2025 (5) TMI 1141 - AT - FEMA

FEMA Tribunal Rejects IBC Moratorium Defense, Orders 25% Penalty Pre-Deposit Under Section 19

The Appellate Tribunal under SAFEMA at New Delhi addressed a waiver application for pre-deposit condition under section 19 of FEMA regarding contravention ... Waiver of condition of pre deposit u/s 19 of FEMA - contravention of section 6(3)(f) of FEMA - HELD THAT:- Proceeding for imposition of penalty under different legislation is not affected by section 14 of the Act. Thus, prima facie we are of the view that the plea raised by the appellant in reference to section 14 is not tenable. It is more so when the order passed by NCLT, Kolkata has been stayed by the NCLAT. In any case, we have expressed our view on the effect of section 14 to these proceeding where the impugned order was passed even much prior to the moratorium under section 14 of the IBC. So far as alleged discrepancies with reference to the Regulation are concerned, we do not find prima facie much substance in the argument of the appellant because show cause notice was issued referring to the Regulation applied by the respondent i.e. Foreign Exchange (Deposits) Regulation, 2000. Thus, we do not find any discrepancy in referring the provision applicable to the case. The reference of a wrong provision does not affect the order if facts available on record make out a case for valuation of the Regulations applicable to the case. The appellants have otherwise not shown any financial crunches to deposit the amount of penalty for maintaining the appeal. However taking overall view, we are of the opinion that it would be appropriate to direct the appellants to deposit only 25% of the penalty amount to satisfy the condition of pre-deposit so that there remains no hardship on the appellants to pursue the appeal and with the aforesaid, the application is disposed of. The order would be satisfied by the appellants within three weeks of its pronouncement and subject to satisfaction of the condition of pre-deposit, appeal may be heard. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal were:Whether the condition of pre-deposit under section 19 of the Foreign Exchange Management Act, 1999 (FEMA) can be waived in the present case involving imposition of penalty for alleged contravention of section 6(3)(f) of FEMA read with Regulation 3 of Foreign Exchange (Deposits) Regulations, 2000.Whether the moratorium imposed under section 14 of the Insolvency and Bankruptcy Code (IBC) operates to stay or bar proceedings under FEMA, thereby justifying waiver of the pre-deposit condition.Whether the omission of section 6(3)(f) of FEMA by the Finance Act, 2015 (effective 15th October 2019) without a saving clause affects the jurisdiction to impose penalty for contraventions alleged to have occurred prior to the omission.Whether there was any discrepancy or error in the invocation of the applicable Regulation (2000 vs. 2016) in the show cause notice and penalty order, and if such discrepancy affects the validity of the penalty.Whether the appellant's contention that no contravention occurred due to the nature of the transaction (payment allegedly not made by appellant but between two foreign companies) has merit.Whether the appellants have demonstrated any financial hardship warranting waiver of the pre-deposit condition.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Waiver of Pre-Deposit Condition under Section 19 of FEMAThe legal framework mandates a pre-deposit of penalty amount as a condition precedent to filing an appeal under section 19 of FEMA. The appellants sought waiver of this condition on various grounds including pendency of insolvency proceedings and alleged errors in the imposition of penalty.The Tribunal noted that the penalty imposed was substantial (Rs. 20 crores on the company and Rs. 3.6 crores on the Managing Director) for contravention of section 6(3)(f) of FEMA read with Regulation 3 of Foreign Exchange (Deposits) Regulations, 2000. The appellants did not sufficiently establish financial hardship to justify waiver. However, considering the overall circumstances, the Tribunal exercised discretion to reduce the pre-deposit to 25% of the penalty amount to balance the interests of justice and enable the appeal to be heard without undue hardship.Issue 2: Effect of Moratorium under Section 14 of IBC on FEMA ProceedingsThe appellants contended that the moratorium imposed under section 14 of the IBC by NCLT/NCLAT barred any proceedings against the company, including under FEMA, and thus pre-deposit should be waived or proceedings stayed.The Tribunal held that the moratorium under section 14 of IBC does not automatically stay or bar all proceedings against a corporate debtor. It emphasized that penalties under FEMA are regulatory and civil in nature, not criminal or debt recovery proceedings. The Tribunal relied on authoritative precedents including the Apex Court's ruling in a consumer protection penalty case, which distinguished regulatory penalties from debt recovery and held that moratorium does not stay such penalties.Furthermore, the impugned penalty order was passed prior to the moratorium, and the appeal was filed before the moratorium was imposed, thus the moratorium could not retrospectively affect the proceedings. The Tribunal concluded that the plea based on section 14 IBC moratorium lacked merit and did not warrant waiver of pre-deposit or stay of proceedings.Issue 3: Impact of Omission of Section 6(3)(f) of FEMA by Finance Act, 2015The appellants argued that since section 6(3)(f) of FEMA was omitted effective 15th October 2019 without any saving clause, the penalty proceedings initiated prior to the omission should not continue or should be stayed.The Tribunal observed that the initiation of proceedings occurred prior to the amendment and thus the omission does not affect the jurisdiction or validity of the penalty proceedings. The Tribunal noted relevant High Court precedents which held imposition of penalty after omission to be without jurisdiction but distinguished the facts here. The issue was reserved for final adjudication during appeal hearing.Issue 4: Discrepancy in Reference to Applicable Regulation (2000 vs. 2016)The appellants contended that the show cause notice initially referred to Regulation 3 of Foreign Exchange Management (Deposits) Regulation, 2016 but later alleged contravention of Regulation 3 of Foreign Exchange (Deposits) Regulation, 2000, creating inconsistency and procedural irregularity.The Tribunal found no substance in this argument. It held that the show cause notice and penalty order clearly referred to the Regulation of 2000 which was applicable to the case facts. The Tribunal emphasized that misnaming or erroneous reference to a regulation does not vitiate the order if the facts disclose contravention of the correct regulation. The Tribunal rejected the plea of discrepancy as a ground for waiver of pre-deposit.Issue 5: Merits of Alleged Contravention under Section 6(3)(f) of FEMAThe appellants submitted that no contravention occurred as the payment of Rs. 23.6 crores was not made by them but between two foreign companies, and therefore section 6(3)(f) was not violated.The Tribunal noted that the payment was made on behalf of the appellant company, and held that what cannot be done directly cannot be done indirectly. Thus, prima facie, the allegation of contravention stood on a reasonable basis. However, the Tribunal clarified that this was not a final finding and the issue would be examined in detail during final hearing of the appeal.Issue 6: Financial Hardship and Waiver of Pre-DepositThe appellants did not demonstrate any financial hardship or inability to make the pre-deposit. The respondents contended that both appellants were financially sound. The Tribunal noted the absence of any credible plea of hardship and accordingly did not find merit in waiver of pre-deposit on this ground.3. SIGNIFICANT HOLDINGSThe Tribunal made the following key determinations and legal pronouncements:'Moratorium under section 14 of the IBC does not affect or stay proceedings under the Foreign Exchange Management Act, 1999, especially where penalty orders were passed prior to the moratorium and appeal was filed before moratorium was imposed.''Penalties imposed under regulatory statutes such as FEMA are civil in nature and serve regulatory functions, and cannot be equated with debt recovery proceedings that fall within the ambit of insolvency moratorium.''Misreference to applicable Regulations in show cause notices or penalty orders does not vitiate the proceedings if the facts disclose contravention of the correct Regulation.''Omission of a penal provision without a saving clause does not necessarily invalidate proceedings initiated prior to such omission.''What cannot be done directly cannot be done indirectly; thus, payments made on behalf of a company may amount to contravention under FEMA.''In exercise of discretion under section 19 of FEMA, the Tribunal may reduce the pre-deposit amount to mitigate hardship but complete waiver is not warranted without cogent proof of financial distress.'Accordingly, the Tribunal directed the appellants to deposit 25% of the penalty amount as pre-deposit within three weeks to enable the appeal to be heard, while clarifying that observations made were prima facie and not final adjudications on merits.