Case: M.M. Shah Vs. The Deputy Director of Enforcement & Others

R.M. Savant, J.1. The above Appeal raises the following question of law:Whether the Nominee / Processional Director of a Joint Venture Company can be vicariously held liable for the acts of commission or omission of subordinate of the company2. The facts necessary to be cited for adjudication of the above Appeal can be stated thus:The Appellant during the relevant period i.e. 161994 to 2821997 was the paid Managing Director of the Company known as Indian Card Clothing Ltd. (for short ICC), a public limited company. The Appellant was devoting his full time attention to the affairs of the ICC and retired from the said Company in the year ending 2001. The said ICC and one Spifa Germany promoted a Joint Venture Company known as Suessen Asia Ltd. (for short SA Ltd.) wherein Spifa Germany was to hold 60% equity and ICC was to hold 40% equity. By a resolution dated 27-6-1994 passed by the S A Ltd., the Appellant was to be concurrently appointed as the Managing Director of S.A. Ltd effective from 181994 at nil salary for a period of 5 years on the terms and conditions as mentioned in the contract which was tabled at the meeting. However, the said contract did not fructify as the ICC Board was not in favour of having concurrent Managing Directors for two companies and, therefore, by further resolution dated 2991994, the Appellants appointment as the Managing Director of S.A. Ltd, was deferred till further notice. By further resolution passed by the Board of S.A. Ltd. dated 971997, it was reiterated that the Appellant was not appointed as Managing Director of S. A. Ltd and that his appointment was deferred, since the Appellant could only periodically visit the factory of S.A. Ltd as a nominee Director of ICC Ltd. The S. A. Ltd appointed one Mr. Oberoi as the Managing Director of S.A. Ltd. In 1997. Since the Appellant has been held to be responsible for the evasion of customs duty, by the said S.A. Ltd, it would be necessary to go into the factual background in respect of which, the penalty has now been imposed upon the Appellant in his capacity as a Managing Director of the said S.A. Ltd.3. It appears that in furtherance of its intentions the Spifa which held 60% shares in S.A. Ltd, entered into Licence Agreement with it for the manufacture of textile machinery and its components on account of which, several capital goods, spare part and raw materials were required to be imported by the S.A. Ltd from Spifa. It appears that to expedite the said process of acquisition of certain spare parts on certain occasions, S.A. Ltd imported such items through the baggage of several personnel of Spifa visiting India and/or the personnel of S.A. Ltd. who were returning from Germany to India. It is the case of the Appellant that the said imports were covered under the Open General Licence and, therefore, did not require any import licence and that through over sight and inadvertence the baggage imported was not declared by the personnel of Spifa and/or S.A. Ltd to the Customs authorities. On investigation, the Commissioner of Customs issued a show cause notice dated 1571998 and called upon the S.A. Ltd to explain the non payment of customs duty on items imported through baggage. It is the case of the Appellant that there was no allegation against the Appellant for alleged infraction of Customs Law or baggage Law nor was he made a party to the said show cause notice. The said show cause notice culminated in the order dated 3131999 passed by the Commissioner of Customs who inter alia held that the employees of S. A. Ltd had failed to declare the contents of their baggage under Section 77 of the Customs Act, 1961 which has led to the evasion of Customs Duty to the tune of Rs.25,99,941/-and that the dutiable goods imported in personal baggage were classifiable under the head 98.03 of the Schedule to the Customs Tariff Act, 1975. The Commissioner by the said order refrained from confiscation of the goods, as he was of the view of the penal action under Section 112 of the Customs Act would be sufficient to meet the ends of justice and although the show cause notice demanded the duty of Rs.27,01,755/-, the duty adjudicated was lesser i.e. Rs.25,99,941/-. It is the case of the Appellant that the customs duty of Rs.26,29,624/-had been deposited by the S.A.Ltd before issue of the said show cause notice. It is also stated by the Appellant that the total value of import through baggage was Rs. 33,53,590/-and that the sum of Rs.33,53,590/-was credited to the account of Spifa maintained by the S.A. Ltd in its books of accounts. However, according to the Appellant the said amounts were not paid to Spifa as S.A. Ltd was facing financial difficulties and Spifa agreed to not to insist on payment being made by S.A. Ltd.4. Thereafter some time in August 1999, the Appellant received a show cause notice dated 2561999, a similar show cause notice has also issued to S.A. Ltd, to one Shri Venkatramani and Shri Traubel who were the nominee Directors, Deputy General Manager (Materials) and Resident Representative of Spifa, the collaborator of S.A. Ltd. respectively. It was alleged in the said show cause notice that by placing sums to the credit of Spifa in the manner which was set out in the show cause notice, the S.A.Ltd. appeared to have contravened the provisions of Section 9(1)(e) of the Foreign Exchange Regulation Act (FERA for short) and, thereby rendered themselves liable to be proceeded against under Section 50 of the FERA Act. The said show cause notice also called upon the Appellant as to why the adjudication proceedings as contemplated under Section 51 of the said Act should not be initiated against him. It was further alleged against the Appellant that the Appellant was incharge of S.A. Ltd and responsible for the conduct of the Company and, therefore, appeared to have contravened the provisions of Section 68(1) of the said Act. The said Show cause notice was adjudicated and by an order dated 30102001, the Respondent No.1 imposed a penalty of Rs. 2,00,000/-on the Appellant and the other two noticees and a penalty of Rs. 3,50,000/-on S.A. Ltd. While imposing the said penalties, the Respondent No. 1 held that S.A. Ltd had contravened the provision of Section 9(1)(c) of the FERA Act, despite the fact that in the show cause notice, the allegations against the S.A.Ltd was as regards the contravention of Section 9(1)(e) of the said Act. Being aggrieved by the said order dated 31102001, the Appellant filed an Appeal under the provisions of Foreign Exchange Management Act, 1999 (FEMA) and also a stay application. The Appellant had before the hearing of the said Stay Application, had filed an affidavit inter alia setting out the correct facts enclosing the explanatory note showing that for the relevant period he was the Managing Director of ICC and that as far as his appointment of being the concurrent Managing Director, S.A. Ltd at nil salary was concerned, the same was deferred which was duly recorded in various Board Resolutions of S.A. Ltd. The Respondent No.2 granted a conditional stay to the Appellant vide order dated 2282008, on the Appellant furnishing a bank guarantee of the entire penalty amount of Rs. 2,00,000/-through a nationalised Bank. The said Appeal ultimately came to be dismissed. However, in so far as the Appellant was concerned, the penalty against him was reduced from Rs. 2,00,000/-to Rs.50,000/-for the reasons mentioned in the said order. As indicated above, it is the said Order dated 1082009 which is impugned in the present Appeal.5. We have heard Mr. R.G.Seth the Learned Counsel appearing for the Appellant. None appears for the Respondent though served.6. On behalf of the Appellant, the Learned Counsel Shri Sheth made the following submissions. That the Tribunal has proceeded on an erroneous premise that the Appellant was the Director incharge of the day to day operations of S.A.Ltd till July 1997. The said finding according to the Learned Counsel has been recorded without there being any evidence or material on record to the said effect. The Learned Counsel further submitted that the Tribunal notwithstanding the documentary evidence on record adversely held against the Appellant on the ground that the Appellant had not produced the copy of Form No.32 from the Registrar of Companies which could have been filed by him to show that the Appellant was not a Director of the Company during the relevant period. The Learned Counsel lastly submitted that under Section 68 the liability arises only if the Director is in charge of and responsible for the conduct of the business of the Company at the relevant time when the offence was committed. To buttress of his submission, the Learned Counsel relied upon the Judgment of the Apex Court reported in AIR 2005 Supreme Court 3512 in the matter of SMS Pharmaceuticals Ltd. Vs. Neeta Bhalla & Anr.7. We have heard the Learned Counsel for the Appellant and have bestowed our anxious consideration to the contentions urged by him. It is pertinent to note that the Tribunal thought it fit to reduce the penalty imposed upon the Appellant from Rs. 2,00,000/-which was imposed by the order in original to Rs.50,000/-The Tribunal, as can be seen from its order has merely recorded a finding that the Appellant was the Director incharge for the day to day operation of S.A. Ltd. till about July 1997. The said finding as can be seen from the order is not backed by any evidence or material on record It appears that the Tribunal was swayed by the fact that the Appellant had not produced the copy of Form No.32 from the Registrar of Companies to show that he was not a Director of the Company during the relevant period. The Tribunal, it seems, held against the Appellant merely on the said ground. A reading of Section 68 of the FERA Act discloses that the authority has to reach a satisfaction that the person concerned was incharge of and was responsible to the Company for the conduct of the business of the Company as well as the Company, and then only he could be proceeded with.8. It would be relevant in the said context to consider the material which was placed on record by the Appellant. The Appellant has placed on record the resolutions of the Board of S.A. Ltd. by which resolution, the Appellant was to be a common Managing Director of ICC Ltd and Suessen Ltd. However, by subsequent resolutions passed by the Board of S.A.Ltd, the said appointment of the Appellant was put on hold and in fact the Appellant never became the Managing Director of S.A. Ltd, as the S.A. Ltd was desirous of having a full time Managing Director who could devote his time whole heartedly to S.A. Ltd. In fact S. A. Ltd appointed a full time Managing Director in the year 1997 itself. Though the said material was on record, the Tribunal has not even adverted to the same and has held against the Appellant only on the ground that the Appellant has not produced Form No.32 to show that he was not the Director of the S.A. Ltd during the relevant period. The question is not as to whether the Appellant was the Director or not during the relevant period but as to whether as postulated in Section 68 whether he was incharge of and was responsible to the Company for the conduct of the business of the Company. It is pertinent to note that, no finding to that effect has been recorded by the Tribunal in its Judgment. It would also be relevant to note that in the instant Appeal, the Appellant has placed the said Form No.32 along with an Affidavit, the said Form No.32 discloses that the Appellant was appointed as Director of S.A. Ltd by way of an ordinary resolution for the relevant period and was not the Managing Director of S.A.Ltd. That apart, since no finding has been recorded by the Tribunal in terms of Section 68 as regards the role of the Appellant qua the S.A.Ltd., in our view, the penalty imposed on the Appellant is wholly unsustainable. It is pertinent to note that the Appellant was not a party to the proceedings under the Customs Act, against the said S.A.Ltd. Which proceedings are the genesis in so far as the penalty proceedings against the Appellant are concerned. The Learned Counsel for the Appellant has rightly relied upon the Judgment of the Apex Court in SMS Pharmaceuticals Ltd. (Supra). In the said case the Apex Court was concerned with the interpretation of Section 141 of the Negotiable Instrument Act, which is in terms para materia to Section 68 of the FERA Act, under which a Director can be made responsible for the contravention for the said Act. In the said Judgment, the Apex Court has held that the liability under Section 141 arises only if the person is in charge of and responsible for the conduct of business of the Company at the relevant time when the offence was committed and not on the basis of merely holding a designation or office in a Company and that merely being a Director of a Company is not sufficient to make a person liable under Section 141 of the Negotiable Instruments Act. Paragraphs No.12, 13, 14 and 20 of the said Judgment are material and are reproduced herein under:12. While analysing Section 141 of the Act, it will be seen that it operates in cases where an offence under Section 138 is committed by a Company. The key words which occur in the Section are every person. These are general words and take every person connected with a company within their sweep. Therefore, these words have been rightly qualified by use of the words who at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence etc. What is required is that the persons who are sought to be made criminally liable under Section 141 should be at the time the offence was committed, in charge of and responsible to the company for the conduct of the business of the company. Every person connected with the company shall not fall within the ambit of the provision. It is only those persons who were in charge of and responsible for conduct of business of the company at the time of commission of an offence, who will be liable for criminal action. It follows from this that if a director of a Company who was not in charge of and was not responsible for the conduct of the business of the company at the relevant time, will not be liable under the provision . The liability arises from being in charge of and responsible for conduct of business of the company at the relevant time when the offence was committed and not on the basis of merely holding a designation or office in a company. Conversely, a person not holding any office or designation in a Company may be liable if he satisfied the main requirement of being in charge of and responsible for conduct of business of a Company at the relevant time. Liability depends on the role one plays in the affair of a company and not on designation or status. If being a Director or Manager or Secretary was enough to cast criminal liability, the Section would have said so. Instead of every person the section would have said every Director. Manager or Secretary in a Company is liable........ etc. The legislature is aware that it is a case of criminal liability which means serious consequences so far as the person sought to be made liable is concerned. Therefore, only persons who can be said to be connected with the commission of a crime at the relevant time have been subjected to action.13. A reference to subsection (2) of Section 141 fortifies the above reasoning because subsection (2) envisages direct involvement of any Director, Manager, Secretary or other officer of a company in commission of an offence. This section operates when in a trial it is proved that the offence has been committed with the consent or connivance or its attributable to neglect on the part of any of the holders of these officers in a company. In such a case, such persons are to be held liable. Provision has been made for Directors, Managers, Secretaries and other officers of a company to cover them in cases in their proved involvement.14. The conclusion is inevitable 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. Therefore, in order to bring a case within Section 141 of the Act the complaint must disclose the necessary facts which make a person liable.20. In view of the above discussion, our answers to the questions posed in the Reference are as under:(a) It is necessary to specifically aver in a complaint under Section 141 that at the time the offence was committed the person accused was in charge of and responsible for the conduct of business of the company. This averment is an essential requirement of Section 141 and has to be made in a complaint. Without this averment being made in a complaint, the requirements of Section 141 cannot be said to be satisfied.(b) The answer to question posed in sub-para (b) has to be in negative. Merely, being a director of a company is not sufficient to make the person liable under Section 141 of the Act. A director in a company cannot be deemed to be in charge of and responsible to the company for conduct of its business. The requirement of Section 141 is that the person sought to be made liable should be in charge of and responsible for the conduct of the business of the company at the relevant time. This has to be averred as a fact as there is no deemed liability of a director in such cases.(c) The answer to question (c) has to be in affirmative. The question notes that the Managing Director or Joint Managing Director would be admittedly in charge of the company and responsible to the company for conduct of its business. When that is so, holders of such positions in a company become liable under Section 141 of the Act. By virtue of the office they hold as Managing Director or Joint Managing Director, these persons are in charge of and responsible for the conduct of business of the company. Therefore, they get covered under Section 141. So far as signatory of a cheque which is dishonoured is concerned, he is clearly responsible for the incriminating act and will be covered under subsection (2) of Section 141.9. In the light of the aforesaid, the above Appeal would have to be allowed and the question of law would have to be answered in favour of the Appellant and against the Department.

Decision:
1[ds]20. In view of the above discussion, our answers to the questions posed in the Reference are as under:(a) It is necessary to specifically aver in a complaint under Section 141 that at the time the offence was committed the person accused was in charge of and responsible for the conduct of business of the company. This averment is an essential requirement of Section 141 and has to be made in a complaint. Without this averment being made in a complaint, the requirements of Section 141 cannot be said to be satisfied.(b) The answer to question posed in(b) has to be in negative. Merely, being a director of a company is not sufficient to make the person liable under Section 141 of the Act. A director in a company cannot be deemed to be in charge of and responsible to the company for conduct of its business. The requirement of Section 141 is that the person sought to be made liable should be in charge of and responsible for the conduct of the business of the company at the relevant time. This has to be averred as a fact as there is no deemed liability of a director in such cases.(c) The answer to question (c) has to be in affirmative. The question notes that the Managing Director or Joint Managing Director would be admittedly in charge of the company and responsible to the company for conduct of its business. When that is so, holders of such positions in a company become liable under Section 141 of the Act. By virtue of the office they hold as Managing Director or Joint Managing Director, these persons are in charge of and responsible for the conduct of business of the company. Therefore, they get covered under Section 141. So far as signatory of a cheque which is dishonoured is concerned, he is clearly responsible for the incriminating act and will be covered under subsection (2) of Section 141.In the light of the aforesaid, the above Appeal would have to be allowed and the question of law would have to be answered in favour of the Appellant and against the Department.