2023 (11) TMI 315 - HC - FEMA

Enforcement Directorate cannot issue insolvency notice while appeal pending under Section 9(2) Presidency Towns Insolvency Act

Enforcement Directorate, (Foreign Exchange Regulation Act now FEMA) Rep. by its Deputy Director, Chennai Versus T.T.V. Dhinakaran And T.T.V. Dhinakaran Versus The Collector of Chennai District, Chennai, The Tahsildar, The Directorate of Enforcement, Rep. by Deputy Director, Directorate of Enforcement

Madras HC dismissed application challenging single judge's order regarding insolvency notice validity. Court held that terms 'creditor,' 'debt,' and ... Recovery of penalty imposed on the respondent - Validity of insolvency notice issued to the respondent - interpretation of statute - words creditor, debt and debtor as defined under Section 2A and 2B of the Presidency Town Insolvency Act should be given a restricted conventional meaning - term decree or order appearing in Section 9(2) of the Presidency Towns Insolvency Act 1909 would mean only a decree or order of a civil Court or would it include any order for payment of money passed after an adjudicatory process? - maintainability of application under Section 9(5) - Enforcement Directorate is competent to initiate proceedings in insolvency for failure in payment of penalty imposed or not - invocation of Section 9(2) before the decree or order becoming final. Definition of the terms creditor, debt and debtor - Section 2(a) of the Presidency Towns Insolvency Act 1909 - HELD THAT:- As could be seen from the definitions, both the definitions are inclusive definitions. In REGIONAL DIRECTOR EMPLOYEES' STATE INSURANCE CORPN. VERSUS HIGH LAND COFFEE WORKS OF PFX. SALDANHA & SONS [1991 (7) TMI 367 - SUPREME COURT], the Hon'ble Supreme Court had considered the import of the term 'includes' used in a definition clause, the Hon'ble Supreme Court had held The word 'include' is very generally used in interpretation clauses in order to enlarge the meaning of words or phrases occur- ring in the body of the statute; and when it is so used, these words or phrases must be construed as comprehending, not only such things as they signify according to their natural import but also those things which the interpretation clause declares that they shall include. The word “includes” as pointed out by the Hon'ble Supreme Court has been used with a intent to impart wider meaning to the terms defined. We should also be alive to the various developments in law since the enactment of the Presidency Towns Insolvency Act, 1909, more than a century ago. Various other Forums, Tribunals and alternative Dispute resolution mechanism have been put in place and those Forums and Tribunals have been empowered to decide legal disputes and have been empowered to pass orders for payment of money. Therefore, at this distant point of time, the meaning of the words appearing in Sections 2(a) and 2(b) of the Presidency Towns Insolvency Act, 1909 should not be restricted and the other creditors not to be deprived from invoking the provisions of the Act - thus, in view of the inclusive definition adopted in Section 2(a) and 2(b) of the Presidency Towns Insolvency Act, 1909, the terms creditor, debt and debtor defined thereunder should be given a wider meaning and it cannot be restricted to a decreed debt or a debt payable under order of a Court. Whether the term decree or order appearing in Section 9(2) of the Presidency Towns Insolvency Act 1909 would mean only a decree or order of a civil Court or would it include any order for payment of money passed after an adjudicatory process? - HELD THAT:- While considering this definition the Hon'ble Supreme Court after referring to the inclusive definition, held that the judgment in PARAMJIT SINGH PATHEJA VERSUS ICDS LTD. [2006 (10) TMI 419 - SUPREME COURT] being one with regard to legal fiction provided under Section 36 of the Arbitration and Conciliation Act cannot be taken as a precedent for having decided on the effect of various orders that may be passed by various Tribunals or Authorities who are empowered to pass orders imposing financial liability. Sections 50 and 51 of the Foreign Exchange Regulation Act, 1973 provides for a mechanism for determination of the penalty payable by a person who violates the provisions of the said Act. Section 56 of the said Act enables prosecution and that is without prejudice to the power to levy penalty - Though the word penalty is used in Section 50 it is not a fine levied on the basis of conviction or a penalty as used under Article 20(1) of the Constitution of India. The provisions of Sections 50 and 51 of the Foreign Exchange Regulation Act, 1973 are more in the nature of recovery of loss that is caused to the exchequer because of the violation of the provisions of the Foreign Exchange Regulation Act and the Act also provides for criminal prosecution without prejudice to the power to levy penalty. The conclusion of the learned Single Judge cannot be agreed upon where he held that an order of the Adjudicating Authority imposing penalty would not create a debt within the meaning of Section 2(b) and the person in whose favour the order is passed could not be creditor within the meaning of Section 2(a), in order to enable them to invoke Section 9(2) of the Presidency Towns Insolvency Act, 1909. Whether the application under Section 9(5) on the grounds mentioned in it is maintainable? - Whether Section 9(2) can be invoked before the decree or order becoming final? - HELD THAT:- The failure to pay, on being served with the notice under Section 9(2) of the Presidency Towns Insolvency Act, 1909, would amount to an act of insolvency to enable the creditor to initiate insolvency proceeding. This is a reason why the grounds set out in Section 9(5) of the Presidency Towns Insolvency Act, 1909 are very relevant. Section 9(5) of the Presidency Towns Insolvency Act, 1909 extracted above would show that the specific grounds have been set out. The question as to whether a debt existed or not is not a ground that is postulated in the said provision - No doubt, the words “being a decree or order which has become final and the execution thereof has not been stayed” would definitely provide a ground under Section 9(5) of the Presidency Towns Insolvency Act, 1909. The very jurisdiction to issue an insolvency notice would be in doubt, since the appeal in CMA.No.914 of 2001 was pending on the date when the insolvency notice was sought to be issued. The reference to the provisions of Section 138 of the Negotiable Instruments Act and the judgment of the Hon'ble Supreme Court concluding that a complaint filed under Section 138 of the Negotiable Instruments Act before the expiry of 15 days time could still be sustained, if the drawer had not paid the money due under the cheque within 15 days from the date of receipt of summons cannot be applied to the instant case, inasmuch as it is the non-payment of money ordered to be paid within a particular time that constitutes the act of insolvency - the very act of insolvency would occur only if the debtor fails to pay within 31 days from the date of issuance of a notice, the money payable under an order which has already become final. The question Whether Section 9(2) can be invoked before the decree or order becoming final is not answered. Application is dismissed upholding the order of the Hon'ble Single Judge only on the ground that the insolvency notice issued on 28.02.2001 is unsustainable, in view of the fact that it has been issued when the Civil Miscellaneous Appeal was pending and the order has not become final. Issues Involved:1. Definition and scope of 'creditor,' 'debt,' and 'debtor' under the Presidency Towns Insolvency Act, 1909.2. Interpretation of 'decree or order' in Section 9(2) of the Presidency Towns Insolvency Act, 1909.3. Grounds for setting aside insolvency notice under Section 9(5) of the Presidency Towns Insolvency Act, 1909.4. Competence of the Enforcement Directorate to initiate insolvency proceedings.5. Validity of invoking Section 9(2) before the decree or order becomes final.Summary:Point 1: Definition and Scope of 'Creditor,' 'Debt,' and 'Debtor'The court held that the terms 'creditor,' 'debt,' and 'debtor' as defined in Sections 2(a) and 2(b) of the Presidency Towns Insolvency Act, 1909, should be given a wider meaning. The inclusive definitions are intended to cover a broader range of liabilities, not just decreed debts or judgment debts. The court emphasized that various legal developments and the establishment of different tribunals and alternative dispute resolution mechanisms necessitate a broader interpretation to include orders passed by these bodies.Point 2: Interpretation of 'Decree or Order'The court concluded that the term 'decree or order' in Section 9(2) of the Presidency Towns Insolvency Act, 1909, should include orders passed by any empowered authority under a statute following an adjudicatory process. The court disagreed with the restrictive interpretation that limits 'decree or order' to those passed by civil courts, noting that this would be unfair and unjust in today's legal context.Point 3: Grounds for Setting Aside Insolvency NoticeThe court found that the grounds for setting aside an insolvency notice under Section 9(5) are specific and do not include questioning the existence of a debt. The court noted that the grounds set out in the application for setting aside the insolvency notice did not fall within the ambit of Section 9(5). However, the court held that the insolvency notice issued on 28.02.2001 was invalid because the order imposing the penalty had not become final, as the appeal was still pending.Point 4: Competence of the Enforcement DirectorateThe court did not venture to answer the competence of the Enforcement Directorate to initiate insolvency proceedings, as it became academic in light of the conclusion that the insolvency notice was invalid due to the pending appeal.Point 5: Validity of Invoking Section 9(2)The court held that Section 9(2) of the Presidency Towns Insolvency Act, 1909, requires that the decree or order must have become final and its execution not stayed. Since the appeal was pending when the insolvency notice was issued, the notice was deemed invalid.Writ Petition:The court allowed the writ petition, setting aside the notice issued under Section 29 of the Tamil Nadu Revenue Recovery Act. The court held that the Tamil Nadu Revenue Recovery Act cannot be used to recover monies due to the Central Government. The correct enactment for such recovery would be the Revenue Recovery Act, 1890, and the notice should have been issued by the Commissioner of Customs, not the District Collector.Conclusion:The appeal (OSA.No.124 of 2005) was dismissed, and the writ petition (W.P.No.20492 of 2008) was allowed. The court upheld the order of the Hon'ble Single Judge on the ground that the insolvency notice was unsustainable due to the pending appeal. The findings regarding the nature of the order passed by the adjudicating authority were set aside, allowing the Enforcement Directorate to take proceedings afresh if advised.