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2013 (9) TMI 706 - HC - CustomsRecovery of demand from the Directors of the company - Export Obligations - Provision of Export and Import Policy - Notification Nos.30/97 & 31/97 - Penalty u/s 11(2) The goods imported against the licence were to be utilized in accordance with the provisions of export and import policy and custom Notification Nos.30/97 & 31/97 both dated 1.4.1997 as amended from time to time - Held that - Penalty u/s 11 (2) had been imposed upon the petitioner, the same having been imposed only upon the Company - Even otherwise, no penalty could have been imposed upon the petitioner, without serving him with a mandatory notice in terms of Section 14 of the Act and no such notice was ever given to the petitioner - The notice issued to the Company can by no stretch be construed as notice to its directors, since it contained no proposal to impose penalty on the directors of the company - The penalty imposed upon M/s. Hitkari China Limited shall not be enforced against the petitioner, though it can certainly be enforced against the company - This order, however, shall not come in the way of the respondents proceeding against the petitioner, under Section 11(2) of the Act, in terms of this order. Recovery of Penalty - Whether the penalty imposed upon the Company can be recovered from its Directors of the Company Held that - There was no provision in the Act for recovery of the penalty imposed upon a company from its directors, even in the event the said penalty cannot be recovered from the Company - In the absence of a statutory provision, the directors of a company cannot be made liable to discharge its liabilities unless they have stood as guarantors for discharge of such a liability Relying upon Anita Grover vs Commissioner of Central Excise and Ors 2012 (12) TMI 802 - DELHI HIGH COURT - The dues recoverable from the company cannot be, in the absence of a statutory provision, be recovered from the directors - the directors of the company were not personally liable for the liability owned by the company - Therefore, the penalty imposed upon the company cannot be enforced against the petitioner. Lifting of Corporate Veil Imposition of Penalty - Whether in a case where import licence was issued to a company and there was a default in carrying out the export obligation attached to the licence, penalty in terms of Section 11(2) of the Act can be imposed upon the director of the company or not Held that - The respondents would be competent to proceed against the petitioner u/s 11(2) of the Act, if they were of the opinion that he was under a duty or obligation to fulfil the export obligation of the company and consciously failed to do so - Of course, in such a case, it would be incumbent upon the respondents to issue a notice u/s 14 of the Act to him, stating therein the ground on which such a liability was sought to be fastened on him - Such an obligation cannot be assumed merely on account of the petitioner being or having been a director of the company. In Santanu Ray vs. Union of India 1988 (8) TMI 106 - HIGH COURT OF DELHI AT NEW DELHI - After the veil of the corporate entity was lifted, the adjudicating authorities will determine as to which of the directors was concerned with the evasion of the excise duty by reason of fraud, collusion or willful mis-statement or suppression of facts, or contravention of the provisions of the Act and the Rules made there under - So far as individual liability of a director to the payment of excise duty and penalty is concerned, no liability can be fastened on him unless the department was able to show as to how and to what extent a particular director is liable.
Issues Involved:
1. Non-fulfillment of export obligations by the Company. 2. Validity of the show cause notices and adjudication orders. 3. Liability of directors for the Company's penalty. 4. Legal provisions under the Foreign Trade (Development and Regulation) Act, 1992. 5. Lifting the corporate veil to hold directors accountable. Detailed Analysis: Non-fulfillment of Export Obligations by the Company: The Company applied for and received an advance licence on 28.8.1997, allowing import of goods with the condition of fulfilling export obligations worth Rs.1,24,25,099/- within 18 months. However, the Company failed to honor these export obligations. Consequently, a show cause notice was issued on 17.3.2004, followed by identical notices on 21.7.2005 and 12.2.2008. The Company was declared a defaulter on 28.3.2008, and a penalty of Rs.2,51,81,335/- was imposed on 31.5.2010. Validity of the Show Cause Notices and Adjudication Orders: The petitioner argued that the show cause notice dated 7.3.2008, which he responded to, was unrelated to the adjudication order dated 31.5.2010. The court clarified that the adjudication order pertained to non-fulfillment of export obligations for a different advance licence (No.0085811 dated 28.8.1997) than the one mentioned in the show cause notice (No.2274981 dated 12.12.1995). The court noted that the show cause notices were addressed only to the Company and not to its directors, and no mandatory notice under Section 14 of the Act was served to the petitioner. Liability of Directors for the Company's Penalty: The court emphasized that a company is a separate legal entity, and its directors cannot be held personally liable for the company's liabilities unless a statute explicitly provides for such liability or they have personally guaranteed the obligations. The court referenced judgments from the Punjab & Haryana High Court and Delhi High Court, which upheld that directors cannot be held personally liable for the company's financial obligations in the absence of statutory provisions. Legal Provisions under the Foreign Trade (Development and Regulation) Act, 1992: Section 11 of the Act prohibits export or import except in accordance with the Act and imposes penalties for contraventions. Section 14 mandates giving an opportunity to the concerned person before imposing penalties. The court noted that the penalty under Section 11(2) was imposed on the Company, and no notice under Section 14 was served to the petitioner, making the penalty unenforceable against him. Lifting the Corporate Veil to Hold Directors Accountable: The court discussed circumstances under which the corporate veil could be lifted, such as statutory provisions, fraud prevention, and evasion of statutes. It cited the case of Santanu Ray vs. Union of India, where the court held that individual liability of directors could be determined by lifting the corporate veil if fraud or willful mis-statement was involved. However, the court held that in the present case, the respondents must issue a notice under Section 14 of the Act to the petitioner, detailing the grounds for imposing liability on him. Conclusion: The court concluded that the penalty imposed on the Company could not be enforced against the petitioner without serving a mandatory notice under Section 14 of the Act. The penalty can be enforced against the Company, but the respondents are allowed to proceed against the petitioner under Section 11(2) of the Act, provided they comply with the procedural requirements. The writ petitions were disposed of accordingly, with no order as to costs.
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