Director 'may' be held liable for the penalty imposed upon the Company

Today, Delhi High Court has pronounced a judgment (Ved Prakash v. Union of India & Ors.) wherein an issue, regarding the liability of director for the acts of the company, had arisen. One significant question that had arisen in the petition was - whether the penalty imposed upon the Company can be recovered from its Directors?

Facts: The petitioner, in the instant case, claimed to be the Director of M/s. Hitkari China Limited (“Company”). The Company, in 1997, received an advance licence for import of certain goods subject to the condition that the company would fulfil the export obligations of Rs. 1,24,25,099/-. Since the company failed to discharge this obligation of export, a penalty of Rs. 2,51,81,335/- was imposed on it. When penalty was not paid, a recovery notice was sent to the Govt. of NCT which, in turn (via. Asst. Collector), issued a notice to four persons (including the petitioner) requiring them to deposit the amount of Rs. 2,51,81,335/-. It is this notice against which the petitioner filed this writ petition before the Delhi High Court.

Issues and Finding of the Court

Section 11 of the Foreign Trade (Development and Regulation) Act, 1992 (“Act”) provides that no export or import shall be made except in accordance with the provisions of the Act. Further, Section 11 also makes one liable who makes or abets or attempts to make any export or import in contravention of any provision of this Act or any rules or orders made thereunder or the export and import policy. Section 14 of the Act requires that no order of penalty or of adjudication of confiscation shall be made unless an opportunity of representation has provided to the concerned person. In the light of these provisions, it had to be decided  in the instant case whether the directors of the company can be made liable.

In the judgment, High Court noted that no penalty could have been served on the petition in the absence of a mandatory notice under Section 14 of the Act. The court held that, since the impugned notice did not propose to impose any penalty on the directors, it cannot be construed as a notice to the directors. As regards the question whether the penalty can be recovered from the petitioner, the court first discussed the general principle of separate identity of a company and the principle that directors are normally not responsible for the acts of the company. However, it was also observed by the High Court that the courts, in certain situations, lift the corporate veil [This is an established principle now]. It was observed by the Court that:

                                       “No doubt, a company being an independent entity ordinarily, the directors of the company are not liable to discharge the liabilities of the company.  However, in  certain  cases,  the  Courts  can  lift  the  corporate veil, inter alia, in the cases where a) the Statute itself contemplates such lifting; b) fraud or improper conduct is intended to be prevented and; c) where a taxing statute or a beneficial statute is sought to be evaded. The nature  of  the impugned  conduct,  the extent of  public interest involved and  effect  on  the  effected  parties  would  be  amongst  the  relevant considerations, while deciding whether to lift the corporate veil or not.”

[Cases cited for identifying the liability of a director: Santanu Ray vs. Union of India  1988(38) E.L.T. 264 (Del.), Krishan  Kumar  Bangur  vs.  Director General  of  Foreign Trade  2006  (88)  DRJ  680. In these cases, it has been observed that a director can be held liable if it can be shown that there is, in fact, a liability on the part of the director]

After discussing the above cases for identifying the liability of a director, the court held that, under Section 11(2) of the Act, the respondents can proceed against the petitioner if it can shown that he was under a duty or obligation to fulfil the export obligation of the company and consciously failed to do so. For doing so, the respondents would have to issue a notice to the petitioner, as required under Section 14 of the Act.

Conclusion: Yes, the petitioner can be held liable if it can be shown that he has failed to discharge a required obligation. However, the present noticed issued to the company was not sufficient to do so. 

[Note: Though this case does not enunciate any new legal principle, it is important in relation to Foreign Trade (Development and Regulation) Act, 1992]