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Bhagwati Prasad Khaitan v. The Special Director, Enforcement Directorate And Another

Calcutta High Court

Jul 11, 1977

Judgment

Subsequent
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Factual and Procedural Background

The petitioner, a director of Hindusthan Motors Limited and a Solicitor of the Court, challenged a notice dated 25 September 1975 issued under the Foreign Exchange Regulation Act, 1947. The notice required the petitioner to show cause why adjudication proceedings contemplated by S.51 of the Foreign Exchange Regulation Act, 1973 (referred to as S.23-D of the Foreign Exchange Regulation Act, 1947) should not be held against him for an alleged contravention of S.4(2) by Hindusthan Motors Ltd. Similar show cause notices were issued to the company, several directors and certain officers.

The impugned notice alleged that the company entered into a forward foreign exchange contract with United Commercial Bank Limited to cover import obligations and that the contract was used to "cover up" the said import. The notice named specific officers (including R.P. Jhunjhunwala, W.D. Jones and K.P. Sonthalia) and also alleged that the listed directors (including the petitioner) "were in charge of, and were responsible to, the said company for the conduct of the business of the said company" and thereby liable for the contravention.

The company had earlier challenged a related notice by a rule nisi under Article 226. A previous single-judge decision (United Commercial Bank v. Director, Enforcement Directorate, 1977 (1) Cal LJ 292) held that the company's contentions could be agitated in adjudication proceedings and that it was premature to decide validity at the interlocutory stage; that rule nisi was discharged. In the instant petition the petitioner raised substantially similar contentions and additionally argued that he was being made vicariously liable solely because he was a director.

Legal Issues Presented

Whether, on the averments made in the impugned show cause notice, the petitioner (a director simpliciter) could be held vicariously liable as a "person in charge of, and responsible to, the company for the conduct of the business" under S.23-C of the Foreign Exchange Regulation Act.
Whether the petition under Article 226 of the Constitution is maintainable after the Constitution (Forty-second Amendment) Act, 1976 — specifically (a) whether an alternative remedy exists, and (b) whether the injury complained of is substantial.
Whether the precedent in Giridharilal Gupta v. D.N. Mehta (1971) and related authorities are applicable to restrain the impugned notice as to the petitioner.

Arguments of the Parties

Petitioner's Arguments

The impugned notice lacked material to justify adjudication against the petitioner; the averments did not establish that the petitioner was a person "in charge of, and responsible to, the company for the conduct of the business" so as to attract vicarious liability under S.23-C.
The petitioner contended that he was being made vicariously liable merely because he was a director and that such liability must be judged by the specific averments in the notice.
An ancillary point was raised (later in proceedings) about the vires of the Forty-second Amendment to the Constitution insofar as it amended Article 226, but that point had not been pleaded in the petition itself.

Respondent's Arguments

The respondent argued that the Supreme Court decision in Giridharilal Gupta v. D.N. Mehta related to a criminal trial and therefore its ratio would not apply to the present (adjudicatory) proceedings.
Relying on the Constitution (Forty-second Amendment) Act, 1976, the respondent contended that the petition under Article 226 was not maintainable. Two sub-arguments were advanced: (a) there was an adequate alternative remedy available; and (b) the injury complained of (exposure to adjudication) was not substantial.
The respondent relied on Supreme Court observations in Chanan Singh v. Registrar (Co-operative Societies, Punjab) to support the maintainability contention.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
United Commercial Bank v. Director, Enforcement Directorate, 1977 (1) Cal LJ 292	Held that certain contentions could be agitated in adjudication proceedings and it was premature to decide their validity at the interlocutory stage.	The Court noted that the same contentions had been raised earlier before Mr. Justice A.K. Mukherjee and that the earlier rule nisi had been discharged on that basis; the present petition nevertheless raised the same contentions.
Giridharilal Gupta v. D.N. Mehta, (1971) 3 SCC 189 : AIR 1971 SC 2162	Held that a director simpliciter cannot be treated as a person "in charge of, and responsible to, the company for the conduct of its business" for purposes of vicarious liability under S.23-C of the Act.	The Court relied on this Supreme Court decision to conclude that, on the averments in the show cause notice, the petitioner could not be proceeded against merely as a director.
Monindra Mohan Sarkar v. Income-tax Officer, Project Circle, North Bengal, Siliguri, 1977 Cal HC (Notes) 603	cited in support of the proposition that exposure to adjudication without material may justify relief under Article 226 (as viewed by the High Court).	The Court treated this decision as consonant with its view that there is no adequate remedy to redress the injury of being exposed to adjudication proceedings without material, and relied on it in assessing maintainability.
Surja Mohan v. State of West Bengal, 81 Cal WN 820 : (1977 Tax LR (NOC) 77)	cited as supporting the view that relief may be available where a person is exposed to adjudication without material.	The Court noted this single-judge decision as consistent with its conclusion on the absence of an adequate alternative remedy for the injury complained of.
Ahmedabad Cotton Manufacturing Ltd. v. Union of India, AIR 1977 Guj 113 (Full Bench)	Full Bench decision cited in support of the view that relief may be available against exposure to adjudication when there is no material to justify it.	The Court regarded the ratio of that Full Bench decision as aligned with its view that there was no remedy available under the statute for exposure to adjudication without material.
Chanan Singh v. Registrar, Co-operative Societies, Punjab, (1976) 3 SCC 361 : AIR 1976 SC 1821	Supreme Court observations cited by the respondent in arguing that the petition under Article 226 was not maintainable.	The Court distinguished these observations and held that they were not applicable to the facts and circumstances of the present case, because the Court found no remedy available for exposure to an adjudication without material.

Court's Reasoning and Analysis

The Court's analysis proceeded in these principal steps:

Examination of the impugned notice's averments: the notice detailed conversion of import bills and identified specific officers who signed documents (K.P. Sonthalia and R.P. Jhunjhunwala) and listed directors (including the petitioner) as persons who "were in charge of, and were responsible to, the said company for the conduct of the business" and alleged consent/connivance by certain officers.
Identification of the statutory provision governing vicarious liability: the Court set out S.23-C of the Foreign Exchange Regulation Act (text reproduced in the opinion) which makes persons in charge and responsible for the conduct of the business liable, subject to the proviso and sub-section (2) relating to consent, connivance or neglect.
Application of controlling precedent: the Court relied on the Supreme Court decision in Giridharilal Gupta v. D.N. Mehta which held that a director simpliciter cannot be treated as a person in charge and responsible for the conduct of the company's business (i.e., cannot be made liable merely by virtue of directorship) — a construction informed by the Act's provisions, notably sub-sec. (2) of S.23-C. The Court held that, on the averments in the show cause notice, the petitioner could not be proceeded against.
Response to the respondent's contention that Giridharilal Gupta was restricted to criminal trials: the Court rejected this submission, holding that while the decision arose in a criminal trial, the construction of S.23-C applied for all purposes and was therefore binding on the present adjudicatory context.
Consideration of maintainability under Article 226 post-Forty-second Amendment: the respondent argued that the petition was not maintainable because an alternative remedy existed and the injury was not substantial. The Court analyzed the nature of the injury complained of — exposure to an adjudication proceeding without material — and concluded that no remedy was available under the statute to redress that specific injury. The Court found this view consistent with certain High Court decisions (Monindra Mohan Sarkar, Surja Mohan, Ahmedabad Cotton Manufacturing Ltd.) and therefore held the petition maintainable.
Assessment of the substantiality of the injury: the Court held that being exposed to an adjudication with quasi-criminal consequences without any material is a substantial injury warranting relief under Article 226. The Court considered but distinguished Chanan Singh as not applicable on the facts.
Procedural/pleading point: the petitioner sought to challenge the validity of the Forty-second Amendment (argument of ultra vires) and sought adjournment to amend the petition. The Court noted that the point had not been taken in the petition and that it was unnecessary to consider the adjournment/amendment request in view of the Court's decision on the merits.
Relief and limitation: having found that the impugned notice did not, on its averments, establish the petitioner as a person in charge and responsible under S.23-C, the Court quashed the notice insofar as it related to the petitioner and restrained respondents from giving it effect against him. The Court expressly left open the respondents' right to issue a fresh notice in accordance with law if proper material becomes available.

Holding and Implications

Holding: The petition is allowed and the impugned show cause notice is quashed insofar as it relates to the petitioner.

Implications:

The direct effect is that the petitioner cannot be proceeded against on the basis of the impugned notice as it stands, because the averments do not establish that he was a person "in charge of, and responsible to" the company for the conduct of its business under S.23-C of the Foreign Exchange Regulation Act.
The respondents are restrained from giving effect to that particular notice as against the petitioner; however, the respondents remain free to issue any fresh notice in accordance with law if they have or obtain proper materials to justify such action.
The Court did not make any order as to costs.
The opinion does not purport to lay down any broader new constitutional principle; it applies established statutory construction (as explained in Giridharilal Gupta) and High Court authorities to the facts before it. The Court did not decide the constitutional question about the Forty-second Amendment, because that point was not properly before it and was unnecessary to determine for disposal of the petition.

Disposition in the opinion: "Petition allowed." (No order as to costs.)

Show all summary ...

1. In this application under Art. 226 of the Constitution the petitioner challenges a notice dated the 25th September, 1975, issued to the petitioner under Foreign Exchange Regulation Act, 1947. The petitioner is a director of the Hindusthan Motors Limited. He is also a Solicitor of this Court. By the said notice the petitioner was required to show cause why adjudication proceedings contemplated by S. 51 of the Foreign Exchange Regulation Act, 1973 (S. 23-D of the Foreign Exchange Regulation Act, 1947) should not be held against the petitioner for the alleged contravention of S. 4(2) of the Foreign Exchange Regulation Act, 1947, by the Hindusthan Motors Ltd. Show cause notices were also issued to the said company and other directors and some officers of the said company on the said alleged grounds. The said notice alleged that the said company had entered into a contract with the United Commercial Bank Limited for the purchase of forward foreign exchange equivalent to Rs. 1.25 crores at the rate prevailing on the date of the said contract. It was, further, alleged that the said contract was entered into by the said company with the said Bank against its outstanding orders for import of raw materials, Bedford Trucks in CKD condition and components for which the said company had been granted import licences. It was alleged that there was violation of the provisions of the said Act by the said company in making the said contract With the Bank to cover up the said import. The petitioner, being a director, was asked to show cause to the said charge. The company challenged the said notice on the ground that on the materials alleged there was no ground for issuing the impugned notice, and a rule nisi was issued by this Court under Article 226 of the Constitution. The said application came up for hearing before Mr. Justice Amiya Kumar Mukherjee. By a judgment in United Commercial Bank v. Director, Enforcement Directorate, 1977 (1) Cal LJ 292, Mr. Justice Mukherjee has held that the said contentions could be agitated in the adjudication proceedings and, therefore, it was premature at this stage to go into the validity of the said contentions. He has accordingly discharged the rule nisi. In the instant case on behalf of the petitioner the same contentions were again raised before me. It was, further, argued however that the petitioner, who was a director, had been sought to be vicariously made liable because the petitioner was a director of the company. That vicarious liability of the petitioner will have to be judged by the averments made in the impugned notice. The said notice, after setting out the relevant allegations, inter alia, alleges as follows:

“And Whereas the import bills as aforesaid amounting in aggregate to about £ 9,32,221-17-1d. were converted at the rate of sh. 1-5 29/32d — Re. 1 at the request in writing of the said company which writing was mostly signed by Shri K.P Sonthalia, an officer of the said Company and in a few cases by certain other officers of the said Company who signed for K.P Sonthalia;

And Whereas the said conversion was made on the basis of the forward exchange contract No. 130/66 booked by the said Bank on 4-6-66 at the request of the said company contained in a letter dated 4-6-66 signed by Shri R.P Jhunjhun-wala, Vice-President of the said Company;”

2. It further alleged—

“And Whereas the said R.P Jhunjhunwala furnished on 4-6-66 to the said Bank a list of orders alleged to have been placed with M/s. Vauxhall Motors Limited valued at Rs. 88,00,000 and also a list of steel orders alleged to have been placed with M/s. East Indian Produce Co. Ltd., U.K and M/s. Mitsui Company Ltd., Japan valued at Rs. 30,00,000 and 9 printed acknowledgments of the East Indian Produce Co. Ltd.”

3. Thereafter the impugned notice alleged as follows:—

“And Whereas at the time the aforesaid contravention was committed by the said Company, S/Shri B.M Birla, Kasturbhai Lal Bhai, Badri Das Goenka, B.P Khaitan, A. Pamaswari Mudaliar, Dhirendra Nath Mitra. M.K Valloidi, Rasesh M. Mafatlal and Khan Bahadur C.B Taraporvala were the Directors and Shri S.L Bhattar was the President of the said company;

And Whereas it appears that the aforesaid Directors and the President who were in charge of, and were responsible to, the said company for the conduct of the business of the said company, have contravened the provisions of S. 4(2) read with S. 230 of the said Act and have thereby rendered themselves liable to be proceeded against under S. 25(1)(a) of the said Act;

And Whereas it appears that the aforesaid contravention has taken place with the consent and/or connivance of S/Shri R.P Jhunjhunwala, W.D Jones and K.P Sonthalia respectively Vice-President (Finance), Director of Supply and Accountant of the said company at the material time.”

4. It is, therefore, clear that apart from the officers, who have been specifically, mentioned, namely Shri R.P Jhunjhunwala, Shri W.D Jones, Shri K.P Sonthalia, the said notice was Issued to the other directors as well the petitioner on the ground that they were the directors of the company. In case of offences by companies, the vicarious liability of the officers and directors of a company for offences committed under the Foreign Exchange Regulation Act, 1947, arise under S. 23-C of the said Act, which is to the following effect.

“23-C. (1) If the person committing a contravention is a company, every person who, at the time the contravention was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company as well as the company, shall be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly.

Provided that nothing contained in this sub-section shall render any such person liable to punishment if he proves that the contravention took place without his knowledge or that he exercised all the due diligence to prevent such contravention.

23-C. (2) Notwithstanding anything contained in sub-section (1), where a contravention under this Act has been committed by a company and it is proved that the contravention has taken place with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the Company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

Explanation.— For the purposes of this section,—

(a) ‘Company’ means any body corporate and includes a firm or other association of individuals; and

(b) ‘director’, in relation to a firm, means a partner in the firm.”

5. Therefore, in order to be made vicariously liable the petitioner must be shown to have been a person who was in charge of or was responsible to the company for the conduct of the business of the company. This provision of the Act fell for consideration by the Supreme Court. As to the meaning of the “person in charge and responsible for the conduct of the affairs of the company” in the case of Giridharilal Gupta v. D.N Mehta, (1971) 3 SCC 189 : AIR 1971 SC 2162, the Supreme Court held that the director simpliciter as such cannot be said to be the person who was in charge of and was responsible to the company for the conduct of its business. The Supreme Court came to that conclusion having regard to the provisions of the Act, specially in view of sub-sec. (2) of S. 23-C of the Act. Having regard to the averments made in this case, which I have set out hereinbefore, and in view of the said decision of the Supreme Court, it must be held that the petitioner as such, on the allegations made in the show cause notice, cannot be proceeded against by the impugned notice. It was, however, contended by the learned advocate on behalf of the respondent that the aforesaid decision of the Supreme Court was in respect of a criminal trial. It was, therefore, urged that the ratio of the said decision would not be applicable in the instant case, I am however, unable to accept this contention. It is true that the construction of Section 23-C and the effect thereof fell for consideration before the Supreme Court in a criminal case. But the effect of the construction will be valid for all purposes.

6. It was, then, contended on behalf of the respondent that in view of Article 226 of the Constitution as amended by the Constitution (42nd Amendment) Act, 1976, this application was not maintainable. On this aspect two arguments were made. It was, firstly, urged that there was remedy for the redress and secondly, it was urged that the injury complained of was not substantial. Now, so far as the question whether there is any other remedy for the injury complained of in this case, it has to be borne in mind that here the injury that the petitioner is complaining is the injury of being exposed to an adjudication proceeding where on the face of the proceeding or on the notice issued, there is no cause to adjudicate under the law. If the petitioner was complaining of improper adjudication, the adjudication provided by the Act would be sufficient remedy for the injury of improper adjudication. But there is no remedy provided for the injury of being exposed to an adjudication proceeding without any material or without any cause. If that is the position, then for such Injury it cannot be said that there is any remedy available, or provided for under the law. The above view seems to he in consonance with the view of this Court In the case of Monindra Mohan Sarkar v. Income-tax Officer, Project Circle, North Bengal, Siliguri, 1977 Cal HC (Notes) 603 as well as with the decision taken by the learned single Judge of this Court in the case of Surja Mohan v. State of West Bengal, 81 Cal WN 820 : (1977 Tax LR (NOC) 77) and the ratio of the Full Bench decision of the Gujarat High Court in the case of Ahmedabad Cotton Manufacturing Ltd. v. Union of India, AIR 1977 Guj 113 (FB).

7. I am also unable to accept the position that the injury was not substantial, because to be exposed to an adjudication leading to quasi-criminal consequences without any material, in my opinion, would be a substantial injury for which a person aggrieved can seek remedy under Art. 226 of the Constitution. On behalf of the respondent reliance was placed on the observations of the Supreme Court in the case of Chanan Singh v. Registrar, Co-operative Societies, Punjab, (1976) 3 SCC 361 : AIR 1976 SC 1821. In my opinion, the said observations in view of the facts and circumstances of this case would not be applicable because I have come to the conclusion that there is no remedy provided for being exposed to an improper adjudication without any material at all.

8. Learned advocate on behalf of the petitioner sought to contend that the Constitution (Forty-second Amendment) Act, 1976 in so far as it sought to amend Art. 226 of the Constitution, was ultra vires. The said point had not been taken in this petition; as a matter of fact it could not have been taken. Learned advocate sought adjournment on the ground that he proposed to make an application for amendment of the petition. In the view I have taken, it is not necessary for me to consider this prayer any longer. This Rule, therefore, must succeed and impugned notice is quashed and the respondents are restrained from giving effect to the same so far as the petitioner is concerned. This, however, will not prevent the respondent authorities from issuing any fresh notice in accordance with law on proper materials, if they are so entitled. There will be no order as to costs.

9. Petition allowed.