Case: SHAILENDRA SWARUP Vs. THE DEPUTY DIRECTOR, ENFORCEMENT DIRECTORATE

2. Brief facts of the case giving rise to this appeal are:2.1 Modi Xerox Ltd.(MXL) was a Company registered under the Companies Act 1956 in the year 1983. Between the period 12.06.1985-21.11.1985, 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 Accountants Certificates for balance 16 amounts for which MXLs 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 29.10.2003. 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. 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.3. 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.

Court's reasoning:
10. As noted above, the High Court has rejected the plea of the appellant that he was part-time, non-executive Director not responsible for the conduct of business of the Company at the relevant period on the ground that the above plea is an afterthought since in reply given by the Company Secretary to show cause notice dated 19.02.2001 no such plea was taken.12. The show cause notice, thus, asked the Directors to show cause as to why adjudication proceedings as contemplated in Section 51 of the FERA, 1973 should not be held against them. The reply to the said notice was sent only by the Company through Acting Company Secretary dated 26.03.2001. The Deputy Director, Enforcement Directorate after considering the reply to show cause by XMCs vide letter dated 26.03.2001 decided to hold adjudication proceedings as contemplated in Section 51 of FERA, 1973. Adjudication notice dated 08.10.2003 was issued by Deputy Director, Enforcement asking the Directors to appear for personal hearing on 22.10.2003.14. The provisions of Section 51 as noted above oblige the adjudicating officer to hold an inquiry in the prescribed manner after giving that person a reasonable opportunity for making a representation in the matter.16. The representation dated 29.10.2003 was, thus, first representation submitted by the appellant in response to adjudication notice and the plea taken by the appellant that he was only a part-time, non-executive Director of erstwhile MXL and was never in charge of nor even responsible for the conduct of business of the Company was the plea taken first time by the appellant and could not have been termed either as afterthought or denied consideration. The High Court committed error in observing that plea taken by the appellant in its reply dated 29.10.2003 was afterthought, since, no such plea was taken in reply to the show cause notice dated 19.02.2001. As noted above the notice dated 19.02.2001 although was addressed to the Company and all its Directors, the reply was given only by the Company Secretary and none of the Directors has given any reply. The notice dated 19.02.2001 was issued by the Deputy Director, Enforcement Directorate to decide as to whether the adjudication proceedings as contemplated in Section 51 should be held against the Directors for contravention. When the Deputy Director decided to hold the adjudication proceedings under Section 51 reply given in response to the notice dated 08.10.2003 was statutorily required to be considered under Section 51 and the said reply could not have been ignored or knocked down by an erroneous assumption that it was an afterthought as has been done by the High Court. 29.10.2003 was the date fixed by the adjudicating officer for personal hearing of the Directors. The appellant had not submitted any reply to show cause notice dated 19.02.2001 which though was addressed to the Company and all Directors and the reply was sent only by the Company Secretary on 26.03.2001. The representation dated 29.10.2003 was the first representation submitted by the appellant before the adjudicating officer during course of personal hearing. What is said by a person who is called for personal hearing even though given in the form of written representation dated 29.10.2003 required to be considered by the adjudicating officer otherwise the personal hearing shall become an empty formality and meaningless, specially when what was said by the appellant in his representation dated 29.10.2003 in no manner contradicted the reply 26.03.2001 sent by the Company Secretary. We, thus, are of the considered opinion that written representation dated 29.10.2003 submitted by appellant required due consideration and the High Court erred in discarding it as an afterthought.17. We may further note that the High Court in its judgment has observed that affidavit relied upon by the appellant dated 04.07.2003 of the Company Secretary had not been filed either before the Adjudicating Authority or the Appellate Tribunal nor any such plea was taken in the earlier communications. This has been observed in paragraph 17 of the impugned judgment, which is to the following effect:17. It was only as an afterthought and later on that the petitioner in his subsequent reply dated 29.10.2003 took up a plea that he was only a part time director and relied upon an affidavit dated 4.7.2003 of the Company Secretary Mukesh Dugar which even otherwise does not appear to have been filed either before the Adjudicating Authority or the Appellate Tribunal. No such plea had been taken in any of the earlier communications.18. The above view of the High Court is neither correct nor based on materials on the record.19. The adjudicating officer in its order dated 31.03.2004 has noted the reply dated 29.10.2003 on behalf of the appellant. The reply dated 29.10.2003 has been brought on the record of the paper book as Annexure P-4. In paragraph 10(1) of the reply dated 29.10.2003, the affidavit filed by the Company Secretary has been relied which was also enclosed with the reply as Annexure C.20. Thus, the affidavit of Company Secretary dated 04.07.2003 clearly stating that the appellant who was Director of the erstwhile MXL was only a part time Director of the said Company and was never in charge of the day to day business of the Company was very much on the record of the adjudicating officer and the High Court erred in holding that the said material was not filed before the Adjudging Authority or the Appellate Tribunal.21. The High Court, thus, discarded the plea of the appellant that he was part-time, non-executive Director as afterthought and did not consider the same on the ground that the affidavit dated 04.07.2003 relied by the appellant was not filed which, as noted above, is not correct. There was nothing on record brought on behalf of the Department that the above plea of the appellant was incorrect and it was the appellant who was responsible for the conduct of business of the Company at the relevant time.22. We, thus, are of the view that the material was brought by the appellant 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, which was erroneously refused to be considered.23. The Adjudicating Authority has in its order dated 31.03.2004 noted the reply dated 29.10.2003 filed on behalf of the appellant and Adjudicating Authority has extracted several paragraphs of the reply of the appellant.25. There is no consideration of pleas of the appellant as has been extracted by the adjudicating officer himself as noted above specially in paragraph 10(1), 10(2) and 10(3) of the reply. The adjudicating officer has not even held that the pleas taken by the appellant were untenable. The adjudicating officer, thus, has 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 order of the adjudicating officer, thus, is unsustainable on the above ground also.26. The Appellate Tribunal has also not considered the above plea of the appellant and by making general observation that management of the Company is to be handled by the Board of Directors, hence, the appellant being Director is held guilty. No finding has been returned by the Appellate Tribunal that the appellant was not a part- time, non-executive Director and was responsible for the conduct of business of the Company at the relevant time.29. A bare reading of Section 141 of Negotiable Instruments Act, 1881 indicates that sub-section (1) and sub-section (2) of Section 141 are pari materia to Section 68 of FERA, 1973 which was already in the statute.In N. Rangachari this Court has noticed the earlier three-Judge judgment in S.M.S. Pharmaceuticals Ltd.(supra) and clearly held that the said judgment is binding.In paragraph 20 of N. Rangachari, this Court laid down following:20. In other words, the law laid down by this Court is that for making a Director of a Company liable for the offences committed by the Company Under Section 141 of the N.I. Act, there must be specific averments against the Director showing as to how and in what manner the Director was responsible for the conduct of the business of the Company.. Thus, what was held in S.M.S. Pharmaceuticals Ltd.(supra) has been reiterated by N. Rangachari. We may also refer to paragraph 23 of the N. Rangachari judgment where following has been laid down:23. In the light of the ratio in S.M.S. Pharmaceuticals Ltd. (2005) 8 SCC 89 ,  what is to be looked into is whether in the complaint, in addition to asserting that the appellant and another are the Directors of the company, it is further alleged that they are in charge of and responsible to the company for the conduct of the business of the company. We find that such an allegation is clearly made in the complaint which we have quoted above. Learned Senior Counsel for the appellant argued that in Saroj Kumar Poddar case (2007) 3 SCC 693 ,  this Court had found the complaint unsustainable only for the reason that there was no specific averment that at the time of issuance of the cheque that was dishonoured, the persons named in the complaint were in charge of the affairs of the company. With great respect, we see no warrant for assuming such a position in the context of the binding ratio in S.M.S. Pharmaceuticals Ltd. and in view of the position of the Directors in a company as explained above.. In the facts of the above case this Court held that allegations were clearly made out in the complaint. Judgment of this Court in N. Rangachari, thus, does not help the respondent nor it, in any manner, dilute the ratio of three-Bench judgment in S.M.S. Pharmaceuticals Ltd.(supra).38. We may notice that Section 141 of the Negotiable Instruments Act, which was inserted in Negotiable Instruments Act by amendment in the year 1988 contains the same conditions for a person to be proceeded with and punished for offence as contained in Section 68 of FERA, 1973. Section 141(1) of Negotiable Instruments Act uses the same expression every person, 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. 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. 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. This Court in S.M.S. Pharmaceuticals Ltd. (supra) while elaborating the ambit and scope of Section 141 of Negotiable Instruments Act has already laid down above in paragraph 10 of the judgment as extracted above.39. It is true that with regard to any offence punishable under Section 138 of Negotiable Instruments Act with respect to offences by companies, a complaint in writing has to be filed as required by Section 142 of the Negotiable Instruments Act. A complaint as contemplated for offence under Section 138 needs to be necessarily contain all allegations constituting offence. In FERA, 1973 for imposing a penalty under Section 50, the adjudicating officer is required to hold an enquiry after giving the person a reasonable opportunity for making a representation in the matter. 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.40. 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.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.42. 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 of 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.43. 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.