2023 (11) TMI 315 - HC - FEMA

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

Madras HC dismissed application challenging single judge's order regarding insolvency notice validity. Court held that terms 'creditor,' 'debt,' and ... Inclusive definition of 'includes' in statutory interpretation - meaning of 'creditor', 'debt' and 'debtor' in insolvency law - scope of the expression 'decree or order' in Section 9(2) of the Presidency Towns Insolvency Act, 1909 - act of insolvency under Section 9(2) - prerequisites for invocation - limited grounds for setting aside insolvency notice under Section 9(5) - nature of penalty under special statutes - civil recovery vs. criminal fine - competence to recover sums due to Central Government - applicability of State Revenue Recovery Act versus Central Revenue Recovery ActInclusive definition of 'includes' in statutory interpretation - meaning of 'creditor', 'debt' and 'debtor' in insolvency law - Whether the terms 'creditor', 'debt' and 'debtor' in Sections 2(a) and 2(b) of the Presidency Towns Insolvency Act, 1909 should be given a restricted conventional meaning or a wider meaning - HELD THAT: - The Court held that the definitions in Sections 2(a) and 2(b) are inclusive and, by reason of the ordinary statutory import of the word 'includes' and subsequent developments in dispute-resolution fora and tribunals, ought to receive a wide construction rather than a restricted one. Reliance was placed on authoritative decisions explaining that 'includes' enlarges meanings in interpretation clauses and on the changed institutional landscape which vested various authorities with power to pass orders for payment. Consequently the words 'creditor', 'debt' and 'debtor' are not to be confined to judgment-creditors, decreed debts or judgment-debtors in the conventional civil court sense. [Paras 48, 49, 50, 51, 52]The terms 'creditor', 'debt' and 'debtor' in Sections 2(a) and 2(b) are to be given a wider meaning and are not restricted to decrees or orders of civil Courts.Scope of the expression 'decree or order' in Section 9(2) of the Presidency Towns Insolvency Act, 1909 - nature of penalty under special statutes - civil recovery vs. criminal fine - Whether the phrase 'decree or order' in Section 9(2) includes orders for payment passed by statutory adjudicating authorities (such as under the Foreign Exchange Regulation Act) or is confined to decrees/orders of a civil Court - HELD THAT: - The Court rejected the restricted reading that 'decree or order' must be only that of a civil Court. While noting the Supreme Court's decision in Paramjeet Singh Patheja concerned with arbitral awards and a particular legal fiction, the Court observed that that judgment does not bind the present question. Having regard to the inclusive definitions in the Insolvency statute and subsequent authorities that treat final monetary orders of tribunals/authorities as creating enforceable financial liabilities, the Court held that an order passed by an empowered adjudicating Authority after giving reasonable opportunity (and endowed with civil court powers) falls within the expression 'decree or order' in Section 9(2). The Court also held that the penalty imposed under Sections 50 and 51 of the Foreign Exchange Regulation Act is civil in nature for recovery purposes and therefore an order imposing such penalty gives rise to an enforceable debt within Section 2(b). [Paras 58, 59, 60, 61, 62]The phrase 'decree or order' in Section 9(2) includes orders for payment passed by statutory adjudicating Authorities (such as under the Foreign Exchange Regulation Act), and an order imposing penalty under Sections 50/51 creates an enforceable debt within Section 2(b).Act of insolvency under Section 9(2) - prerequisites for invocation - limited grounds for setting aside insolvency notice under Section 9(5) - Whether the insolvency notice issued on 28.02.2001 was valid given that the order imposing penalty was under challenge and whether the grounds taken under Section 9(5) were available to set it aside - HELD THAT: - The Court examined the conditions in Section 9(2) and the specific grounds enumerated in Section 9(5). It held that to invoke Section 9(2) there must exist (i) a decree or order for payment of money, (ii) that decree/order must have become final, (iii) its execution must not be stayed, and (iv) the debtor must fail to pay within the statutory period after service of the insolvency notice. The Court declined the appellant's submission to read 'and' as 'or' and concluded that the insolvency notice issued on 28.02.2001 was invalid because the appeal (CMA.No.914 of 2001) was pending on that date and therefore the order had not become final. The Court further observed that the grounds available under Section 9(5) are confined to those enumerated therein and that a challenge on other bases would not suffice. [Paras 64, 65, 66, 67, 68]The insolvency notice dated 28.02.2001 is unsustainable because the order imposing penalty had not become final when the notice was issued; the grounds to set aside an insolvency notice are limited to those in Section 9(5).Competence to recover sums due to Central Government - applicability of State Revenue Recovery Act versus Central Revenue Recovery Act - Whether the notice issued under Section 29 of the Tamil Nadu Revenue Recovery Act for recovery of penalty payable under the Foreign Exchange Regulation Act was competent - HELD THAT: - The Court held that recovery of sums due to the Central Government as arrears of land revenue must proceed under the Central recovery mechanism (Revenue Recovery Act, 1890) or other central enactments enabling recovery, and that the State Revenue Recovery Act is not the correct vehicle to recover sums due to the Central Government. It observed that Section 70(1)(iii) of the Foreign Exchange Regulation Act was amended to substitute 'Commissioner of Customs' for 'Collector', and that the State Act does not empower the Commissioner of Customs; accordingly the notice issued by the District Collector under the Tamil Nadu Revenue Recovery Act was not competent for recovery of Central Government dues. The Court set aside the impugned notice but left open the option for the Enforcement Directorate to pursue recovery under the appropriate central enactment. [Paras 71, 72, 73, 74]The notice issued under the Tamil Nadu Revenue Recovery Act is not competent for recovery of sums due to the Central Government and is set aside; recovery must, if pursued, be under the appropriate Central recovery machinery.Final Conclusion: The appeal is dismissed: the Single Judge's order setting aside the insolvency notice is upheld on the sole ground that the insolvency notice dated 28.02.2001 was issued when the order imposing penalty had not become final; however, the Court sets aside the Single Judge's finding that such adjudicating orders cannot create a debt, holding instead that orders imposing penalty under the Foreign Exchange Regulation Act give rise to an enforceable debt within Sections 2(a)/2(b) of the Presidency Towns Insolvency Act and that the Enforcement Directorate may, if so advised, initiate fresh proceedings. The writ petition is allowed and the State recovery notice under the Tamil Nadu Revenue Recovery Act is quashed as not competent to recover Central Government dues. 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.