2025 (5) TMI 659 - HC - IBC

FEMA notices against corporate debtor in liquidation quashed under IBC Sections 14 and 33(5) moratorium provisions

Anup Kumar Singh Versus Union of India & others

The Calcutta HC quashed FEMA notices issued against a corporate debtor undergoing liquidation under IBC. The court held that IBC provisions, particularly ... Prayer for quashing of notices issued under the provisions of the Foreign Exchange Management Act, 1999 - overriding of moratorium and protection against suits or proceedings imposed under the Insolvency and Bankruptcy Code, 2016 (IBC), specifically Sections 14, 33(5), and 32A, over the provisions of the Foreign Exchange Management Act, 1999 (FEMA) with respect to attachment, seizure, or other legal proceedings against the corporate debtor's assets during the Corporate Insolvency Resolution Process (CIRP) and liquidation - HELD THAT:- Admittedly, the CIRP for Shree Ganesh commenced on 12.02.2018 pursuant to an order passed by the NCLT at Kolkata under the provisions of the IBC. Section 14 of the IBC prohibits the initiation of suits or continuation of pending suits or proceedings against the corporate debtor following the initiation of CIRP. On 14.09.2018 the NCLT directed that Shree Ganesh should be liquidated. Furthermore, the writ petitioner was appointed as a liquidator. Incidentally, the proceeding against the corporate debtor/accused under the FEMA was initiated on 15.11.2016. The mere fact that the proceeding under the FEMA was initiated in 2016 before Section 14 of the IBC came into operation in 2018 would be irrelevant as Section 14 speaks not only about the initiation, but also about the continuation of pending suits or proceedings. Once an order for liquidation was passed, as in the instant case, Section 33(5) provides that subject to Section 52, when a liquidation order has been passed, no suit or other legal proceeding shall be instituted by the liquidator on behalf of the corporate debtor with the prior approval of the Adjudicating Authority - While the PMLA came into force in 2002, the IBC came into existence in 2016. In Ramsarup Industries Limited [2022 (8) TMI 1575 - CALCUTTA HIGH COURT] and Others, the Hon’ble Supreme Court held that the provisions of the IBC would override the provisions of the FEMA. Therefore, the moratorium under the IBC would override the provisions of the FEMA. Not only was the IBC enacted while the FEMA was in existence, but Section 238 of the IBC also clearly provided for a non-obstante clause. In Assistant Director, ED vs. Raj Kumar Ralhan [2019 (8) TMI 1928 - NATIONAL COMPANY LAW TRIBUNAL CHANDIGARH], the NCLT held that moratorium declared under Section 14 of the IBC was applicable to proceedings under the FEMA. The Enforcement Directorate could not proceed against the corporate debtor as long as moratorium under the IBC was in force. If any of the Directors/Officers were individually liable for any actions done prior to the commencement of the CIRP, the applicant might proceed against those Directors/Officers. As has been held by the Hon’ble Apex Court in a catena of decisions, the provisions of the IBC would override the provisions of other Acts like the FEMA. Section 238 is very strongly worded indeed. Conclusion - In view of the proceedings pending under the IBC and the orders passed therein, the impugned provisional seizure order and the impugned notices could not have been issued. Therefore, the impugned notices are quashed. However, a proceeding can fairly be initiated against the erstwhile Director and the Officer of the corporate debtor, if they are found to be individually liable. Petition allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court are:(a) Whether the moratorium and protection against suits or proceedings imposed under the Insolvency and Bankruptcy Code, 2016 (IBC), specifically Sections 14, 33(5), and 32A, override the provisions of the Foreign Exchange Management Act, 1999 (FEMA) with respect to attachment, seizure, or other legal proceedings against the corporate debtor's assets during the Corporate Insolvency Resolution Process (CIRP) and liquidation;(b) Whether the issuance of provisional seizure orders and notices under FEMA against the corporate debtor's assets during liquidation violates the moratorium under the IBC;(c) Whether the initiation or continuation of proceedings under FEMA that commenced prior to the CIRP/liquidation order are barred by the moratorium under the IBC;(d) Whether the liquidator has locus to challenge seizure orders and notices issued under FEMA;(e) The applicability and interpretation of Section 32A of the IBC concerning protection of property covered under resolution plans or liquidation sales from attachment or seizure;(f) The effect of the non-obstante clause in Section 238 of the IBC on conflicting provisions in other laws such as FEMA;(g) Whether the Enforcement Directorate (ED) can proceed against directors or officers individually liable for offences committed prior to CIRP notwithstanding the moratorium;(h) The procedural propriety and jurisdiction of the ED in issuing seizure orders and notices under FEMA during the liquidation process.2. ISSUE-WISE DETAILED ANALYSISIssue (a) and (b): Moratorium under IBC vis-`a-vis FEMA proceedings and seizure ordersLegal Framework and Precedents: Sections 14 and 33(5) of the IBC prohibit initiation or continuation of suits or proceedings against the corporate debtor once CIRP or liquidation commences, respectively. Section 32A(2) further protects the property of the corporate debtor from attachment or seizure if covered under an approved resolution plan or liquidation sale to a person not connected with the debtor or involved in the offence. Section 238 of the IBC contains a non-obstante clause stating that its provisions prevail over inconsistent laws. FEMA, lacking such a clause, regulates foreign exchange violations, including attachment and seizure under Section 37A.Supreme Court precedents (Paschimanchal Viduyt Vitran Nigam Ltd., Sundaresh Bhatt Liquidator of ABG Shipyard, Duncans Industries Limited, Innovative Industries Limited, Principal CIT v. Monet Ispat and Energy Limited) have consistently held that the IBC's provisions override conflicting laws due to Section 238.Ramsarup Industries Limited judgment recognized that confirmatory orders issued during pendency of writ petitions challenging provisional attachment under FEMA do not render the writ petitions infructuous, and the moratorium under IBC applies to FEMA proceedings.Court's Interpretation and Reasoning: The Court emphasized that once CIRP commenced on 12.02.2018 and liquidation was ordered on 14.09.2018, the moratorium under Sections 14 and 33(5) of the IBC applied. This moratorium prohibits seizure or attachment of the corporate debtor's assets, which are to be managed and sold only through CIRP or liquidation processes. The issuance of the provisional seizure order dated 30.11.2022 and the subsequent notice dated 30.01.2023 under FEMA, therefore, violated this moratorium.The Court noted that FEMA proceedings initiated on 15.11.2016 (prior to CIRP) do not override the moratorium because Section 14 prohibits continuation of pending suits or proceedings. Hence, the moratorium applies not only to new proceedings but also to continuation of existing ones.Key Evidence and Findings: The seizure order related to 39 immovable properties and bank accounts of the corporate debtor. The petitioner, acting as liquidator, challenged these orders as infringing the moratorium. The ED contended that these proceedings under FEMA predated CIRP and were thus valid, but the Court found the moratorium applicable regardless of initiation date.Application of Law to Facts: The Court applied Section 33(5) to hold that no legal proceedings, including seizure, could be instituted against the corporate debtor's assets after the liquidation order without prior approval of the Adjudicating Authority. The seizure and notice under FEMA were thus impermissible.Treatment of Competing Arguments: The ED argued that the seizure was part of ongoing FEMA proceedings and that Section 32A(2) of the IBC did not bar such action as the liquidator was not a third party purchaser of liquidation assets. The Court rejected this, stating that Section 32A protects assets from seizure once CIRP/liquidation commences, and the liquidator cannot be treated as a 'person' acquiring assets through sale. The ED's reliance on the initiation date of FEMA proceedings was also rejected.Conclusion: The moratorium under the IBC overrides FEMA provisions; seizure and notices issued under FEMA during liquidation without Adjudicating Authority's approval violate the moratorium and are liable to be quashed.Issue (c): Continuation of FEMA proceedings initiated prior to CIRP/liquidationLegal Framework: Section 14 of the IBC prohibits continuation of pending suits or proceedings against the corporate debtor after CIRP commencement. Section 33(5) extends this moratorium during liquidation.Court's Reasoning: The Court held that the initiation date of FEMA proceedings (15.11.2016) is irrelevant because Section 14 prohibits continuation of pending proceedings post-CIRP. Therefore, the moratorium applies to ongoing FEMA proceedings as well.Conclusion: Continuation of FEMA proceedings against the corporate debtor during CIRP/liquidation is barred by the moratorium.Issue (d): Locus of the liquidator to challenge seizure orders and noticesArguments: The ED contended that the liquidator had no jurisdiction to challenge seizure orders under FEMA, especially those involving properties not belonging to the corporate debtor.Court's Analysis: The liquidator, as an officer appointed by the NCLT to manage and realize the corporate debtor's assets, has the duty and locus to protect the assets from unauthorized attachment or seizure. The Court accepted the liquidator's standing to file the writ petition challenging the seizure and notices.Conclusion: The liquidator has the locus to challenge seizure orders and notices issued against the corporate debtor's assets during liquidation.Issue (e): Interpretation of Section 32A of the IBCLegal Framework: Section 32A(2) prohibits action against property of the corporate debtor in relation to offences committed prior to CIRP commencement where such property is covered under an approved resolution plan or sold as liquidation assets to persons not connected with the debtor or involved in the offence.Court's Reasoning: The Court noted that Section 32A is disjunctive and applies either when a resolution plan is approved or liquidation assets are sold to a third party. In the present case, no sale of liquidation assets had occurred to a third party; the petitioner was the liquidator, not a purchaser. Therefore, Section 32A did not bar the seizure order on this ground, but the moratorium under Sections 14 and 33(5) did.Conclusion: Section 32A does not apply to seizure during liquidation before sale of assets; however, moratorium provisions under the IBC prohibit such seizure.Issue (f): Effect of Section 238 of the IBC (non-obstante clause)Legal Framework: Section 238 states that the IBC's provisions prevail notwithstanding anything inconsistent in other laws.Precedents: The Court relied on several Supreme Court decisions holding that IBC overrides other statutes including Electricity Act, Customs Act, Tea Act, Maharashtra Relief Undertaking Act, and Income Tax Act due to Section 238.Court's Interpretation: Since FEMA does not contain a non-obstante clause, the moratorium and other provisions of the IBC override FEMA provisions to the extent of inconsistency.Conclusion: Section 238 of the IBC ensures that the moratorium and protections under the IBC prevail over FEMA provisions.Issue (g): Proceedings against directors or officers individually liableLegal Framework and Precedents: The NCLT in Assistant Director, ED v. Raj Kumar Ralhan held that while moratorium applies to the corporate debtor, proceedings can continue against directors or officers individually liable for pre-CIRP offences.Court's Reasoning: The Court noted that while the moratorium protects the corporate debtor's assets, it does not bar proceedings against individuals responsible for offences prior to CIRP.Conclusion: Proceedings may be initiated or continued against directors or officers individually liable notwithstanding the moratorium.Issue (h): Procedural propriety and jurisdiction of ED in issuing seizure orders during liquidationArguments: The ED argued that seizure orders and notices under Section 37A of FEMA were issued in compliance with statutory provisions and were intermediate actions in ongoing proceedings.Court's Analysis: The Court held that issuance of seizure orders and notices during liquidation without prior approval of the Adjudicating Authority under the IBC moratorium was impermissible. The existence of ongoing appeal proceedings and status quo orders before the Appellate Tribunal did not validate the seizure.Conclusion: The seizure orders and notices issued by the ED during liquidation without compliance with the moratorium and without prior approval are invalid and liable to be quashed.3. SIGNIFICANT HOLDINGS'The provisions of the IBC would override the provisions of the FEMA. Therefore, the moratorium under the IBC would override the provisions of the FEMA.''Section 14 of the IBC prohibits the initiation of suits or continuation of pending suits or proceedings against the corporate debtor following the initiation of CIRP.''Subject to Section 52, when a liquidation order has been passed, no suit or other legal proceeding shall be instituted by or against the corporate debtor.''Section 238 of the IBC clearly stated that 'The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of such law.'''The issuance of the provisional seizure order was in complete disregard of the moratorium prescribed by Section 33(5) of the IBC.''A proceeding can fairly be initiated against the erstwhile Director and the Officer of the corporate debtor, if they are found to be individually liable.'The Court quashed the impugned provisional seizure order and notices issued under FEMA during liquidation, holding them to be in violation of the moratorium under the IBC.The Court established the core principle that the IBC's moratorium provisions prevail over other laws lacking a non-obstante clause, including FEMA, thereby protecting the corporate debtor's assets during CIRP and liquidation from seizure or attachment except with prior approval of the Adjudicating Authority.Finally, the Court allowed the writ petition, quashing the seizure and notice, but clarified that proceedings against individual directors or officers may continue if liability is established.