BY RISHABH KUMAR, FOURTH-YEAR STUDENT AT NATIONAL LAW UNIVERSITY, JODHPUR
The Liability of people acting on behalf of companies, for offences committed by companies, has been a very widely debated topic under the law of corporate governance. The general rule in the cases involving criminal liability stands against vicarious liability. This means that no one can be held criminally liable for offences committed by others. However, this general rule is overridden by specific provisions, provided by statutes, extending liability to others. An example of one of such provisions can be found under the Foreign Exchange Regulation Act, 1973 (‘FERA’). Section 68(1) of FERA provides that, in case of contravention of any of the provisions of the act by a company, a person in charge of, and responsible to the company for, the conduct of the business of the company has to be deemed guilty. Recently,in the case of Shailendra Swarup v. The Deputy Director, Enforcement Directorate, a bench of the Hon’ble Supreme Court dealt with the question of liability for offences under FERA, committed by a company, and the procedure for attributing such liability to persons acting on behalf of the company.
A show cause notice was issued by the Enforcement Directorate against all the directors of a company named Modi Xerox Ltd. (‘MXL‘) for alleged violation of FERA provisions. The appellant, Mr.Shailendra Swarup was a practising advocate of the Supreme Court and only a part-time non-executive director of MXL. He replied to the show cause notice stating that he was a part-time non- executive director for MXL and that he was not in the employment of the company nor he played any role in conducting the affairs of the company. Irrespective of this, the Enforcement Directorate went on to conduct a hearing, implicating the appellant and imposed a fine of Rs. 1,00,000/- on all the directors including the appellant. On appeal, this order was upheld by the appellate tribunal as well as the High Court resulting in an appeal before the Supreme Court.
It was held by the court that, the adjudicating officer was wrong in imposing a penalty on the appellant and, the same was wrongly upheld by the appellate tribunal as well as the High Court. Moving further on, the court held that, for holding a person liable under the provisions of FERA, the active involvement of such person in company affairs must be looked into rather than just superficially taking into consideration the designation they are accorded. The court, to come to this conclusion, heavily relied on the ratio of judgments involving section 141 of the Negotiable Instruments Act, 1881 (“NIA”).
The court said that, section 68(1) of FERA contains a legal fiction, i.e. “shall be deemed to be guilty” which is qualified by certain conditions that have to be fulfilled in order to establish liability under the provision. The conditions as mentioned in the provision require a person to be in charge of, and responsible to the company for, the conduct of the business of the company for them to be liable for any contravention of the section. In N. Rangacharivs. Bharat Sanchar Nigam Limited, the apex court had observed that, although a person in the commercial world transacting with a company is entitled to presume that the directors of the company are in charge of the affairs of the company, the court has held that such a presumption is rebuttable. The provision cannot be interpreted in a manner so as to implicate each and every person who was a director of the company at the time the offence was committed. Therefore, if a person is to be proceeded against and punished for any contravention, necessary ingredients as required by section 68 have to be fulfilled.
Since the appellant was just a part-time non-executive director and was neither in charge of nor responsible for the conduct of the business of the company, the ingredients under Section 68 are not fulfilled in order to hold him liable for the contravention.
Relevance of Section 141 of the Negotiable Instruments Act, 1881
In view of the court, section 68 of FERA is pari materia to Section 141 of NIA, 1881. Section 141 of NIA imposes the liability of a company, for the dishonour of cheques, on a person who at the time of such dishonour was in charge of and responsible for the conduct of the business of the company. Therefore, the ratio of judgments involving liability under section 141 of the NIA, 1881 are of considerable importance while interpreting section 68 of FERA.
The ratio of the following two judgments have been referred by the court, while deliberating upon the present case:
Since section 141 of the NIA creates criminal liability, the conditions provided thereunder have to be strictly complied with. What is required is that the persons who are sought to be 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. The condition requires so because a person in charge of and responsible for the conduct of the business of the company is supposed to know the purpose behind the issuing of a cheque and the reasons for its dishonour. Furthermore, a complaint under section 141 must contain specific averments disclosing the facts that fulfil the conditions under the provision. If facts making a person liable under the provision are missing from the complaint, the conditions as required by the provision cannot be said to have been satisfied.
Reiterating the principle given in Neeta Bhalla (supra), the court held that, besides mentioning in the complaint that the person implicated is a director of the company, it is important to specifically allege that they were in charge of and responsible for the conduct of the business of the company at the time of the commission of the offence. Otherwise, a complaint may be found unsustainable.
Referring to the above mentioned case laws, the court has laid down a due procedure for proceeding against a director under section 68 of FERA.
Due procedure for conducting proceedings under the FERA
The court has laid down that, even though FERA is silent on filing of written complaints, while proceeding under section 51, the person who has to be proceeded against shall be informed of the contravention for which penalty proceedings are to be initiated against them. This flows from section 51 which imposes an obligation on the adjudicating officer to give a reasonable opportunity to a person to be proceeded with for making a representation in the matter. The requirement under section 51 envisages due communication of the allegations of contravention and requires fulfilment of the ingredients of the offence under section 68. If this due procedure is not followed, the reasonable opportunity, as contemplated by section 51, cannot be said to have been given to the person to make representation in the matter. After a reasonable opportunity to make representation is granted in true sense, the adjudicating officer shall hold an inquiry and if on such inquiry he finds the person guilty of the alleged contravention he may impose the requisite penalty in accordance with section 50.
The general notion that persists in the corporate world about non-executive directors is that, they are not involved in the day to day affairs of the company, i.e. they are not in charge of, or responsible for the conduct of the business of the company. Although, by virtue of this, they may not be held liable for various offences or contraventions committed by the company, it doesn’t provide them with blanket immunity. As held in Chaitan M. Maniar vs. State of Maharashtra, they can still be held liable for those contraventions in which their active involvement is shown. The judgment in the present case has furthered this standing. While settling the law as to the liability of directors under FERA, it has also laid down a due procedure for establishing such liability. Moreover, the court, by widening the scope of the phrase “reasonable opportunity for making representation” under section 51, has ensured that the principle of audi alteram partem is duly adhered to under FERA. The judgment shall act as a good precedent, while determining the corporate criminal liability of directors of companies in future.