Liability For Offence Depends On Role One Plays In Company Affairs And Not On Mere Designation Or Status: SC

             In a remarkable, righteous and recent judgment titled “Shailendra Swarup vs The Deputy Director, Enforcement Directorate” in Criminal Appeal No. 2463 of 2014 delivered just recently on July 27, 2020, the Supreme Court Bench comprising of Justice Ashok Bhushan and Justice R Subhash Reddy minced just no words to explicitly, elegantly and effectively hold that the liability to be proceeded with for offence under Section 68 of the FERA, 1973 depends on the role one plays in the affairs of the company and not on mere designation or status. The Supreme Court has held that for proceeding against a Director of a company for contravention of provisions of Foreign Exchange Regulation Act, 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. Very rightly so!

To start with, we see that in this latest, landmark and laudable judgment authored by Justice Ashok Bhushan for himself and Justice R Subhash Reddy, the ball is set rolling in para 1 wherein it is observed that, “This appeal has been filed against the judgment of Delhi High Court dated 18.11.2009 dismissing the criminal appeal filed by the appellant by which appeal the judgment dated 26.3.2008 of the Appellate Tribunal for Foreign Exchange in Appeal No. 622 of 2004 filed by the appellant was challenged.”

While proceeding ahead, it is then held about the facts of the case in para 2 that, “Brief facts of the case giving rise to this appeal are:

2.1 Modi Xerox Ltd. was a Company registered under the Companies Act 1956 in the year 1983. Between the period 12.6.1985-21.11.1985, 20 remittances were made by the Company MXL through its banker Standard Chartered Bank. The Reserve Bank of India issued a letter stating that despite reminder issued by the Authorised Dealer, MXL had not submitted the Exchange Control copy of the custom bills of Entry/Postal Wrappers as evidence of import of goods into India. Enforcement Directorate wrote to MXL in the year 1991-1993 for supplying invoices as well as purchase orders. MXL on 09.07.1993 provided for four transactions and Chartered Accountant’s Certificates for balance 16 amounts for which MXL’s Bankers were unable to trace old records dating back to 1985. MXL amalgamated and merged into Xerox Modicorp Ltd. (hereinafter referred to as “XMC”) on 10.01.2000. A show cause notice dated 19.02.2001 was issued by the Deputy Director, Enforcement Directorate to MXL and its Directors, including the appellant. The show cause notice required to show cause in writing as to why adjudication proceedings as contemplated in Section 51 of Foreign Exchange Regulation Act, 1973 (hereinafter referred to as “FERA, 1973”) should not be held for contravention. Xerox Modi Corporation Ltd. (successor of MXL) replied the show cause notice dated 19.02.2001 vide its letter dated 26.03.2001. The Directorate of Enforcement decided to hold proceedings as contemplated in Section 51 of the FERA, 1973 read with Section 3 and 4 of Section 49 of FEMA and fixed 22.10.2003 for personal hearing. Notice dated 08.10.2003 was sent to MXL and its Directors. Notice dated 08.10.2003 was replied by the appellant vide its detailed reply dated 29.10.2013. In the reply the appellant stated that he is a practicing Advocate of the Supreme Court and was only a part-time, non-executive Director of MXL and he was never in the employment of the Company nor had executive role in the functions of the Company. It was further stated that the appellant was never in charge of nor ever responsible for the conduct of business of the Company. Along with the reply an affidavit of the Company Secretary dated 04.07.2003 that the appellant who was the Director of erstwhile Company – XML was only a part-time, Director of the said Company and never in charge of day to day business of the Company was also filed. The MXL has also submitted a reply dated 29.10.2003. The Deputy Director, Enforcement Directorate after hearing the appellant, other Directors of the Company passed an order dated 31.03.2004 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.

2.2 Aggrieved by the order dated 31.03.2004 imposing penalty of Rs. 1,00,000/- on the appellant, Appeal No. 622  of 2004 was filed by the appellant before the Appellate Tribunal for Foreign Exchange which appeal came to be dismissed by the Appellate Tribunal on 26.03.2008. Against the order of the Appellate Tribunal dated 26.03.2008, Criminal Appeal No. 575 of 2008 was filed by the appellant in Delhi High Court. The Delhi High Court by the impugned judgment dated 18.11.2009 has dismissed the appeal of the appellant, questioning which judgment this appeal has been filed.”

Be it noted, it is then envisaged in para 3 that, “The High Court, in Criminal Appeal, during pendency of the appeal has stayed the order of penalty. This Court while issuing notice on 19.02.2010 in the present appeal had also stayed the order of penalty imposed on the appellant.”

What’s more, it is then brought out in para 37 that, “Section 68 of FERA, 1973 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 business of the company as well as the company, shall be deemed to be guilty of the contravention……….. . .” Section 68(1)  creates a legal fiction, i.e., “shall be deemed to be guilty”. The legal fiction triggers on fulfillment 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. Had the legislature intended that all the Directors irrespective of their role and responsibilities shall be deemed to be guilty of contravention, the section could have been worded in different manner. When a person is proceeded with for committing an offence and is to be punished, necessary ingredients of the offence as required by Section 68 should be present.”

As it turned out, the Bench then notes in para 41 that, “Learned Additional Solicitor General also submitted that all the three Courts have held and found contravention proved by the appellant, this Court may not interfere with such conclusion. We have already noticed above that the plea of the appellant that he was part-time, non-executive Director not in charge of the conduct of business of the Company at the relevant time was erroneously discarded by the authorities and the High Court and there is no finding by any of the authorities after considering the material that it was the appellant who was responsible for the conduct of business of the Company at the relevant time. Thus, present is a case where the liability has been fastened on the appellant without there being necessary basis for any such conclusion.”

Needless to say, it cannot be overlooked that it is then brought out in para 42 that, “It is also relevant to notice that an order which was passed on 13.02.2004 by the Deputy Director in adjudication proceedings although with regard to different period, the plea of the appellant that he was only a part-time, non-executive Director and not responsible for the conduct of business of the Company was accepted and notice was discharged against the appellant. The order dated 13.02.2004 although related to different period but has categorically noticed the status of the appellant as part time non-executive Director. There being decision of Adjudicating Authority, in the recent past, passed on 13.02.2004, that the appellant was only a part-time non-executive Director of MXL, there has to be some reasons for taking a contrary view by the adjudicating officer in order dated 31.03.2004 with regard to affairs of the same company, i.e., MXL.”

Quite ostensibly, it is then held in para 43 that, “In view of the foregoing discussions, we are of the view that the adjudicating officer has erroneously imposed penalty on the appellant for the alleged offence under Section 8(3), 8(4) and 68 of the FERA, 1973 which order was erroneously affirmed both by the Appellate Tribunal and the High Court.”

Finally, it is then held in the last para 44 that, “In view of the aforesaid, this appeal deserves to be allowed, the judgments of the High Court as well as those of the adjudicating officer and the Appellate Tribunal are set aside. The appeal is allowed and the penalty imposed on the appellant is set aside.”

In summary, the inevitable conclusion that can be drawn from this noteworthy judgment is that the liability to be proceeded with for offence under Section 68 of the FERA, 1973 depends on the role one plays in the affairs of the company and not on mere designation or status. The facts of this case have already been discussed in detail. All courts and all tribunals must always adhere to the crux of this notable judgment as has already been explained in all such similar cases!

Sanjeev Sirohi

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