Supreme Court Overturns Penalty on Director in Foreign Exchange Violation Case

The Supreme Court of India recently delivered an important judgment in the case of Shailendra Swarup vs. Deputy Director, Enforcement Directorate. The ruling addressed key issues concerning liability under the Foreign Exchange Regulation Act, 1973 (FERA). The case revolved around the imposition of a penalty on a part-time, non-executive director for an alleged foreign exchange violation by the company Modi Xerox Ltd. (MXL). The Court ultimately overturned the penalty, ruling that liability could not be imposed without proving that the director was actively responsible for the company’s business operations at the relevant time.

This judgment has far-reaching implications for corporate governance, particularly in cases where directors are penalized for violations without any direct role in the decision-making processes of the company.

Background of the Case

The dispute originated from remittances made by Modi Xerox Ltd. (MXL) between June and November 1985 through Standard Chartered Bank. The Reserve Bank of India (RBI) later questioned these transactions due to the company’s failure to submit the required Exchange Control documents as proof of imports. The Enforcement Directorate initiated proceedings in 1991 and later issued a show-cause notice to MXL and its directors in 2001, citing violations under Sections 8(3), 8(4), and 68 of FERA, 1973.

The Directorate imposed a penalty of Rs. 1,00,000 on Shailendra Swarup, who was a part-time, non-executive director of MXL at the time of the alleged violation. Aggrieved by the penalty, he challenged the order before the Appellate Tribunal for Foreign Exchange, which dismissed his appeal. The Delhi High Court also upheld the Tribunal’s ruling, leading to the present appeal before the Supreme Court.

Arguments of the Petitioner

Shailendra Swarup, through his legal counsel, argued:

• He was only a part-time, non-executive director of MXL and had no executive role in the company’s operations.
• There was no evidence to establish that he was responsible for the conduct of the company’s business at the relevant time.
• The show-cause notice merely listed his name among the directors without specifying his direct involvement in the transactions in question.
• The adjudicating officer had failed to return a specific finding that Swarup was in charge of the company’s business when the alleged violations occurred.
• In a separate case involving a different transaction, the Enforcement Directorate had previously accepted that Swarup had no executive responsibilities, leading to the withdrawal of proceedings against him.

Arguments of the Respondent

The Enforcement Directorate contended that:

• As a director, Swarup was presumed to be responsible for the company’s compliance with foreign exchange regulations.
• The company’s failure to provide the required documentation justified penal action against all directors, including part-time ones.
• Swarup had not provided adequate evidence to prove that he was not in charge of the company’s business operations.
• The burden was on the appellant to establish that he had no role in the transactions under scrutiny.

Supreme Court’s Key Findings

The Supreme Court examined the provisions of FERA, particularly Section 68, which deals with offenses by companies. The key findings of the Court were:

1. Mere Directorship Does Not Establish Liability

The Court observed that Section 68(1) of FERA imposes liability only on those directors who were ‘in charge of and responsible for’ the conduct of business at the relevant time. The Court stated:

“The liability to be proceeded against under Section 68 depends on the role one plays in the affairs of the company and not merely on holding a designation or office.”

2. The Burden of Proof Rests on the Prosecution

The Supreme Court clarified that it was not the appellant’s responsibility to prove his innocence but rather the duty of the prosecution to establish his active role in the company’s affairs. The Court ruled:

“A person cannot be held liable solely based on his designation as a director unless there is cogent evidence that he was responsible for the business operations at the time of the violation.”

3. Prior Proceedings Had Already Established Swarup’s Non-Executive Role

The Court noted that in a previous case involving a different transaction, the Directorate had accepted that Swarup was a non-executive director and had dropped proceedings against him. It found no reason to treat this case differently.

4. The Adjudicating Authority and Appellate Tribunal Erred in Law

The Court criticized the lower authorities for imposing the penalty without recording a specific finding that Swarup was responsible for the alleged violation. The ruling stated:

“The adjudicating officer imposed the penalty without returning any finding that the appellant was responsible for the conduct of the business at the relevant time.”

Final Judgment

Based on these observations, the Supreme Court:

• Allowed the appeal.
• Set aside the orders of the adjudicating officer, the Appellate Tribunal, and the Delhi High Court.
• Revoked the penalty imposed on Swarup.

Key Takeaways from the Judgment

• A director cannot be held liable for company violations under FERA unless it is established that they were actively responsible for the conduct of business at the relevant time.
• The burden of proof lies on the prosecution to demonstrate a director’s involvement, not on the director to prove their innocence.
• Decisions in prior proceedings involving the same individual can be used as relevant evidence to establish their non-involvement.
• Corporate governance principles must be adhered to, ensuring that only those who genuinely bear responsibility are held accountable.

Conclusion

The Supreme Court’s ruling in this case reinforces the principle that liability for corporate violations must be based on actual involvement in business operations, not merely on one’s designation as a director. This judgment is a landmark precedent for corporate governance and enforcement of foreign exchange regulations, ensuring fairness in penal actions taken against directors.

Petitioner Name: Shailendra Swarup.
Respondent Name: Deputy Director, Enforcement Directorate.
Judgment By: Justice Ashok Bhushan, Justice R. Subhash Reddy.
Place Of Incident: New Delhi.
Judgment Date: 27-07-2020.

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