In FERA, penalty on recovery gives rise to ‘enforceable debt' under Presidency Town Insolvency Act: Madras High Court

In FERA, penalty on recovery gives rise to ‘enforceable debt' under Presidency Town Insolvency Act: Madras High Court

Refers to the precedents set by the Supreme Court

The Madras High Court has observed that the term 'decree' or 'order' used in the Presidency-Town Insolvency (PTI) Act, 1909, is not limited to a decree of the civil court. However, it would include an order passed by an empowered authority under a statute after following the adjudicatory process.

A bench comprising Justice R Subramanian and Justice R Kalaimathi was hearing an appeal by the Enforcement Directorate (ED) against an order of a single-judge bench setting aside an insolvency notice issued to former Tamil Nadu MLA TTV Dinakaran.

The court held that under the Foreign Exchange Regulation Act (FERA), 1973, the order was passed after proper adjudication. Thus, it was an order/decree under the PTI Act giving rise to an enforceable debt.

The judges stated, “The term decree or order used in Section 9(2) of the PTI Act, would take within its fold an order passed by an empowered authority under the statute after following the adjudicatory process. Section 51 of FERA provides a reasonable opportunity and invests the powers of the civil court in the adjudicating authority. Therefore, it cannot be denied that under FERA, an order is passed after the adjudicatory process.”

The case pertains to an individual Dinakaran, accused of violating the provisions of the FERA Act.

The proceedings were initiated by the appropriate authority under the Act for adjudication of the penalty. The Special Director of Enforcement imposed a penalty of Rs.31 crores on Dinakaran, who appealed before the Foreign Exchange Regulation Appellate Board, which reduced the penalty to Rs.28 crores.

Even as Dinakaran appealed against the appellate board order, the ED sent a notice of insolvency by invoking Section 9(2) of the PTI Act.

Once the notice was challenged, the single judge set it aside. He noted there was no legally enforceable debt, and the ED was not a creditor under the PTI Act. Thereafter, the ED filed an appeal.

Justice Subramanian and Justice Kalaimathi observed that the terms creditor, debt, and debtor defined under the Act should not be given a restrictive or conventional meaning as a judgment creditor, a decreed debt, or a judgment debtor.

They referred to the precedents set by the Supreme Court, wherein it intended to impart wider meaning to the defined terms. The judges noted that the law was enacted more than a century ago when other forums, tribunals, and alternative dispute-resolution mechanisms did not exist.

The bench held that since then, “Various forums, tribunals, and alternative dispute resolution mechanisms were put in place. Those were empowered to decide legal disputes and empowered to pass payment orders. Therefore, we should not restrict the meaning of the words appearing in Sections 2(a) and 2(b) of the PTI Act and deprive other creditors of invoking the provisions.”

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

Terming the attempt of the ED as ‘naming the child before it was born’, the bench remarked that it could not sustain the directorate’s argument. The order imposing the penalty was not final when the insolvency notice was issued. However, the order of the adjudicating authority would create a debt within the meaning of the PTI Act.

Thus, while dismissing the appeals, the court said that the ED was open to taking fresh proceedings in the matter.