India: Directors And Their Liability For Company Actions Under Foreign Exchange Norms

In a recent decision in the case of Shailendra Swarup v. Deputy Director of Enforcement Directorate¹, the Supreme Court of India has reaffirmed that the liability of a director depends on the role such director played in managing the affairs of the company and not merely by virtue of being a director in a company.

Background facts

Shailendra Swarup ("Appellant") was a director of Modi Xerox Limited ("MXL") which was subsequently amalgamated into another company, Xerox Modicorp Limited. The Appellant is also a practicing advocate of the Supreme Court of India.

MXL had made 20 remittances outside India during the month of June 1985 till November 1985. The Reserve Bank of India ("RBI") issued reminders to MXL for submitting certain documents in relation to such remittances. However, MXL failed in submitting the said copies to the RBI. Further, the Enforcement Directorate ("ED") wrote to MXL in the year 1991-1993 asking for documents to be submitted to them. MXL, in reply to the ED and RBI, provided documents for 4 transactions and stated that MXL was unable to track documents pertaining to the other 16 transactions.

In 2001, the ED issued a show cause notice ("SCN") to all the directors of MXL, including the Appellant, citing alleged violations of relevant provisions of Foreign Exchange Regulation Act, 1973 ("FERA"). The Appellant in response to the SCN stated that he was only a part-time, non-executive director of MXL,  and that he was never in the employment of MXL, nor did he ever have an executive role in the functions of MXL.

The ED further requisitioned the company secretary of MXL for providing the details of directors of MXL. The company secretary provided the details of directors of MXL in a letter, which included the name of the Appellant as a director of MXL.

After hearings, the ED passed an adverse order against MXL and also imposed a penalty of Rs.1,00,000/- on all the directors including the Appellant. The said order was upheld by the appellate tribunal as well as the High Court.

Arguments

The Appellant contended that the honorable High Court had committed an error while dismissing the appeal made by him. The Appellant further contended that he was not in charge of the day-to-day business of MXL and had no executive role in MXL. The Appellant further contended that for the mere reason that the name of Appellant was included in the letter issued by the company secretary of MXL does not imply any executive responsibility on him. The Appellant submitted that he was only a part-time, non-executive director of MXL and not an employee of MXL having any executive authority therein.

The Additional Solicitor General on behalf of the ED refuted all the claims made by the Appellant and justified the penalty imposed on the Appellant. He further submitted that the proceedings initiated against the Appellant under Section 51 of the FERA requires burden of proof to be on the Appellant to prove that he had no active role to play in MXL. 

View of the Supreme Court

The two-judge bench of the honorable Supreme Court of India ("SC") regarded three issues pertaining to the case in hand and provided explanation and reasoning on the same.

Firstly, whether the appellant was only a part-time, non-executive director of MXL. The SC observed that the first reply to the ED's notice was given by the company secretary of MXL. None of the directors of MXL had provided their reply therein. At a later date, the Appellant submitted his reply to the ED stating his limited role in MXL during the personal hearing instituted by the ED through an affidavit. It is pertinent to note that the reply of the Appellant was in consonance with that of the reply given by the company secretary of MXL to the ED. The SC held that the honorable High Court erred in dismissing the reply statements of both the Appellant and company secretary stating them to be an "afterthought".

Secondly, the SC decided upon the material available with it proving the limited role of the Appellant as a director in MXL. The SC accepted the affidavit submitted by the Appellant and the company secretary of MXL as conclusive evidence to provide his limited role as a part-time, non-executive director of MXL.

Thirdly, the SC contemplated on the fact that whether the ED, appellate tribunal and the High Court erred in holding the Appellant in contravention of Section 8(3), 8(4) and Section 68 of the FERA. The SC observed that it was erroneous on the part of the adjudication authority to dismiss the conclusive proof and material brought by the Appellant in relation to his limited role in MXL.

Accordingly, the SC referred to the ratio passed in the case of M.S Pharmaceuticals Ltd. v. Neeta Bhalla 2005 8 SCC 89 i.e. the conduct, act or omission on the part of a person gives rise to liability and the same is not dependent merely on account of holding a specific office or designation in a company. Citing the said ratio, the SC stated that no proof was made available with them by the ED to refute the submissions of the Appellant. Accordingly, the SC dropped the charges instituted against the Appellant.

Comment

Considering the reasoning and the approach undertaken by the SC, it is clear that the role of the directors has to be borne in mind while assessing his liability in relation to his conduct, actions and omissions. Although a person may take the plea of being a non-executive, part time director of a company, however, if such director is attending board meetings, he should be aware of the agenda of the meeting and the reasoning for voting in favour or against the said agenda, and such acceptance/dissent should be  recorded in the minutes of the meeting. It is an important practice for every non-executive director to be inquisitive and carefully peruse the agendas for unusual items and seek additional information from the board of directors. Although the Companies Act, 2013 and various judgments passed by the courts in India provide protection to such directors who do not actively participate in the role of the company, however, the facts surrounding the case will have to be evaluated minutely for coming to a conclusion.

Footnote

1. Criminal Appeal No. 2463 of 2014.

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