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UMESH K. MODI (Appellant) Vs. DEPUTY DIRECTOR OF ENFORCEMENT [DEL] (Respondent)

Criminal Appeal No. 568 of 2008 S. Muralidhar, J.[Decided on 31/07/2014] Foreign Exchange Regulation Act,1973- section 68- offences by company- director’s vicarious liability-nonexecutive director- non submission of proofs of imports – SCN issued to the company and its directors- no specific averments in the SCN- reply of the director not considered by Assessing officer (AO)– penalised- whether tenable Held, No. Brief Facts: The Appellant, Umesh K. Modi, was one of the directors of Modi Xerox Limited (“MXL”). The appellant along with other directors of MXL was found guilty of committing an offence, of non-submission of import evidence, under section 8 (3) read with Section 8 (4) and Section 68 of the Foreign Exchange Regulation Act, 1973 (“FERA”) and a total penalty of Rs. 1 lakh each on certain directors of MXL including the Appellant and Rs. 5 lakh on MXL was imposed, which was confirmed by the Appellate Tribunal for Foreign Exchange. The Appellant states that he was a part time, non-executive director of MXL but neither in-charge of nor responsible for the conduct of its day-to-day affairs and that he had communicated this fact to the SCN issued to him who was not at all considered by the adjudicating authority as well as the Tribunal. Decision: Appeal allowed. Reason: The wording of Section 68 FERA is no different from Section 141 of the Negotiable Instruments Act, 1881 (“NI Act”). The legal requirement of the complaint filed under Section 138 NI Act having to make specific averments as to the role of the directors of a company, where such company is the accused, has been subject matter of several decisions of the Supreme Court. In SMS Pharmaceuticals Limited v. Neeta Bhalla (2005) 8 SCC 89 while interpreting Section 141 NI Act, the Supreme Court stated that "a clear case should be spelled out in the complaint against the person sought to be made liable." It was observed that it is necessary to specifically aver in a complaint that at the time the offence was committed, the person accused was in charge of, or responsible for the conduct of business of the company. Later in Saroj Kumar Poddar v. State (NCT of Delhi) (2007) 3 SCC 693 the Court emphasized that it was necessary to make “specific allegations” to show as to how and in what manner the director is liable. In National Small Industries Corporation Limited v. Harmeet Singh Paintal (2010) 3 SCC 330, the Supreme Court discussed the entire case law and noted that the decision in N. Rangachari v. Bharat Sanchar Nigam Limited (supra) cannot be said to have overlooked the previous decisions of the Court and was distinguishable on facts. It was then observed in para 38: "38. But if the accused is not one of the persons who falls under the category of "persons who are responsible to the company for the conduct of the business of the company" then merely by stating that "he was in charge of the business of the company" or by stating that "he was in charge of the day-to-day management of the company" or by stating that "he was in charge of, and was responsible of the company" or by stating that "he was in charge of, and was responsible to the company for the conduct of the business of the company", he cannot be made vicariously liable under Section 141 (1) of the Act. To put it clear that for making a person liable under Section 141 (2), the mechanical repetition of the requirements under Section 141 (1) will be of no assistance, but there should be necessary averments in the complaint as to how and in what manner the accused was guilty of consent and connivance or negligence and therefore, responsible under sub-Section (2) of Section 141 of the Act." In the present case the Appellant gave a separate reply to the Show cause Notice (SCN) which has not been discussed by the Assessing Officer. In other words the Deputy Director (DD) did not advert to specific defence of the Appellant that at the relevant time he was not a director in-charge of or responsible to the company for the conduct of its day- to-day affairs. The Appellate Tribunal (AT) too does not appear to have noticed the above decisions of the Supreme Court and has mechanically concluded that since there was no restriction on the exercise of powers by the Appellant in relation to the transactions in question, he should be held liable. In light of the reply sent by the Appellant it was possible to discern the distinction between those directors who were in-charge of the day-to-day affairs of the company and those were not. The explanation offered by the Appellant is that the Company Secretary of XML placed before the Board of Directors of MXL compliance certificates at every meeting held during the relevant period, which led the directors, including the Appellant, to believe that there were no contravention of any of the statutory provisions, appears to be a plausible one. This explanation has not been considered either by the DD or the AT. In the considered view of the Court, the Appellant on his part discharged the burden in terms of Section 68 (2) of the FERA and was entitled to the benefit of doubt. Conclusion: The Director of the Company who does not manage the day-to-day business of the Company need not be held liable for the in-operations of the other Executive Directors. This case would act as a relief to all the Non-executive Directors and Independent Directors whose liability is limited only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.
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