Company penalty cannot be recovered from former director who resigned with proper compliance under Companies Act 1956 The Madras HC held that a penalty imposed on a company cannot be recovered from its former director in individual capacity. The court ruled that directors ...
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Company penalty cannot be recovered from former director who resigned with proper compliance under Companies Act 1956
The Madras HC held that a penalty imposed on a company cannot be recovered from its former director in individual capacity. The court ruled that directors cannot be substituted for the company and no statutory provision exists for recovering company penalties from directors. Since the petitioner had resigned from directorship in 2011 with proper compliance under Companies Act 1956, the recovery order against him was quashed. The court directed implementation of the penalty order against other parties only, excluding the petitioner.
Issues Involved: 1. Liability of a former director for penalties imposed on the company. 2. Validity of the impugned order dated 24.12.2021. 3. Requirement of notice to the petitioner.
Summary:
Issue 1: Liability of a Former Director for Penalties Imposed on the Company The petitioner, a former director of M/s. KFPL Drum Private Limited, resigned on 01.09.2011, and his resignation was accepted with Form 32 submitted as per the Companies Act, 1956. The penalty imposed on the company for non-fulfillment of export obligations under the EPCG Scheme arose in 2016 and 2018, well after the petitioner's resignation. The court referenced the judgment in Anita Grover vs Commissioner of Central Excise and Ved Kapoor vs Union of India, which established that directors are not personally liable for company debts unless specified by statutory provisions. The court concluded that the petitioner, having resigned, cannot be held liable for the company's penalties.
Issue 2: Validity of the Impugned Order Dated 24.12.2021 The impugned order dated 24.12.2021, which directed the petitioner to remit the penalty amount and pay customs duty with interest, was challenged. The court found that the petitioner was no longer involved in the company's affairs post-resignation and that the penalty could not be enforced against him. The court held that the impugned order could not be sustained and was liable to be quashed.
Issue 3: Requirement of Notice to the Petitioner The show cause notice dated 20.02.2020 was issued only to the company, with copies marked to the directors, including the petitioner. The court emphasized that no mandatory notice was served to the petitioner as required u/s 14 of the Foreign Trade (Development and Regulation) Act, 1992. The court cited the necessity of such notice for imposing penalties on individuals, as highlighted in the Ved Kapoor case.
Conclusion: The court quashed the impugned order dated 24.12.2021 against the petitioner, directing the respondents to implement the order against others in accordance with the law. The writ petition was allowed, and connected miscellaneous petitions were closed with no costs.
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