The Delhi High Court, in a significant ruling, held that directors cannot be held personally liable for a company’s failure to meet export obligations unless specific allegations are made regarding their individual role in the default.
The bench of Justice Tara Vitasta Ganju quashed four penalty orders issued by the Directorate General of Foreign Trade (DGFT) against Anand Mehta, a non-executive director of M/s Poysha Industrial Ltd., stating:
“Unless specific allegations which discuss the role of a director in the export performance are made, there is no question of finding the director personally liable.”
Background of the Case
Anand Mehta had challenged DGFT’s orders from 2009 that imposed a cumulative penalty of ₹11.5 crore on the company and its directors for non-fulfilment of export obligations under advance licenses issued between 1989 and 1991.
The company was declared sick under SICA in 1993 and subsequently ordered to be wound up by the Bombay High Court in 1998. The Official Liquidator had taken possession of the company’s assets and records.
Mehta claimed that after resigning as Joint Managing Director in 1990, he remained only as a non-executive director and had no involvement in the day-to-day affairs of the company.
“Since the Company was wound up and all business records were taken over by the Official Liquidator, I had no access or control to fulfill export obligations or respond to notices,” the Petitioner argued.
The Court highlighted that the penalty orders were passed without issuing any valid show cause notice to Mehta, in violation of Section 14 of the Foreign Trade (Development and Regulation) Act, 1992.
“It cannot be said that the Petitioner has been given a show cause notice… merely listing the names of directors without specific allegations is insufficient.”
Notably, the notices were addressed only to the company and many were returned undelivered. The only notice Mehta received was for recovery of penalty in 2014.
Citing previous rulings, including Pankaj Mehra v. UOI, Krishan Kumar Bangur v. DGFT, and Ved Kapoor v. UOI, the Court reiterated that directors cannot be held vicariously liable unless there are clear allegations of abetment or specific roles in the violations.
“To assume or foist such a liability on the Directors would run counter to the basic tenets of Company law,” the Court quoted from the Krishan Kumar Bangur judgment.
The Court also found fault with the DGFT’s failure to address the liquidation status of the company and noted that post-liquidation, any such proceedings should have been initiated against the Official Liquidator.
The DGFT had argued that Mehta applied for the licenses on behalf of the company and was therefore presumed to have knowledge of its affairs. However, the Court rejected the claim, observing that no proof was provided to establish personal culpability or fraud.
“There is no basis to lift the corporate veil merely because the director once held office.”
The Court further noted the excessive delay in initiating action, as the show cause notice dated 1992 was acted upon only in 2009—after 17 years—with no explanation for the delay.
Finding the penalty orders arbitrary and unsustainable, the Court concluded:
“The Respondent imposing the penalty on the Petitioner is arbitrary in the given facts. The Four Orders-in-Original and the Impugned Order are set aside.”
The petition was accordingly allowed, and all pending applications were disposed of.
Appearance:
For the Petitioner : Mr. Dayan Krishnan, Sr. Adv. with Mr. Rishi Agrawala, Ms. Tarini Khurana, Mr. Sukrit Seth, Advs.
For the Respondent : Ms. Nidhi Raman, CGSC with Mr. Zubin Singh, Mr. Akash Mishra, Mr. Arnav Mittal, Advs.
Case title: Anand Mehta v. Director General Of Foreign Trade
Case no.: W.P.(C) 5669/2014
