2025 (5) TMI 88 - HC - Customs

Director not personally liable for company export defaults without proper notice under FTDR Act

Delhi HC set aside orders holding a director personally liable for company's export obligation defaults under FTDR Act. Court found no show cause notice ... Liability of Directors and the Petitioner for non-fulfilment of its export obligations under the FTDR Act by the company - lifting of corporate veil - no show cause notice was issued to the Petitioner at all - violation of principles of natural justice - HELD THAT:- The Impugned Order does not contain any discussion with regard to the personal liability of the Petitioner. In fact, it is the case of the Petitioner that the show cause notices that are sought to be relied upon by the Respondent are all issued to the Company and have not been specifically addressed to the Petitioner - The Four O-I-O's state that the show cause notice dated 29.06.2004 was issued, thereafter another notice was issued on 05.05.2008 subsequently as well. However, it also states that the summons issued came back undelivered. In any event, after the Company had been directed to be wound up on 09.01.1998, all notices should have been issued to the Official Liquidator of the Company, which was concededly not done by the Respondent. The issue that obtains in the present case also obtains in a matter decided by this Court, the Pankaj Mehra case [2024 (12) TMI 1475 - DELHI HIGH COURT]. In the said case, a similar situation had arisen where after order for winding up of the Company was passed, notices under Section 11 of the FTDR Act were issued by the Respondent and Order(s) in Original were passed fastening a personal liability on the Directors of the Company for their role in the non-fulfilment of export obligations of the Company. This Court examined these Orders-in-Original and the final adjudication undertaken by the Respondent and found that no averment fastening personal liability on a Director was made either in the show cause notice or in the Order (s) passed by the Respondent. It was held by the Court that unless specific allegations are made against a Director regarding its role in the Company's export performance, they cannot be held personally liable. 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 contention of the Respondent that the Petitioner being a whole-time director is automatically liable and culpable for the defaults of the Company is also misconceived. It is no longer res integra that in order for a Director to be vicariously liable for the offences of the Company unless such Director was in charge and responsible to the Company for the conducts of its business, such Director cannot be held to be liable for offences alleged to have been committed by that Company. The Respondent has 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. Conclusion - In order for a Director to be vicariously liable for the offences of the Company unless such Director was in charge and responsible to the Company for the conducts of its business, such Director cannot be held to be liable for offences alleged to have been committed by that Company. This Court therefore finds no merit in the contentions of the Respondent - the Impugned Order and the Four Order(s)-In-Original are set aside - Petition disposed off. Issues Presented and ConsideredThe core legal questions considered by the Court include:Whether a 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, without specific allegations or proof of his personal involvement or abetment.Whether the imposition of penalty on the petitioner-director was valid when the company had been ordered to be wound up and was under the control of an Official Liquidator, with all company records and assets seized.Whether the show cause notices and summons issued by the Directorate General of Foreign Trade (DGFT) were properly served on the petitioner and whether principles of natural justice were complied with.Whether the proceedings and imposition of penalty were barred by limitation, given the long delay between alleged contraventions and initiation of proceedings.Whether the corporate veil could be lifted to impose personal liability on directors in the absence of evidence of fraud, misconduct, or evasion of statutory obligations.Issue-wise Detailed Analysis1. Personal Liability of Directors under Section 11(2) of the FTDR ActThe FTDR Act, under Section 11(2), provides that any person who makes or abets any export or import in contravention of the Act or rules is liable to penalty. The Court emphasized that for imposing personal liability on a director, there must be specific allegations or proof that the director either committed or abetted the contravention. Merely being a director or having one's name listed in show cause notices addressed to the company is insufficient.The Court relied on precedents from coordinate benches, including the Pankaj Kapal Mehra case, Krishan Kumar Bangur case, and Ved Kapoor case, which consistently held that personal liability on directors requires clear and specific allegations regarding their role in the default. The Court noted that the impugned orders and show cause notices failed to specify any personal role or duty of the petitioner in fulfilling export obligations or in the contravention alleged.The Court observed:'...unless specific allegations are made against a Director regarding its role in the performance of export obligations, they cannot be held personally liable. The Show Cause Notice does not mention the grounds on which individual liability is sought to be fastened on the Director... To assume or foist such a liability on the Directors would run counter to the basic tenets of Company law.' The Court held that the mere inclusion of the petitioner's name as a director in the notices addressed to the company without individualized allegations or opportunity to be heard violates principles of natural justice.2. Effect of Company's Winding Up and Role of Official LiquidatorThe company had been declared a sick industrial company under the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), and subsequently wound up by an order of the Bombay High Court in 1998. The Official Liquidator took possession of all company records and assets.The petitioner ceased to be a director from the date of winding up. The Court held that after winding up, all proceedings relating to the company's liabilities should be directed to the Official Liquidator, who alone has authority and control over company affairs. The DGFT's failure to issue notices to the Official Liquidator rendered the proceedings against the petitioner and the company irregular.The Court noted that the petitioner had communicated the company's liquidation status and inability to comply with notices due to lack of access to records, but the adjudicating authority disregarded the absence of documentary proof and proceeded with penalty imposition.Hence, the Court found the imposition of penalty on the petitioner personally, and on the company without involving the Official Liquidator, to be arbitrary and unsustainable.3. Compliance with Principles of Natural Justice and Proper Service of NoticesThe petitioner contended that none of the show cause notices or summons were personally served on him, and that all communications were addressed only to the company at its registered office. The notices did not mention the petitioner's address nor specify his alleged role in the default.The Court examined the record and found that multiple summons and notices issued under Section 17 and Section 14 of the FTDR Act were returned undelivered with remarks such as 'left,' indicating non-receipt. The petitioner's name appeared only in a list of directors without individualized service.The Court emphasized that imposing penalty without affording an individual an opportunity to be heard on specific allegations violates natural justice. The adjudicating authority's failure to consider this fundamental procedural requirement vitiated the penalty orders.4. Limitation and Delay in Initiating ProceedingsThe export licenses were obtained between 1989-1991, but the show cause notices and adjudication orders were issued many years later-some after 14 to 18 years. The petitioner argued that such delay renders the proceedings barred by limitation and unreasonable, citing Supreme Court precedents which require proceedings to be initiated within a reasonable time.The Court noted that the DGFT did not provide any explanation for the delay in initiating proceedings against the petitioner or the company. While the Court did not base its decision solely on limitation, it acknowledged that the long delay undermined the fairness and efficacy of the proceedings.5. Lifting the Corporate Veil and Liability of DirectorsThe respondent argued for lifting the corporate veil to hold the petitioner personally liable, relying on a Supreme Court judgment permitting such action in cases of fraud, misconduct, or evasion of statutory obligations.The Court distinguished the present facts from such exceptional cases, observing that there was no evidence of fraud or misconduct by the petitioner. The petitioner's mere status as a whole-time director or working director did not automatically render him responsible for the company's defaults. The Court reiterated that vicarious liability requires proof that the director was in charge and responsible for the company's business conduct related to the offence.Thus, the Court held that the corporate veil could not be pierced in this case to impose personal liability on the petitioner.Significant HoldingsThe Court's key legal conclusions include:'Unless specific allegations are made against a Director regarding its role in the performance of export obligations, they cannot be held personally liable.' 'The mere inclusion of a Director's name in show cause notices addressed to the Company without specific allegations or opportunity to be heard violates principles of natural justice.' 'Once a Company has been wound up and an Official Liquidator appointed, all proceedings relating to the Company's liabilities must be directed to the Official Liquidator. Failure to do so renders such proceedings invalid.' 'The corporate veil may only be lifted in cases where fraud, misconduct, or evasion of statutory obligations is established. Mere directorship or working director status does not automatically attract personal liability.' The Court set aside the impugned order confirming penalty and the four Orders-in-Original imposing penalties on the petitioner and the company. The Court held that the DGFT failed to establish personal liability on the petitioner, did not comply with natural justice, and improperly proceeded against a company under liquidation without involving the Official Liquidator.The Court's decision underscores the principle that personal liability of directors under the FTDR Act cannot be presumed and must be based on clear, specific allegations and due process. It affirms the protection of directors from arbitrary penal consequences where they have no direct role in the alleged contraventions, especially in the context of a company's winding up and liquidation.