Directors Not Personally Liable For Non-Fulfilment Of Company's Export Obligations Unless Specific Role Is Alleged: Delhi HC

The Delhi High Court has held that unless specific allegations which discuss the role of a director in the export performance are made, there is no question of finding the director personally liable for non-fulfilment of export obligations by the company.Justice Tara Vitasta Ganju relied on Santanu Ray vs. Union of India where the Supreme Court discussed vicarious liability of directors. In the case at hand, the Petitioner, a non-executive Director of M/s Poysha Industrial Ltd was aggrieved by four orders passed by the Directorate General of Foreign Trade in 2009, levying a fine of Rs. 11,50,81,116/- on the Company and its Directors.Significant to note that the company had undergone liquidation in 1998.Petitioner contended that being a non-executive director, he was not involved in the day-to-day affairs of the Company. It was submitted that since the Company was wound up and the Official Liquidator took possession of all books of accounts and business records, the failure to submit documents in compliance with export obligations could not have been attributed to the Petitioner as he had no access or control over Company records.Petitioner further contended that Section 14 of the FTDR Act mandates that a show cause notice is required to be issued before any penalty can be imposed on a Director of a company; however, no such notice was served upon him. Moreover, the notices, which were served at the company address, did not attribute any role of the Petitioner in the alleged violations.Further, it was contended that FTDR Act does not contain any deeming provision for vicarious liability and Section 11(2) of the FTDR Act requires specific allegations of abetment for liability to be imposed on an individual.Respondent-Department on the other hand averred that Petitioner, along with other directors had applied for a (export) license on "behalf of the firm". It disputed Petitioner's claim of being a non-executive or independent director, stating that no document has been submitted to prove this assertion. By virtue of his position as a Director, the Petitioner is deemed to have knowledge of the affairs of the Company, the Department submitted that argued that it is a fit case for lifting the corporate veil, as the Directors of the Company were fully aware of the non-compliance.At the outset, the High Court took note of Section 11(2) of the FTDR Act which sets out that where a person makes or abets in the making of export or import in contravention of the provisions of FTDR Act, he shall be liable to a penalty which will not be less than Rs. 10,000/- and shall not exceed five times the value of the goods in respect of which the contravention has been made. “Thus, for the provision to be applicable, the person should either have been in contravention of the FTDR Act or abetted in the same,” it observed.In the case at hand, the Court noted that the Company had wound up in 1998 an Petitioner had no control over the Company and was not even in a position to provide any documents as required by the Respondent. “If at all any notice was to be issued, it ought to have been issued to the Official Liquidator. In these circumstances, the Respondent imposing the penalty on the Petitioner is arbitrary in the given facts,” the Court held.It also pointed out that the impugned orders made no reference as to how the Directors were personally liable for the company's default.It also agreed with the Petitioner that as per Section 14 of the FTDR Act, a show cause notice is required to be issued to a party before a penalty can be imposed.“It is the case of the Petitioner that the show cause notices that are sought to be relied upon by the Respondent are all issued to the Company and have not been specifically addressed to the Petitioner. Concededly, the principles of natural justice have also not been complied with by the Respondent,” Court held and set aside the impugned orders.Appearance: For the Petitioner : Mr. Dayan Krishnan, Sr. Adv. with Mr. Rishi Agrawala, Ms. Tarini Khurana, Mr. Sukrit Seth, Advs. For the Respondent : Ms. Nidhi Raman, CGSC with Mr. Zubin Singh, Mr. Akash Mishra, Mr. Arnav Mittal, Advs.Case title: Anand Mehta v. Director General Of Foreign TradeCitation: 2025 LiveLaw (Del) 495Case no.: W.P.(C) 5669/2014Click here to read order

Directors Not Personally Liable For Non-Fulfilment Of Company's Export Obligations Unless Specific Role Is Alleged: Delhi HC

Kapil Dhyani

Tags