2023 (1) TMI 1195 - HC - Customs

Liability of nominee directors for offence / non compliance committed prior to their appointment - EPCG Scheme - non-fulfilment of export obligation - nominee director and their contiguous liabilities - Section 140 of the Customs Act, 1962 - HELD THAT - In the present case all directors have been appointed as nominees from among the consortium of banks to oversee the adherence of the company to its financial obligations. Their role and responsibility is thus specific and this is the context against which the liability cast in terms of Section 140 of the Companies Act, has to be tested - While there may be some justification in implicating a nominee director for statutory violations that are current, the violation in question touches upon alleged non-compliance with the terms EPCG licence issued in 2010, long prior to their appointment. No doubt, the terms of the EPCG licence required the assessee to comply with export obligations for a period of eight years after date of licence. However, at the time when such nominee directors were appointed such obligations would not have been at the forefront and there is no justification in expecting the newly appointed directors to apply their minds to the obligations that had crystallized long prior to their appointment and previously in time. It would be improper, unjustified and unwarranted to expect them to have had any participation or involvement in compliance with the continuing export obligation. Petition allowed.

Summary

Issues:
1. Liability of nominee/independent directors for non-adherence to the terms and conditions of the Export Promotion Capital Goods Scheme (EPCG Scheme).
2. Interpretation of Sections 140 of the Customs Act, 1962, and 2(13) of the Companies Act, 1956 regarding the liability of directors.
3. Examination of the role and responsibilities of nominee directors under the Companies Act, 1956 and 2013.
4. Application of Circulars issued by the Ministry of Corporate Affairs (MCA) in determining the liability of directors.
5. Consideration of the appointment of nominee directors by banks to oversee financial obligations and their liability in statutory violations.
6. Justification for implicating nominee directors for alleged non-compliance with EPCG license terms issued prior to their appointment.

Analysis:
The judgment involves writ petitions filed by bank employees against an order passed concerning an entity that failed to meet export obligations under the EPCG Scheme. The petitioners, appointed as nominee directors by a consortium of banks for corporate debt restructuring, were held liable for non-adherence to the EPCG Scheme's conditions. The court examined the liability of nominee directors under Sections 140 of the Customs Act and 2(13) of the Companies Act, emphasizing the need for active involvement in the offense at the time it occurred.

The court analyzed the roles of nominee directors under the Companies Act, 1956 and 2013, highlighting the specific responsibilities and liabilities associated with their positions. It referenced Circulars issued by the MCA, emphasizing the importance of verifying a director's role in an offense before initiating penal action, and distinguishing between acts of omission and commission with or without the director's knowledge or consent.

Regarding the appointment of nominee directors by banks to oversee financial obligations, the court considered the specific mandate and focused responsibilities of such directors. It noted that expecting these directors to oversee obligations that arose prior to their appointment would be unjustified, especially when their primary role was to monitor financial aspects rather than compliance with export obligations.

Ultimately, the court found merit in the petitioners' arguments and set aside the impugned order, indicating that the liability of the present petitioners as nominee directors was unwarranted given the circumstances. The judgment clarified the distinction between statutory violations that occurred during a director's tenure and those that predated their appointment, emphasizing the need for a clear connection between the director's actions and the offense in question.