2009 (4) TMI 457 - HC - Companies Law

Show-cause Notice/Memorandum for adjudication - whether the notices issued to the petitioners are vague and unspecific in particulars as not to answer to the description of a notice and thus would lead to an unfair procedure? Held that - The relevant paragraphs of the impugned show-cause notice merely go on to say that as the petitioners herein are directors/in-charge of NIL therefore they were liable for the contravention of law by NIL in the export of coffee to Russia. There undoubtedly are no specific allegation against them which pinpoints their role in the alleged offence. A show-cause notice is not a mere empty formality but a necessity so that the person is informed of allegations against him to provide a proper timely and reasonable opportunity to explain and present his case. Thus the petitioners can arguably say that the show-cause notice does not contain the essential foundational facts by which the company NIL s decision could be attributed to them as directors or that they point to how they were in charge of or responsible for the affairs of the said company. The party aggrieved should reply to the show-cause notice and if aggrieved by the order seek remedies through appeal. In view of these observations the challenge is insusceptible of scrutiny under Article 226 of the Constitution of India. W.P. dismissed.

Summary

Issues Involved:
1. Validity of the Show-cause Notice under Section 51 of the Foreign Exchange Regulation Act, 1973 (FERA).
2. Alleged contraventions by the petitioners under Sections 16(1), 18(1), 18(2), and 18(3) of FERA.
3. Vicarious liability of the petitioners as directors under Section 68 of FERA.
4. Procedural fairness and specificity in the issuance of the Show-cause Notice.
5. Jurisdiction of the High Court under Article 226 of the Constitution of India to quash the Show-cause Notice.

Detailed Analysis:

1. Validity of the Show-cause Notice under Section 51 of FERA:
The petitioners challenged the Show-cause Notice dated 21-5-2002 issued under Section 51 of FERA, seeking its quashing. They argued that the notice was based on assumptions without application of mind and lacked specific allegations against them. The notice implicated them merely because they were directors of the company during the relevant period. The Court observed that the notice must inform the individual of the allegations against them adequately and provide a reasonable opportunity to present their case.

2. Alleged Contraventions by the Petitioners under Sections 16(1), 18(1), 18(2), and 18(3) of FERA:
The Show-cause Notice alleged that the petitioners, as directors of NIL, failed to take action to recover foreign exchange from NWTC, violating Section 16(1) of FERA. It also alleged that the export transactions were not covered under the Repayment of State Credit Scheme, violating RBI Circular No. 30, dated 28-9-1993, and thereby contravening Section 18(1), 18(2), and 18(3) of FERA. The Court noted that the notice must contain specific allegations and foundational facts connecting the directors to the alleged contraventions.

3. Vicarious Liability of the Petitioners as Directors under Section 68 of FERA:
The petitioners argued that they were non-executive directors and not involved in the day-to-day business of NIL. They contended that the notice did not particularize their role in the alleged contraventions. The Court emphasized that for vicarious liability under Section 68 of FERA, there must be specific allegations connecting the directors to the decision-making process of the company. The notice should not be vague and must provide details of how each director was responsible for the alleged wrongdoing.

4. Procedural Fairness and Specificity in the Issuance of the Show-cause Notice:
The Court highlighted that in quasi-judicial proceedings, the procedure must be fair and reasonable. The notice must inform the individual of the specific allegations and provide a reasonable opportunity to respond. The Court referred to several judgments emphasizing the need for specificity in notices to ensure procedural fairness. The Court found that the impugned notice lacked specific allegations against the petitioners, which could arguably deny them a fair opportunity to defend themselves.

5. Jurisdiction of the High Court under Article 226 of the Constitution of India to Quash the Show-cause Notice:
The petitioners argued that they were not bound to respond to the Show-cause Notice and could seek relief under Article 226 of the Constitution. They cited various judgments to support their claim that the High Court could intervene if the notice was without jurisdiction or violated principles of natural justice. However, the respondents contended that the petitioners should first submit to the jurisdiction of the adjudicating officer and seek appellate remedies if aggrieved by the order. The Court referred to the Supreme Court's decisions in Standard Chartered Bank v. Directorate of Enforcement and Special Director v. Mohd. Ghulam Ghouse, which held that parties should respond to the Show-cause Notice and pursue available remedies through appeal if aggrieved by the order. Based on these precedents, the Court concluded that it should not interfere with the notice at this stage.

Conclusion:
The Court dismissed the writ petition, holding that the petitioners should respond to the Show-cause Notice and pursue their defenses before the adjudicating authority. If aggrieved by the order, they could seek appellate remedies. The Court emphasized the need for specificity in Show-cause Notices to ensure procedural fairness but refrained from quashing the notice at this stage, following the Supreme Court's guidance in similar cases.