Penalty In Nature Of Recovery Under FERA Gives Rise To 'Enforceable Debt' Under Presidency Town Insolvency Act: Madras High Court

Justice R Subramanian and Justice R Kalaimathi were hearing an appeal preferred by the Enforcement Directorate against an order of a single judge setting aside an insolvency notice issued to former Tamil Nadu MLA TTV Dinakaran. The court also observed that the order passed under the Foreign Exchange Regulation Act was one passed after proper adjudication and thus, the same would be an order/decree under the Insolvency Act giving rise to an enforceable debt.

“We are therefore of the view that the term decree or order used in Section 9(2) of the Presidency Towns Insolvency Act, 1909, would take within its fold an order passed by an empowered Authority under the statue after following the adjudicatory process. Section 51 of the Foreign Exchange Regulation Act, 1973 provides for a reasonable opportunity and it also invests the powers of the civil Court in the adjudicating Authority and therefore it cannot be denied that an order passed under Section 51 of the Foreign Exchange Regulation Act, 1973 is an order passed after the adjudicatory process,” the court observed.

Background

Dinakaran was accused of violating the provisions of the FERA Act. The proceedings were initiated by the appropriate authority under the Act for adjudication of penalty. The Special Director of Enforcement imposed a penalty of 31 crore on Dinakaran. When Dinakaran preferred an appeal with the Foreign Exchange Regulation Appellate Board, the appellate board reduced the penalty to 28 crores.

While Dinakaran preferred another appeal against the order of the appellate board, the Enforcement Directorate sent a notice of insolvency by invoking Section 9(2) of the Presidency Town Insolvency Act 1909.

When a challenge was made to the notice, the single judge set aside the notice observing that there was no legally enforceable debt and that the directorate was not a creditor within the meaning of the Insolvency Act. The enforcement directorate had thus preferred the appeal.

The court observed that the terms creditor, debt and debtor defined under the act should not be given restrictive or a conventional meaning as a judgment creditor, a decreed debt or a judgment debtor. Looking into the precedents by the Supreme Court, the court noted that the Apex court had intended to impart wider meaning to the terms defined. The court observed that the law was enacted more than a century ago when other forums, tribunals and alternative dispute resolution mechanism did not exist.

“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, we do not think that we should restrict the meaning of the words appearing in Sections 2(a) and 2(b) of the Presidency Towns Insolvency Act, 1909 and deprive the other creditors from invoking the provisions of the Act,” the court observed.

The court further observed that a failure to pay on being served with the notice under the Insolvency Act would amount to an act of insolvency to enable the creditor to initiate insolvency proceedings. However, the court noted that in the present case, the very jurisdiction to issue an insolvency notice was under challenge. The court observed that in order to provide a cause of action, the decree or order should have become final and should not have been stayed by the court.

Calling the directorate’s attempt as “naming child before it was born”, the court noted that it could not sustain the directorate’s argument and observed that the order imposing penalty had not become final when the insolvency notice was issued. However, the court added that the order of the adjudicating authority would create a debt within the meaning of the Act and it was open for the Directorate to take proceedings afresh if so advised.

Thus, the court dismissed the appeals.

Counsel for the Appellant: Mr.AR.L.Sundaresan, Additional Solicitor General of India Assisted by Mr.Rajnish Pathiyil

Counsel for the Respondent: Mr.B.Kumar, Senior Counsel for Mr.A.Jenasenan

Citation: 2023 LiveLaw (Mad) 333

Case Title: Enforcement Directorate v TTV Dinakaran

Case No: O.S.A.No.124 of 2005