Introduction

This commentary delves into the appellate judgment delivered on November 10, 2020, by the Appellate Tribunal for Foreign Exchange in the case of B. Balakrishnan and others versus The Special Director, Directorate of Enforcement, Chennai. The case revolves around violations of the Foreign Exchange Regulation Act (FERA), 1973 by members of the Trend Setters Group of Companies, including directors and promoters.

The appellants were charged with contraventions concerning the non-realization of export proceeds, failure to furnish necessary documentation for imports, and obstruction in adhering to stipulated foreign exchange regulations. The Tribunal's decision addressed both collective and individual liabilities, offering significant insights into director responsibilities under FERA.

Summary of the Judgment

The appellants, comprising individuals and companies within the Trend Setters Group, filed appeals against penalties imposed for violating sections 8(3), 8(4), 18(2), 18(3), and 68 of FERA, 1973. The Enforcement Directorate had issued five Show Cause Notices (SCNs) alleging:

• Failure to realize export proceeds.
• Non-submission of Bills of Entry against import remittances.
• Short shipments without adequate follow-up for recovery.

Upon review, the Tribunal:

• Dismissed the appeal of Shri Sebastian Chokkattu.
• Dismissing the appeal of Shri B. Balakrishnan.
• Allowed the appeals of Shri Biju Thomas and Shri S. Sunil Kumar.

The decision underscored the principle that individuals in managerial or directorial positions bear responsibility for ensuring compliance with foreign exchange laws.

Analysis

Precedents Cited

The judgment references several key court decisions that influenced its outcome:

• D. Govind Ram vs. Shamji K. & Company (AIR 1961-SC 1285 at Para 17): This Supreme Court case clarified the scope of "force majeure," emphasizing that strikes and equipment breakdowns could fall under this doctrine.
• Kavita Dogra vs. Directorate of Enforcement (CRL.A.44 of 2008): Highlighted that directors not involved in day-to-day operations should not be held liable for managerial oversights.
• Shri M.M. Shah vs. Deputy Director of Enforcement & Ors. (FEMA Appeal No.01 of 2010): Reinforced the notion that higher authorities should not indiscriminately hold directors accountable without concrete evidence of negligence or complicity.

These precedents collectively emphasized the necessity of establishing a clear connection between an individual's managerial role and the alleged contraventions before imposing liabilities.

Legal Reasoning

The Tribunal's legal reasoning was multifaceted:

• Responsibility Under FERA: Under Section 68 of FERA, individuals in charge of a company's business are liable for contraventions unless they can prove the absence of knowledge and that they exercised due diligence.
• Burden of Proof: The Enforcement Directorate bore the burden of demonstrating that the appellants had either consented to, connived in, or neglected the violations.
• Division of Liabilities: The Tribunal differentiated between appellants based on their actual involvement in daily operations. For instance, directors like Biju Thomas and Sunil Kumar, who were predominantly NRI directors not involved in ground-level operations, were allowed appeals due to insufficient evidence linking them to the contraventions.
• Force Majeure and External Factors: While appellants cited external challenges like labor unrest and strikes, the Tribunal assessed whether these genuinely exonerated them from responsibilities, ultimately finding that managerial oversight prevailed.

Impact

This judgment sets a precedent in the realm of corporate compliance with foreign exchange laws by:

• Defining the threshold of responsibility for directors under FERA.
• Demonstrating the importance of direct involvement in company operations for establishing liability.
• Highlighting the need for concrete evidence linking managerial actions to specific violations.
• Clarifying the application of precedents in assessing director liability.

Future cases will likely reference this judgment to determine the extent of director accountability, especially in complex corporate structures with dispersed operational roles.

Complex Concepts Simplified

• FERA Sections 8(3), 8(4), 18(2), 18(3): These sections deal with restrictions on foreign exchange transactions, ensuring that exports are properly realized and that imports are documented accurately.
• Section 68 of FERA: Targets companies committing offenses under FERA and holds responsible individuals liable unless they can prove absence of knowledge and due diligence.
• Show Cause Notices (SCNs): Official notices issued by authorities asking the recipient to explain or justify certain actions before penalties can be imposed.
• Set Off/Write Off: Financial mechanisms allowing companies to offset their export receipts against import liabilities to manage foreign exchange efficiently.
• Force Majeure: Unforeseeable circumstances preventing someone from fulfilling a contract, which, under certain conditions, can exempt parties from liability.

Conclusion

The Balakrishnan v. The Special Director judgment offers critical insights into the accountability mechanisms for company directors under FERA. By delineating the boundaries of managerial responsibility and emphasizing the necessity of direct involvement or negligence for establishing liability, the Tribunal has reinforced the importance of proactive compliance with foreign exchange regulations.

For corporate entities, this underscores the imperative to ensure that directors are not only aware of regulatory obligations but are actively engaged in overseeing their implementation. Additionally, the judgment serves as a reminder that mere peripheral involvement does not suffice to absolve higher management from legal responsibilities.

The decision also illustrates the balanced approach of the Tribunal in considering both the legal frameworks and the factual intricacies of each case, ensuring that penalties are appropriately levied only when justified.