2019 (9) TMI 180 - HC - FEMA

Fastening liability on a director of a company for contravention of the FERA - Offences by companies - Opportunity Notice - HELD THAT - The adjudication proceedings are being pursued by the ED on the basis that each of the present Appellants was at the relevant time, in charge of , and responsible to NIL for the conduct of its business. There can be no doubt that the above standard for fastening liability on a director of a company for contravention of the FERA, applies to both criminal proceedings that would result following an Opportunity Notice as well as the adjudication proceedings that would follow an SCN/MFA issued under Section 51 FERA. The foundational fact that requires to be shown to exist for proceeding against a person under Section 51 of the FERA read with Section 68 (1) thereof is that such a person was at the relevant time, when the contravention occurred, in-charge of and responsible to NIL for the conduct of its business. A perusal of the adjudication notice in the present case reveals that the allegations in this regard are of a broad general nature without specifically indicating whether in fact the person was in-charge of and responsible to the company for the conduct of its business at the relevant time and was, therefore, liable for such contravention. Both the Opportunity Notice as well as the SCN are identical in this respect. While ED decided not to proceed against these Appellants on criminal side, pursuant to the Opportunity Notice issued to them, thereby implicitly accepting their explanation that they fell outside the scope of Section 68 (1) of the FERA, it seemingly adopted a different standard as far as the adjudication proceedings are concerned. The Court sees no justification for applying a different standard for fastening liability on the Appellants whether the criminal liability consequent upon the Opportunity Notice or civil liability following the SCN. There appears to be no scope for adopting a different yardstick in this regard. Judgments of the learned Single Judge are unsustainable in law.

Issues Involved:
1. Quashing of Show Cause Notice (SCN)/Memorandum for Adjudication (MFA) issued under Section 51 of the Foreign Exchange Regulation Act, 1973 (FERA).
2. Applicability of Section 68 of FERA to Non-Executive Directors.
3. Validity of subsequent notice dated 2nd September 2003 issued by the Enforcement Directorate (ED).
4. Judicial review of Show Cause Notices.
5. Consistency in standards for criminal and civil liability under FERA.

Issue-wise Detailed Analysis:

1. Quashing of Show Cause Notice (SCN)/Memorandum for Adjudication (MFA) issued under Section 51 of FERA:
The appellants challenged the SCN/MFA dated 21st May 2002 issued by the ED under Section 51 of FERA. The SCN alleged that the appellants, as directors of Nestle India Limited (NIL), were responsible for contraventions committed by the company. The appellants contended that they were non-executive directors and not in charge of or responsible for the conduct of NIL's business, and thus fell outside the scope of Section 68 FERA.

2. Applicability of Section 68 of FERA to Non-Executive Directors:
Section 68 (1) of FERA states that every person who, at the time of contravention, was in charge of and responsible to the company for the conduct of its business, shall be deemed guilty of the contravention. The court noted that the foundational fact required for proceeding against a person under Section 51 of FERA read with Section 68 (1) is that such a person was in charge of and responsible to the company for the conduct of its business at the relevant time. The court found that the allegations in the SCN were of a broad general nature and did not specifically indicate whether the appellants were in charge of and responsible for the conduct of NIL's business at the relevant time.

3. Validity of subsequent notice dated 2nd September 2003 issued by the ED:
The appellants also challenged a subsequent notice dated 2nd September 2003 issued by the ED. The court observed that this notice was a cyclostyled document containing identical paragraphs and mechanically stated that the appellants had failed to reply to the SCN/MFA, despite the fact that each of them had indeed filed a reply. This indicated non-application of mind by the Adjudicating Authority while issuing the notice.

4. Judicial review of Show Cause Notices:
The court acknowledged that while courts generally do not interfere with SCNs at the stage of adjudication, this principle is not inflexible. In cases where the foundational facts necessary for proceeding with adjudication are shown not to exist, judicial intervention is warranted. The court found that the foundational facts required under Section 68 (1) FERA were not established, as the appellants were non-executive directors and not responsible for the conduct of NIL's business.

5. Consistency in standards for criminal and civil liability under FERA:
The court noted that the ED had decided not to proceed against the appellants on the criminal side pursuant to the Opportunity Notice, implicitly accepting their explanation that they fell outside the scope of Section 68 (1) FERA. However, the ED adopted a different standard for the adjudication proceedings. The court found no justification for applying different standards for criminal and civil liability under FERA, as both require the same foundational fact that the person was in charge of and responsible for the conduct of the company's business.

Conclusion:
The court found the impugned judgments of the learned Single Judge unsustainable in law and set them aside. The adjudicating proceedings were quashed, and the appeals were allowed with no order as to costs.

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