Supreme Court Sets Aside FERA Penalty Against Non-Executive Director: Liability Under Section 68 Requires Proof of Being In-Charge and Responsible for Company’s Business

Case Name: Shailendra Swarup v The Deputy Director, Enforcement Directorate
Citation: 2020 INSC 465; Criminal Appeal No. 2463 of 2014
Date of Judgment/Order: July 27, 2020
Bench: Ashok Bhushan, J.; R. Subhash Reddy, J.

Held: The Supreme Court held that a director cannot be penalised for a company’s contravention under FERA merely because he was on the Board; to attract vicarious liability under Section 68, it must be shown (and specifically found) that at the time of contravention the director was in charge of and responsible to the company for the conduct of its business, and authorities cannot impose penalty without considering the director’s defence and recording clear findings on this essential statutory ingredient.

Summary: The Enforcement Directorate initiated adjudication proceedings relating to remittances made by Modi Xerox Ltd. in 1985, alleging failure to submit the requisite exchange control import evidence, and issued a show cause notice to the company and its directors; the appellant, a practising advocate and a non-executive director, asserted in his written representation during adjudication that he was only a part-time, non-executive director, had no executive role, was not in charge of day-to-day affairs, and had no involvement with the remittances, and relied on an affidavit of the company secretary supporting this position, but the adjudicating authority imposed penalty and the appellate tribunal and Delhi High Court affirmed it on the broad premise that he was a director during the relevant period and that the plea was an “afterthought,” prompting the Supreme Court to examine whether the statutory requirements of Section 68 were satisfied and whether the defence materials were duly considered.

Decision: The appeal was allowed; the Supreme Court set aside the Delhi High Court’s judgment as well as the orders of the adjudicating authority and the appellate tribunal, and quashed the penalty imposed on the appellant, holding that liability had been fastened without the necessary statutory basis and without specific findings that he was in charge of and responsible for the conduct of the company’s business at the relevant time.