Anand Mehta v. Director General of Foreign Trade

11. The issue before the Court is whether the Petitioner, as an independent non-Executive Director on the Board of a Company that has 1985 SCR Supp. (3) 909 violated an export obligation, can be made liable personally and penalized for such violation. 11.[1] It is the case of the Respondent that the export obligation imposed by the Advance License(s) were required to be fulfilled by the Company were not fulfilled within the statutory period and that despite show cause notice(s) and an opportunity for personal hearing, the Petitioners and the Company did not comply.

12. It is apposite to extract Section 11(2) of the FTDR Act which is applicable in the present case and is set out below: “11…..(2) Where any person makes or abets or attempts to make any export or import in contravention of any provision of this Act or any rules or orders made thereunder or the foreign trade policy, he shall be liable to a penalty of not less than ten thousand rupees and not more than five times the value of the goods or services or technology in respect of which any contravention is made or attempted to be made, whichever is more.” 12.[1] The provision 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.

13. It is the case of the Petitioner that the proceedings which culminated into the Impugned Order are in complete violation of principles of natural justice as no show cause notice was issued to the Petitioner at all. It is contended that all the show cause notices sent were only addressed to the Company and not to the Directors. The names of the Directors were merely set out in the show cause notices and these show cause notices do not state the address of the Petitioner and thus, were never delivered to the Petitioner.

14. The documents filed by the Respondent along with its Counter Affidavit evidence that undisputably, several communications were issued by the Respondent, however each of these communications only set out the name and address of the Company. No addresses have been set out in these notices of the Directors. The record also reflects that although, show cause notice(s) were addressed to the Company/its Directors, they were neither delivered to the Company nor to any of its Directors. 14.[1] This aspect was brought to the notice of adjudicating authority in the Review Petition filed against order dated 08.09.2009 under Section 16 and 17(3) of the FTDR Act filed by the Petitioner [hereinafter referred to as "Review Petition"]. The Petitioner had set out therein that in the early 1990s, the Company's net worth was completely eroded. Consequently, the Company made a reference to the BIFR under Section 15 of the SICA in 1993 when the Company was declared to be a sick industrial Company. It was further set out therein that in pursuance a Company Petition was filed in the Bombay High Court and the Company was wound up by an order dated 09.01.1998 in view of the fact that no workable proposal for its revival had been put forth. 14.[2] The Petitioner had resigned as a Joint Managing Director in or around November 1990 and thereafter was only holding the position of a nonexecutive Director. The Official liquidator had thereafter on 06.02.1998 taken possession of books, accounts, and files and business accounts of the Company and sealed the offices of the Company. It is not disputed that the Company had several directors and the Petitioner was only one of them. The Petitioner has stated that being a non-executive independent Director of the Company, he was not involved in the day-to-day working of the Company and could not have aided or abated in the contravention under the FTDR Act and thus, is not liable for penalty under Section 11 of the FTDR Act.

15. Four similar orders were passed imposing the penalty, two on 08.09.2009 as well as two on 17.09.2009 and the penalty was imposed on the Company and its Directors. As stated above, these Four O-I-O's are similar to each other, the only difference between being in the amount of fiscal penalties imposed against different advance licences bearing different numbers. 15.[1] No reference is made in the Four O-I-O’s as to how the Directors are personally liable. Given the fact that the Respondent was unable to get the required information, it is unclear as to how the Respondent was able to ascertain and impose fiscal penalty, especially on the Petitioner. The provisions of the statute provides for a decision based on an examination of the facts and documents before it and not otherwise.

16. The O-I-O dated 08.09.2009 refers to the Company as a firm. It also sets out that all summons issued to the Directors were received back from the postal authorities undelivered with the remarks “left”. The O-I-O further goes on to hold that exports have been made by the licensee, however there were deficiencies and despite several summons and notices for personal hearing, the Petitioner has failed to appear. It further acknowledges that one of the Directors, Mr. Harshad F. Shah replied to the letter and informed them that the Company was wound up by an order of the Bombay High Court and that the Official Liquidator had taken possession of all the assets, books and records of the Company and sealed their offices and factories. However, it states that since no evidence to that effect of the aforesaid has been brought, the same cannot be considered. The adjudication order goes on to exercise its powers and impose a fiscal penalty on the “noticee firm” and all its Directors. 16.[1] The findings in the Four O-I-O’s are pari materia to each other. It is apposite to extract these findings which are set out in OIO NO. 03/02/002/00242/AM05/ECA dated 08.09.2009 which is reproduced below: “7. The non compliance for submission of documents of export attracted to the provisions of Rule 10, 13 and 14 of the Foreign Trade (Regulation) Rules 1993 and Section 11(2) of Foreign Trade (Development & Regulation) Act, 1992, and the firm was, therefore, issued Show Cause Notice dated 29.06.2004 by this office in terms of powers vested in undersigned under Section 13 of the said Act requiring the firm to show cause within 15 days as to why action to impose penalty should not be taken against the firm and its Directors under Section 11 of the Foreign Trade (Development & Regulation) Act, 1992. The firm was directed to reply to the Show Cause Notice along with corroborative documents giving evidence in support of their contentions to reach the undersigned within the stipulated period and were warned that failure to do so will be presumed that they had nothing to say in their defence in the matter and the case will be decided ex-parte on merits, on the basis of information and evidence available on record without making further reference to the firm. The Noticee firm was also offered an opportunity of personal hearing by the said Show Cause Notice, to appear before the Joint Director General of Foreign Trade in this office. Further, the Noticee firm was issued a letter dated 22.07.2008, with another opportunity of personal hearing on 08.08.2008 and copies of the same was sent to all the Directors of the notice firm. By the said letter the licensing authority has advised the licensee to get their case redeemed in terms of Public Notice No.79 dated 2.1.2006 as the noticee firm has not submitted the original DEEC (Exports) and shipping bill for redemption purpose. The summons issued to the noticee came back from the postal authorities with the remark ‘left’. However, one of the Directors, Mr. Harshad F. Shah replied to the said letter and informed that the noticee firm was wound up on an order of Hon’ble Bombay High Court on 9th January, 1998 and the Official Liquidator having his office at Ministry of Law, Justice & Company Affairs had took possession of all the assets, books and records of the company had sealed the offices and factories of the noticee firm. They have further informed that they have no knowledge of company's day-to day affairs and have no knowledge of the whereabouts of the records of the company. However, the said person did not submit any documentary evidence in support of this statement. However, nobody appeared for personal hearing on behalf of Noticee firm on the aforesaid dates or any time thereafter, which shows that the firm and all its Directors are not interested in getting the case closed as per the provisions of policy by submitting the original export documents despite several repeated reminders…” [Emphasis Supplied]

17. The Impugned Order was passed more than 15 years after the Four O- I-O's were passed. It was held therein that the O-I-O’s do not suffer from any infirmity, since the firm (Company) had not fulfilled its export obligations, it was liable to pay the penalty imposed. It further goes on to hold that since no documentary proof was provided by the Company confirming that the Company has been wound up and an Official Liquidator has been appointed, the adjudicating authority could not stay the proceedings merely on the basis of a letter. Thus, the Review Petitions filed by the Petitioner against the four O-I-O’s were dismissed. The extract of the findings in the Impugned Order are reproduced below:

cannot merely stay proceedings based on a letter from the Petitioners. Moreover, the Petitioner has never contended before the Adjudicating Authority that the Authority doesn't have power to proceed against the Company or its Directors.

6. Accordingly, the orders passed by the RA suffer from no infirmity. RA has made the order on the basis of records available before it..." [Emphasis supplied] 17.[1] However, and as stated above, the Impugned Order does not contain any discussion with regard to the personal liability of the Petitioner.

18. It is also apposite to refer to Section 14 of the FTDR Act, which sets out that a show cause notice is required to be issued to a party before a penalty can be imposed. Section 14 of the FTDR Act is extracted below:

18.[1] 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.

19. The Four O-I-O's state that the show cause notice dated 29.06.2004 was issued, thereafter another notice was issued on 05.05.2008. However, it states that the summons that were issued came back unserved. Thus, although show cause notices were issued, these were not delivered (except to one Director, who is not a party to the present Petition). 19.[1] Concededly, the principles of natural justice have also not been complied with by the Respondent. The record reflects that the show cause notices dated 29.06.2004 and 05.05.2008 have only been sent to the address of the Company and merely set out a list of Directors of the Company. Thus it cannot be said that the Petitioner has been given a show cause notice by the Respondent which is in terms of Section 14 of the FTDR Act. 19.[2] In any event, after the Company had been directed to be wound up on 09.01.1998, all notices should have been issued to the Official Liquidator of the Company, which was concededly not done by the Respondent. The 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.

20. The issue that obtains in the present case also obtains in a matter decided by this Court, the Pankaj Mehra case. In the said case, a similar situation had arisen where after order for winding up of the Company was passed, notices under Section 11 of the FTDR Act were issued by the Respondent and Order(s) in Original were passed fastening a personal liability on the Directors of the Company for their role in the non-fulfilment of export obligations of the Company. This Court examined these Orders-in- Original and the final adjudication undertaken by the Respondent and found that no averment fastening personal liability on a Director was made either in the show cause notice or in the Order (s) passed by the Respondent. It was held by the Court that unless specific allegations are made against a Director regarding its role in the Company's export performance, they cannot be held personally liable. Reliance was also placed by this Court on the judgments in Krishan Kumar Bangur case and Ved Kapoor case in support of its decision. The relevant extract of the Pankaj Mehra case is set out below: “12. A Coordinate Bench of this Court in Krishna Kumar Bangur case, dealt with a similar issue where a show-cause notice was issued under Sections 8 and 11 of the FTDR Act to a company and all its directors, and reasons for arriving at the conclusion that a Director is personally liable, had not been adumbrated therein. It was held that where the authority had not specifically considered the role to be played by the Petitioner therein in the export performance and was reticent on the reasons for personal culpability of any of the directors, it could not be sustained. It was further held that if the showcause notice or the orders in original and the appellate order did not disclose any reasons, the order would be set aside. The relevant extract of Krishna Kumar Bangur case is below: “6. The Show Cause Notice under Section 14 for action under Sections 8 and 11 of the Foreign Trade (Development and Regulation) Act, 1992 [hereinafter referred to as Act for short) dated 14.10.2003 had been issued to the said M/s. Hastings Mill as well as all its Directors. The say of the Petitioner is that he did not receive the Show Cause Notice. The Show Cause Notice mentions, inter alia, that it is prima facie established that M/s. Hastings Mill and their Directors have violated the conditions of Licence mentioned above and thereby made themselves liable to penal action under Section 11 of the said Act. The reasons for arriving at the conclusion that the Petitioner as a Director, has personally become liable for such action has not been adumberated. xxx xxx xxx

8. A perusal of the above will disclose that the Authority had not specifically considered the role that was to be played by the Petitioner in the Export Performance. It is completely reticent on the reasons for the finding of personal culpability of any of the Directors, including the Petitioner.

9. The matter was carried in Appeal by the Petitioner, and the Appeal was dismissed on 19.5.2005... xxx xxx xxx

14. In order to sustain the imposition of a punishment on an individual Director it was incumbent on the Respondents to allege and assert the existence of a duty or obligation cast on one or all the Directors of the defaulting Company and the contumacious failure to fulfil it. The Show Cause Notice does not mention the grounds on which individual liability is sought to be fastened on the Director. Neither of the Orders, that is, the Order in Original or the Appellate Order, disclose reasons which have persuaded those Authorities to come to the conclusion that the Petitioner had assumed an obligation or duty in ensuring that exports corresponding to four times the CIF value would be undertaken within the prescribed period. To assume or foist such a liability on the Directors would run counter to the basic tenets of Company law.”

13. A similar view was taken by another Coordinate Bench of this Court in Ved Kapoor case, where the question arose as to whether the penalty imposed upon a company can be recovered from its directors. Relying on Krishna Kumar Bangur case, the Court held that unless the Respondents find that the Director was under a duty or obligation of the company, and consciously failed to do so, the liability cannot be attributed on such Director. It was held that such an obligation cannot be assumed merely by virtue of a person being a Director of such Company.

11. In view of the legal proposition enunciated in the above-referred cases, the respondents would be competent to proceed against the petitioner under Section 11(2) of the Act, if they are of the opinion that he was under a duty or obligation to fulfil the export obligation of the company and consciously failed to do so. Of course, in such a case, it would be incumbent upon the respondents to issue a notice under Section 14 of the Act to him, stating therein the ground on which such a liability is sought to be fastened on him. Such an obligation cannot be assumed merely on account of the petitioner being or having been a director of the company

12. For the reasons stated hereinabove, both the writ petition are disposed of with a direction that the penalty imposed upon M/s. Hitkari China Limited shall not be enforced against the petitioner, though it can certainly be enforced against the company. This order, however, shall not come in the way of the respondents proceeding against the petitioner, under Section 11(2) of the Act, in terms of this order.”

21. As stated above, this Court has in Pankaj Mehra case while relying on the judgments passed in Krishan Kumar Bangur case and Ved Kapoor case, and on the judgment of the Supreme Court in the Santanu Ray vs. Union of India[7], has held that unless specific allegations have been made which discuss the role of a director in the export performance, there is no question of finding the director personally liable for the same. The order impugned or even the Four O-I-O's have failed to fulfil this or show any 1988 SCC OnLine Del 169 adjudication on this aspect. In the absence thereof, the Respondent cannot now by, taking additional grounds and pleas, attempt to go beyond the Impugned Order or the Four O-I-O's.

22. There is another aspect which has to be taken into consideration. The export licences were issued during the time period of 1989-1991. Between 27.06.2002 and 11.09.2008, the Respondent issued multiple notices, summons, and orders concerning various Advance Licenses held by the Company. The Four O-I-O's were then passed on 08.09.2009 and 17.09.2009. No explanation has been provided by the Respondent in these Four O-I-O's for the delay in taking steps against the Petitioner or the Company. No reason has been urged before this Court either.

23. The Respondent has placed reliance on the judgment of the Supreme Court in the Life Insurance Corporation of India case to submit that the corporate veil may be lifted in instances where fraud, misconduct, or evasion of statutory obligations is established. The said judgment was with regards to the government introducing Non-Resident Portfolio Investment Scheme under the Foreign Exchange Regulation Act, 1973, which permitted nonresident companies wherein at least 60% ownership or beneficial interest vested in non-resident Indian individuals to invest in shares of Indian companies. The said decision is entirely inapplicable to the present case.

24. In addition, the contention of the Respondent that the Petitioner being a whole-time director is automatically liable and culpable for the defaults of the Company is also misconceived. It is no longer res integra that in order for a Director to be vicariously liable for the offences of the Company, unless such Director was in charge and responsible to the Company for the conduct of its business, such Director cannot be held to be liable for offences alleged to have been committed by that Company. 24.[1] In any event, the Petitioner has stated that he had no role to play in the company's day to day affairs or export obligation or licences.

25. The Respondent has also not disputed the fact either in the Impugned Order or in the Four O-I-O's that the Company went into liquidation in 1998, and that all documents and records were taken over by the Official liquidator. Thus, once a company goes into liquidation, all proceedings to be initiated against such company for the failure to submit documents in compliance with export obligations could only be initiated as is mandated in law. There is no evidence of this being done by Respondent either.

26. This Court therefore finds no merit in the contentions of the Respondent. Accordingly, the Impugned Order and the Four Order(s)-In- Original are set aside.

27. The Petition is disposed of in the aforegoing terms. All pending Application(s) stand closed.