2026 (3) TMI 155 - AT - FEMA

Liability of struck-off companies persists; legal representatives face estate-limited FEMA penalties, with courts able to reduce penalties for proportionality.

Sections 248(6) and 250 of the Companies Act preserve a struck-off company's liabilities and permit realisation and enforcement of amounts due, so ... Imposition of penalty - Liabilities of a company struck off the register continue and remain enforceable - vicarious liability - liability of legal representatives under section 43 of FEMA continues for adjudication though limited to estate - penalty under section 13(1) of FEMA - requirement of mens rea - principle of proportionality in imposition of penalty. Effect of striking off a company on liabilities and enforceability of penalties. - HELD THAT: - The Tribunal examined Chapter XVIII of the Companies Act, 2013 (Sections 248 and 250) and held that even after a company is struck off and deemed dissolved, its liabilities and obligations continue and may be enforced as if the company had not been dissolved; sufficient provision must be made for discharge of liabilities and assets remain available for that purpose. Consequently, penalties imposed on the struck off company in the impugned order subsist unless a contrary judicial order is obtained. [Paras 3, 4] Penalties imposed on the struck off company continue as its liability and remain enforceable. Liability of legal representatives under section 43 of FEMA continues for adjudication though limited to estate - HELD THAT: - The Tribunal reproduced the adjudicating authority's findings that the deceased was personally in charge and responsible for the contraventions (quoting the impugned order paragraphs relied upon). It noted that proceedings do not abate on death and legal representatives may represent the deceased in adjudication. While counsel argued that liability of a legal representative is limited to the inheritance or estate and that the appellants were neither official receivers nor assignees, the Tribunal accepted the AA's application of section 43 to continue adjudication against legal representatives and treated the individual liability as subject to the legal framework governing such representatives. [Paras 6] Adjudication and imposition of penalty against legal representatives in terms of Section 43 is permissible; liability continues to be cognisable against them within the limits of law concerning legal representatives. Penalty under section 13(1) of FEMA is civil in nature and does not require mens rea - Whether mens rea is an essential element for imposing penalty under Section 13(1) of FEMA. - HELD THAT: - Relying on settled precedents (including SEBI v. Shriram Mutual Fund [2006 (5) TMI 191 - SUPREME COURT] and earlier decisions applying similar principles under FERA), the Tribunal held that penalties under Section 13(1) of FEMA are civil in nature and attracted upon proof of contravention; the presence or absence of guilty intention (mens rea) is irrelevant unless the statute expressly requires it. The Tribunal rejected reliance on Hindustan Steel [1969 (8) TMI 31 - SUPREME COURT] (a criminal/quasi criminal context) as inapposite to civil penalties under FEMA. [Paras 7, 8] Mens rea is not required to be established for imposing penalty under Section 13(1) of FEMA. Principle of proportionality in imposition of penalty - Whether the penalties imposed on the individual appellants should be reduced on principles of proportionality. - HELD THAT: - Having considered the nature of the contraventions, the appellants' submissions as to inadvertence and proportionality, and the quantum imposed by the adjudicating authority, the Tribunal exercised its power to moderate the penalties. In the interests of justice and applying proportionality, the Tribunal reduced the penalties on each individual appellant to the specified reduced amount and directed adjustment of pre deposits made earlier. [Paras 9, 10, 11] Penalties on the individual appellants reduced to the quantum determined by the Tribunal and pre deposits adjusted accordingly. Final Conclusion: The appeals are partly allowed: the Tribunal affirmed that liabilities of the struck off company continue and that adjudication against legal representatives under Section 43 of FEMA is maintainable; it held that penalties under Section 13(1) are civil and do not require mens rea; applying proportionality, the Tribunal reduced the penalties payable by each individual appellant to the reduced amount and ordered adjustment of the pre deposits. The company level penalties as imposed in the impugned order remain intact subject to any higher forum order. Issues: (i) Whether penalties and liabilities of a company struck off the register continue to subsist and can be enforced; (ii) Whether the individual appellants, as legal representatives/sons of the deceased managing director, are liable under Section 43 of the Foreign Exchange Management Act, 1999 for contraventions attributed to the struck-off company; (iii) Whether the penalties imposed on the individual appellants should be reduced.Issue (i): Whether penalties and liabilities of a company struck off the register continue to subsist and can be enforced.Analysis: Section 248(6) and Section 250 of the Companies Act, 2013 preserve liability and obligations of a struck-off company, require satisfaction that provision has been made for discharge of liabilities, and deem the certificate of incorporation cancelled only for limited purposes while allowing realisation of amounts due and enforcement of liabilities. The impugned penalties imposed on the company therefore remain liabilities despite the company being struck off unless a higher forum orders otherwise.Conclusion: In favour of Respondent.Issue (ii): Whether the individual appellants, as legal representatives/sons of the deceased managing director, are liable under Section 43 of the Foreign Exchange Management Act, 1999 for contraventions attributed to the struck-off company.Analysis: The adjudicating authority relied on findings that the deceased was in-charge of the company and involved in the contraventions and proceeded under section 42(1) and Section 43 of FEMA to hold legal representatives liable; Section 43 permits continuation of adjudication against legal representatives and liability is limited to the estate/inheritance. The Tribunal examined the record of adjudication, the statements and procedural opportunities afforded to the legal representatives, and the statutory framework under FEMA governing penalty imposition for civil contraventions.Conclusion: Partly in favour of Appellant.Issue (iii): Whether the penalties imposed on the individual appellants should be reduced.Analysis: Section 13(1) of FEMA provides for civil penalties without requiring mens rea; however, the Tribunal considered proportionality and circumstances of the individual appellants, including pre-deposits already made and the nature of the failures alleged, and applied discretionary reduction of monetary penalty consistent with precedents permitting mitigation of civil penalties where appropriate.Conclusion: In favour of Appellant.Final Conclusion: The appeals are partly allowed by upholding that company liabilities continue despite striking off while recognising limited liability of legal representatives and reducing the individual penalties to Rs.30,000 each with adjustment of pre-deposits.Ratio Decidendi: Sections 248(6) and 250 of the Companies Act, 2013 preserve the liabilities of a struck-off company for purposes of realisation and enforcement, and civil penalties under FEMA are attractable without proof of mens rea though their quantum may be judicially moderated on principles of proportionality.