Introduction

The case of Sebastian Chokkattu v. Special Director was adjudicated by the Appellate Tribunal for Foreign Exchange on November 10, 2020. This case involved multiple appellants, including Shri Sebastian Chokkattu, B. Balakrishnan, Shri Biju Thomas, and Shri S. Sunil Kumar, who were directors of the Trend Setters Group of Companies. The appellants challenged penalties imposed by the Special Director of the Enforcement Directorate for alleged violations under the Foreign Exchange Regulation Act (FERA), 1973.

The primary issues revolved around the non-realization of export proceeds, failure to submit Bills of Entry against import remittances, and the consequent diversion of foreign exchange without appropriate authorization. The appellants contended that they were not directly involved in day-to-day operations and that external factors like labor unrest and financial crises were beyond their control.

Summary of the Judgment

The Appellate Tribunal reviewed the findings of the Special Director, Enforcement Directorate, who had issued five Show Cause Notices (SCNs) against the appellants for contravening various sections of FERA, 1973. The Violations primarily included:

• Sections 18(2) & 18(3) of FERA related to the non-realization of export proceeds.
• Sections 8(3) & 8(4) of FERA concerning the failure to submit Bills of Entry for import remittances.
• Section 68 of FERA addressing offenses by companies and the liability of responsible persons.

The Special Director imposed significant penalties on both the companies and the individual appellants. In response, the appellants filed appeals arguing lack of direct involvement, delegation of responsibilities, and external factors causing the alleged violations. The Tribunal meticulously examined these arguments, reviewing precedents and the specific circumstances of each appellant.

The final decision of the Tribunal was mixed:

• The appeals filed by Shri Sebastian Chokkattu and Shri B. Balakrishnan were dismissed, upholding the penalties.
• Conversely, the appeals by Shri Biju Thomas and Shri S. Sunil Kumar were allowed, effectively quashing the penalties imposed on them.

Analysis

Precedents Cited

The judgment extensively referenced several precedents to establish the standards for director liability under FERA:

• D. Govind Ram vs. Shamji.K & Company (AIR 1961 SC 1285): This Supreme Court decision clarified the interpretation of "force majeure," distinguishing it from "Vis Major." It underscored that director liability is not easily absolved by external uncontrollable events unless explicitly proven.
• Kavita Dogra vs. Directorate of Enforcement and M.M. Shah vs. Deputy Director of Enforcement: These High Court rulings reinforced that directors not directly involved in daily operations could contest liabilities, emphasizing due diligence and lack of personal benefit from violations.

These precedents were pivotal in determining the extent of responsibility individual directors held, especially those who were non-resident Indians (NRIs) and not engaged in daily management.

Legal Reasoning

The Court's legal reasoning centered on the interpretation of Section 68 of FERA, which holds responsible persons accountable for contraventions committed by the company:

• Responsibility and Control: The Tribunal assessed whether each appellant was "in charge of, and responsible to, the company for the conduct of business" during the period of contravention. Shri Sebastian Chokkattu and Shri B. Balakrishnan were found to have significant control and responsibility, justifying the penalties imposed.
• Delegation of Duties: Appellants Shri Biju Thomas and Shri S. Sunil Kumar demonstrated that they were not involved in the day-to-day operations during the period in question, delegating such responsibilities to others. The Tribunal found sufficient evidence that these appellants exercised due diligence and were not personally benefiting from the alleged violations.
• Force Majeure and External Factors: While labor unrest and financial crises were presented as external factors, the Tribunal held that the lack of direct control did not absolve directorial responsibility for ensuring compliance with FERA provisions.

The Tribunal balanced the intent and actions of the appellants against the statutory requirements, ensuring that penalties were proportionate to the level of responsibility and involvement.

Impact

This judgment has significant implications for corporate governance under FERA:

• Clarification on Director Liability: It delineates the boundaries of director responsibility, particularly distinguishing between those involved in daily operations and those who are not.
• Emphasis on Due Diligence: Directors must demonstrate active steps to prevent violations, especially in scenarios involving gray areas like pending set-off applications with the RBI.
• Reinforcement of Accountability: The decision reinforces that non-resident directors or absentee directors can still be held accountable if evidence of their responsibility and control over company affairs is established.

Future cases will likely reference this judgment to assess director liability, especially in complex corporate structures with participants operating abroad.

Complex Concepts Simplified

Foreign Exchange Regulations Act (FERA), 1973

FERA was enacted to regulate foreign exchange transactions and ensure that foreign exchange is managed in a manner beneficial to the country. Key sections relevant to this case include:

• Section 8: Imposes restrictions on dealing in foreign exchange, especially concerning imports and exports.
• Section 18: Deals with payments for exported goods and prescribes conditions for their realization.
• Section 68: Addresses offenses by companies, holding responsible persons liable for contraventions by the company.

Show Cause Notice (SCN)

An SCN is an official notice issued by a regulatory authority to an individual or entity, asking them to provide reasons why they should not be penalized for alleged violations. Failure to adequately respond can result in penalties.

Bill of Entry

A Bill of Entry is a document filed with customs authorities declaring imported goods. It serves as proof of import and is essential for validating import-related foreign exchange transactions.

Set-Off/Write-Off

Set-off refers to the arrangement where outstanding import bills can be adjusted against export proceeds, reducing the net foreign exchange due. Write-off pertains to the formal cancellation of uncollectible debts.

Conclusion

The Sebastian Chokkattu v. Special Director judgment provides a nuanced understanding of director liability under FERA, emphasizing the importance of direct involvement and due diligence in managing foreign exchange transactions. It underscores that while directors may delegate operational responsibilities, ultimate accountability remains with those at the helm. This decision serves as a critical reference for corporate directors, highlighting the necessity of active oversight and proactive compliance measures to avert regulatory breaches and associated penalties.