imposing a penalty on the appellant without establishing his responsibility for the company’s business conduct. The court’s reasoning was based on the interpretation of the law and the facts of the case.

The Supreme Court’s decision was based on a careful analysis of the facts, the relevant legal provisions, and the precedents set by earlier judgments. The court emphasized that the liability of a director under Section 68 of FERA, 1973, is not automatic but depends on their role and responsibility in the conduct of the company’s business.

Thecourt’s decision highlights the importance of establishing a clear nexus between a director’s role and the contravention of the law to hold them liable, especially in cases involving part-time and non-executive directors.

Final Order

The Supreme Court allowed the appeal and set aside the order passed by the Deputy Director, Enforcement Directorate, the Appellate Tribunal for Foreign Exchange, and the Delhi High Court. The penalty of ₹1,00,000 imposed on the appellant was quashed.

Legal Principles Established

The Supreme Court’s judgment in Shailendra Swarup vs. Enforcement Directorate established the following key legal principles:

• Liability of Directors: A director of a company cannot be held liable for contraventions of FERA, 1973, merely by virtue of their designation. Liability arises only if the director was in charge of and responsible for the conduct of the company’s business at the time of the contravention.
• Burden of Proof: The burden of proof lies on the authorities to establish that a director was responsible for the conduct of the company’s business and not on the director to prove their lack of involvement.
• Part-Time and Non-Executive Directors: Part-time and non-executive directors cannot be held liable unless there is specific evidence proving their involvement in the day-to-day operations of the company.
• Section 68 of FERA, 1973: The interpretation of Section 68 of FERA, 1973, is similar to Section 141 of the Negotiable Instruments Act, 1881, which requires a specific finding that a person was in charge of and responsible for the conduct of the company’s business.
• Specific Averments: There must be specific averments against a director showing how they were responsible for the conduct of the company’s business to hold them liable.

Implications

The judgment has significant implications for directors and companies:

• Protection for Non-Executive Directors: The judgment provides a layer of protection for non-executive and part-time directors, ensuring they are not penalized for the actions of the company unless their direct involvement in the contravention is proven.
• Due Diligence: Companies and authorities must exercise due diligence in establishing the role and responsibility of directors before initiating proceedings against them.
• Clarity on Liability: The judgment clarifies that the liability of directors under FERA is not automatic and depends on their actual role and responsibility in the company’s affairs.
• Need for Specific Evidence: Authorities need to gather specific evidence to demonstrate a director’s involvement in the conduct of the company’s business to hold them liable for contraventions.
• Importance of Corporate Governance: The judgment underscores the importance of sound corporate governance practices that clearly define the roles and responsibilities of directors, especially in companies with both executive and non-executive directors.

Conclusion

The Supreme Court’s decision in Shailendra Swarup vs. Enforcement Directorate is a landmark judgment that clarifies the liability of directors under the Foreign Exchange Regulation Act, 1973. The court emphasized that a director cannot be held liable for a company’s FERA violations unless it is proven that they were in charge of and responsible for the conduct of the company’s business. This judgment provides significant relief to non-executive and part-time directors and ensures that they are not penalized for the actions of the company unless their direct involvement is established. The ruling highlights the importance of establishing a clear nexus between a director’s role and the contravention of the law. It also underscores the need for authorities to gather specific evidence of a director’s involvement in the company’s business conduct before initiating proceedings. This case is a significant step in ensuring fair and just application of the law and provides a much-needed clarification on the liability of directors in corporate settings. The judgment serves as a reminder of the importance of sound corporate governance practices and the need for clear delineation of roles and responsibilities within a company.