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.
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 bench comprising Justices Ashok Bhushan and R. Subhash Reddy observed.
In this case, Enforcement Directorate issued a show cause notice for alleged FERA violations against all the Directors of a company named Modi Xerox Ltd.(MXL) including Shailendra Swarup, who was a practicing Advocate of the Supreme Court. In response to this show cause notice, he stated that he was only a part-time, nonexecutive Director of MXL and he was never in the employment of the Company nor had an executive role in the functions of the Company. However, the Deputy Director, Enforcement Directorate after conducting a hearing, imposed a penalty of Rs.1,00,000/- on all the Directors including Shailendra Swarup. This order was upheld by the Appellate Tribunal as well as the High Court.
One of the main issues considered by the Apex Court was whether the Adjudicating Authority, Appellate Tribunal and the High Court erred in holding contravention of provisions of Section 8(3), 8(4) and Section 68 of FERA, 1973 by the appellant without their being any material that the appellant was responsible for the conduct of business of the Company at the time of commission of the offence and without recording any specific findings to that effect?
The court observed that it was erroneous on the part of the adjudication authority to have not considered the material brought on the record that he was a part-time, non-executive Director not in charge of the affairs of the Company at the relevant time. It further noted that the adjudicating officer imposed the penalty without returning a finding that it was the appellant who was liable for contravention of the provisions of Section 8(3), 8(4) and Section 68 of the FERA, 1973.
The court noted that Section 141 of the Negotiable Instruments Act, 1981 is a pari materia provision to Section 68 of the FERA, 1973. It referred to the dicutm in S.M.S. Pharmaceuticals Ltd. Vs. Neeta Bhalla (2005) 8 SCC 89, 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. The court observed:
"Section 68 of FERA, 1973 deals with "Offences by companies". Section 68(1) provides that "……………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 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. Had the legislature intended that all the Directors irrespective of their role and responsibilities shall be deemed to be 34 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."
The court further observed that Section 68 of FERA, 1973 as well as Section 141 of the Negotiable Instruments Act deals with the offences by the companies in the same manner. It added:
"The ratio of the judgments of this Court on Section 141 of Negotiable Instruments Act as noted above are also clearly relevant while interpreting Section 68 of FERA Act. We, thus, hold 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. "
A person, who is to be proceeded with has to be made aware of the necessary allegations
The bench further observed that,even though, FERA, 1973 does not contemplate filing of a written complaint but in proceedings as contemplated by Section 51, the person, who has to be proceeded with has to be informed of the contravention for which penalty proceedings are initiated.
"The expression "after giving that person a reasonable opportunity for making a representation in the matter" as occurring in Section 51 itself contemplate due communication of the allegations of contravention and unless allegations contains complete ingredients of offence within the meaning of Section 68, it cannot be said that a reasonable opportunity for making a representation in the matter has been given to the person, who is to be proceeded with.."
"Learned ASG is right in his submission that FERA, 1973 does not contemplate any complaint but the Scheme of the Act indicate that a person, who is to be proceeded with has to be made aware of the necessary allegations, which may constitute an offence on his part. This Court in N. Rangachari (supra) has observed that a person in the commercial world having a transaction with company is entitled to presume that the Directors of the company are in charge of the affairs of the company. The presumption of a person in the commercial world is a rebuttable presumption and when adjudicating authority proceeds to impose a penalty for a contravention of FERA, 1973, essential ingredients constituting an offence under the FERA read with Section 68 has to be communicated to the person proceeded with to enable him to make effective representation in the matter."
Having held thus, the bench allowed the appeal and quashed the orders of Adjudicating officer, Appellate Authority as well as the High Court
Case name: SHAILENDRA SWARUP vs. THE DEPUTY DIRECTOR, ENFORCEMENT DIRECTORATE
Case no.:CRIMINAL APPEAL NO.2463 OF 2014
Coram: Justices Ashok Bhushan and R. Subhash Reddy
Counsel: Sr. Adv C.A. Sundaram for the appellant and ASG K.M. Nataraj, for the respondent