2025 (4) TMI 1607 - HC - Customs

Personal liability of petitioner for non-fulfilment of export obligations by the Company - Petitioner was appointed as an independent non-executive director of the Company in the year 1985 and was neither a promoter nor was involved in the day-to-day affairs of the Company - time barred SCN - HELD THAT - This Court has in Pankaj Mehra case while relying on the judgments passed in Krishan Kumar Bangur case 2006 (4) TMI 256 - HIGH COURT OF DELHI and Ved Kapoor case 2013 (9) TMI 706 - DELHI HIGH COURT and on the judgment of the Supreme Court in the Santanu Ray vs. Union of India 1988 (8) TMI 106 - DELHI HIGH COURT has held that unless specific allegations have been made which discuss the role of a director in the export performance there is no question of finding the director personally liable for the same. The order impugned or even the Four O-I-O s have failed to fulfil this or show any adjudication on this aspect. In the absence thereof the Respondent cannot now by taking additional grounds and pleas attempt to go beyond the Impugned Order or the Four O-I-O s. There is another aspect which has to be taken into consideration. The export licences were issued during the time period of 1989-1991. Between 27.06.2002 and 11.09.2008 the Respondent issued multiple notices summons and orders concerning various Advance Licenses held by the Company. The Four O-I-O s were then passed on 08.09.2009 and 17.09.2009. No explanation has been provided by the Respondent in these Four O-I-O s for the delay in taking steps against the Petitioner or the Company. No reason has been urged before this Court either. In any event the Petitioner has stated that he was appointed as an independent non-executive director and that he had no role to play in the company s day to day affairs or export obligation or licences - The Respondent has also not disputed the fact either in the Impugned Order or in the Four O-I-O s that the Company went into liquidation in 1998 and that all documents and records were taken over by the Official liquidator. Thus once a company goes into liquidation all proceedings to be initiated against such company for the failure to submit documents in compliance with export obligations could only be initiated as is mandated in law. There is no evidence of this being done by Respondent either. This Court therefore finds no merit in the contentions of the Respondent - Petition disposed off.

The core legal questions considered by the Court in this matter include:

(a) Whether a non-executive, independent Director of a Company can be held personally liable and penalized under Section 11(2) of the Foreign Trade (Development and Regulation) Act, 1992 (FTDR Act) for non-fulfilment of export obligations by the Company;

(b) Whether the principles of natural justice were complied with, specifically whether the Petitioner was issued a valid show cause notice under Section 14 of the FTDR Act before imposition of penalty;

(c) Whether the penalty proceedings initiated after the winding up of the Company and after the Official Liquidator had taken possession of the Company's records were legally sustainable;

(d) Whether the delay and limitation in issuing show cause notices and imposing penalties affected the validity of the proceedings;

(e) Whether the corporate veil could be lifted to fasten personal liability on the Director in absence of specific allegations of his role in the default;

(f) The applicability of established legal precedents concerning personal liability of Directors and procedural requirements under the FTDR Act.

Issue-wise detailed analysis:

1. Personal Liability of a Non-Executive Director under Section 11(2) of the FTDR Act

The legal framework mandates that penalty under Section 11(2) can be imposed where a person "makes or abets or attempts to make any export or import in contravention" of the Act or rules. The Court emphasized that mere status as a Director does not automatically impose personal liability. The Director must be shown to have had a duty or obligation to ensure compliance and have consciously failed to discharge it.

Precedents such as Krishna Kumar Bangur and Ved Kapoor were relied upon, where the Court held that unless specific allegations regarding the Director's role in the default are made in the show cause notice or adjudication orders, personal liability cannot be sustained. The Court also referred to a recent coordinate bench decision (Pankaj Kapal Mehra) which reaffirmed this principle, holding that absent specific allegations or reasons for personal culpability, directors cannot be held personally liable.

The Court noted that the impugned orders and show cause notices failed to specify any role or duty of the Petitioner with respect to the Company's export obligations. The Petitioner was appointed as an independent non-executive Director and resigned prior to the winding up. There was no material to show his involvement in day-to-day affairs or in the alleged contraventions.

The Respondent's contention that the Petitioner's name appeared on the license application and registration certificate was insufficient to establish personal liability. The Court rejected the argument that the Petitioner's status as Director alone warranted penalty.

2. Compliance with Principles of Natural Justice and Validity of Show Cause Notices

Section 14 of the FTDR Act requires issuance of a written show cause notice specifying grounds for penalty and affording an opportunity to make representation. The Court found that all show cause notices were addressed only to the Company at its registered address and did not specifically address or serve the Petitioner. The notices merely listed the Directors' names without specifying individual allegations or addresses.

Evidence showed that many notices and summons were returned undelivered or "left," indicating lack of proper service. The Petitioner received only a recovery notice dated 2014, long after the adjudication orders. The Court held that this violated the principles of natural justice and statutory mandate under Section 14.

Furthermore, after the winding up order dated 09.01.1998 and the Official Liquidator's takeover of all Company assets and records, any notices or proceedings ought to have been directed to the Official Liquidator. The Respondent failed to do so, rendering the penalty proceedings against the Petitioner arbitrary and unsustainable.

3. Effect of Winding Up of the Company and Role of Official Liquidator

The Company was declared sick under SICA and ordered to be wound up by the Bombay High Court in 1998. The Official Liquidator took possession of all records and assets. The Petitioner resigned as Director prior to winding up and had no control over Company affairs thereafter.

The adjudication orders acknowledged the winding up but dismissed the Petitioner's claim for stay of proceedings due to lack of documentary proof. The Court found this reasoning flawed as the winding up order and appointment of Official Liquidator were judicially recorded facts. The Respondent's failure to serve or communicate with the Official Liquidator contravened legal requirements for proceedings against a wound-up Company.

4. Limitation and Delay in Initiation of Proceedings

The show cause notice dated 08.09.1992 was followed by adjudication orders only in 2009, after a lapse of 17 years. Other notices and orders were issued 14 to 18 years after the relevant transactions. The Court noted established legal principles that in absence of a prescribed limitation period, proceedings must be initiated within a reasonable time.

The Respondent did not offer any explanation for the delay. The Court held that such delay rendered the proceedings barred by limitation and amounted to abandonment of the cause of action, making the penalty orders untenable.

5. Lifting of Corporate Veil and Reliance on Supreme Court Precedent

The Respondent urged lifting the corporate veil citing the Supreme Court's decision in Life Insurance Corporation of India v. Escorts Ltd., arguing that Directors cannot escape liability in cases of fraud or statutory evasion.

The Court distinguished that precedent as inapplicable to the facts here, which did not involve fraud or misconduct by the Petitioner. The Court reiterated that lifting the corporate veil requires clear evidence of fraud, evasion, or misconduct, which was absent.

6. Application of Law to Facts and Treatment of Competing Arguments

The Court carefully examined the documentary record, including the Four Orders-in-Original (O-I-O's) imposing penalties, the show cause notices, and the winding up proceedings. It found that none of the orders or notices specified the Petitioner's personal role or culpability. The Respondent's argument that the Petitioner was liable by virtue of being a Director was rejected as contrary to settled law.

The Petitioner's contention that he was a non-executive Director, resigned before winding up, and had no access to Company records post-liquidation was accepted. The Respondent's failure to serve notices on the Official Liquidator and the delay in proceedings further undermined the case against the Petitioner.

The Court also noted that the impugned order failed to address the crucial question of personal liability and did not comply with procedural safeguards under the FTDR Act.

Conclusions:

The Court concluded that the penalty imposed on the Petitioner was without jurisdiction, violated principles of natural justice, and was barred by limitation. The Petitioner could not be held personally liable in absence of specific allegations and proof of his role in the Company's default. The Respondent's failure to issue valid show cause notices and to communicate with the Official Liquidator rendered the proceedings arbitrary.

The impugned order and the Four Orders-in-Original imposing penalties on the Petitioner were set aside.

Significant holdings and core principles established:

"In order to sustain the imposition of a punishment on an individual Director it was incumbent on the Respondents to allege and assert the existence of a duty or obligation cast on one or all the Directors of the defaulting Company and the contumacious failure to fulfil it. The Show Cause Notice does not mention the grounds on which individual liability is sought to be fastened on the Director. Neither of the Orders, that is, the Order in Original or the Appellate Order, disclose reasons which have persuaded those Authorities to come to the conclusion that the Petitioner had assumed an obligation or duty in ensuring that exports corresponding to four times the CIF value would be undertaken within the prescribed period. To assume or foist such a liability on the Directors would run counter to the basic tenets of Company law."

"No order imposing a penalty... shall be made unless the owner of the goods... or other person concerned, has been given a notice in writing-(a) informing him of the grounds on which it is proposed to impose a penalty... and (b) to make a representation in writing within such reasonable time... and, if he so desires, of being heard in the matter."

"Where a company has been wound up and the Official Liquidator has taken possession of its records, any proceedings for penalty or recovery must be directed to the Official Liquidator and not to individual Directors who have ceased to be in control."

"Delay of several years in initiating penalty proceedings without explanation renders such proceedings barred by limitation and liable to be quashed."

"Lifting the corporate veil to fasten personal liability requires clear evidence of fraud, misconduct or evasion of statutory obligations, which is absent in this case."

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