WHETHER THE COLLECTOR IS COMPETENT TO EFFECT RECOVERY OF AMOUNT TO THE CENTRAL GOVERNMENT BY INVOKING STATE ACT?

[Mr. M. GOVINDARAJAN]

In ENFORCEMENT DIRECTORATE, (FOREIGN EXCHANGE REGULATION ACT NOW FEMA) REP. BY ITS DEPUTY DIRECTOR, CHENNAI VERSUS T.T.V. DHINAKARAN AND T.T.V. DHINAKARAN VERSUS THE COLLECTOR OF CHENNAI DISTRICT, CHENNAI, THE TAHSILDAR, THE DIRECTORATE OF ENFORCEMENT, REP. BY DEPUTY DIRECTOR, DIRECTORATE OF ENFORCEMENT - 2023 (11) TMI 315 - MADRAS HIGH COURT, proceedings were initiated against the respondent T.T.V. Dinakaran, the respondent in this writ petition for violation of the provisions of Foreign Exchange Regulation Act, 1973 (‘Act’ for short).  Penalty proceedings were also initiated against him.  The Adjudicating Authority imposed Rs.31 crores on the respondent.  The respondent filed an appeal before the Appellate Authority against the order of Adjudicating Authority.  The Appellate Authority modified the order of adjudicating Authority by reducing the penalty to Rs.28 crore from Rs.31 crore.  The order of Appellate Authority was challenged before the High Court in CMA 914 of 2000. 

During the pendency of the above petition the Enforcement Directorate invoked section 9(2) of the Presidency Towns Insolvency Act, 1909 (‘1909 Act’ for short) and issued an insolvency notice dated 28.02.2001.  The same was challenged by the respondent before the High Court under Section 9 of 1909 Act.  The Single Judge of the High Court set aside the insolvency notice.  The High Court held that there was no statutory enforceable debt within the meaning of Section 2(b) of the   1909 Act.  The High Court further held that the notice was premature as the order imposing penalty had not become final, since the appeal against the order of the Appellate Authority in CMA No. 914 of 2000 was pending.   This order was challenged before Division Bench of High Court. 

Pending the above case, the Enforcement Directorate invoked the provisions in Tamil Nadu Revenue Recovery Act, 1864.  A notice was issued by the District Collector under Section 29 of the said Act in Form 6 taking over the management of the property of the respondent.  This notice was challenged in WP 20492 of 2008.

The appellant submitted the following before the High Court-

• A bare reading of Section  of the 1909 Act would show that nonpayment of monies payable pursuance to a decree or order which has become final and execution thereof has not been stayed would per se amount to an act of insolvency.
• Even though the order has not become final on the date when the insolvency notice was issued, today the appeal filed by the respondent was dismissed and the SLP filed against the order before the Supreme Court was also dismissed.  Therefore there is no prohibition in continuing the proceeding.
• There is no justification for restricting the term decree or order found in Section 9(2) of 1909 Act as a decree or order of Civil Court.
• If a restrictive meaning is assigned to the term decree or order in Section 9(2) of the 1909 Act the very object of insertion of section 9(2) of the Act would be defeated and it will aid the defaulters to evade in making the payment.
• Nonpayment of monies adjudicated to be due would amount to a debt.
• Penalty is a fine assessed for violation of a statute or regulation and the same is not a find imposed for an offence would be a money payable under the order which would be a debt within the meaning of Section 2(b) of the 1909 Act.
• The penalty levied for violation of the statutory provision is different from a fine imposed for an offence.  Therefore penalty only lead to a civil liability.
• The term debt and the term penalty are wide enough to cover a civil liability arising out of an adjudicator process.
• The action of the Single Judge had qualified the term decree or order as a decree of order of a Civil Court which is uncalled for and does violation of the provisions of section 9(2) of 1909 Act.
• The proceedings for penalty under section 50, 51 and 52  of the Act are quasi criminal in nature and they cannot be termed as pure criminal proceeding and the penalty levied cannot be termed as pure criminal proceeding  and the penalty levied cannot be termed as a fine or punishment imposed for contravention.
• The insolvency notice could be set aside only on the grounds under Section 9(5) of the 1909 Act.  None of the grounds shown in the said section for setting aside the order.
• The Deputy Director of Enforcement is an ex officio Under Secretary to the Government of India and the notice issued by him is perfectly valid.

The respondent submitted the following before the High Court-

• Section 9(2) of the 1909 Act can be invoked only by the creditor who has been favored with an order or decree by a Civil Court.
• The penalty imposed under the Act cannot give raise to a debt within the meaning of Section 2(b) of 1909 Act.
• The Enforcement Directorate is not a juristic person and therefore it cannot invoke Section 9(2) of the 1909 Act.
• It is only the Central Government who is an aggrieved party and not the Director of Enforcement. Therefore the notice issued by the Enforcement Directorate is not valid.
• The Tamil Nadu Revenue Recovery Act cannot be invoked for recovery of money due to the Central Government but the correct enactment would be Revenue Recovery Act, 1890.

The High Court considered the submissions made by the parties.  The High Court framed the following points that arised for determination in the present appeal-

• Whether the words creditor, debt and debtor as defined under Section 2A and 2B of the 1909 Act should be given a restricted conventional meaning?
• Whether the term decree or order would mean only a decree or order of civil court or would it include any order for payment of money passed after an adjudicatory process?
• Whether the application under Section 9(5) is maintainable?
• Whether the Enforcement Directorate is competent to initiate proceedings in insolvency for failure in payment of penalty imposed?
• Whether Section 9(2) can be invoked before the decree or order becoming final?

The High Court analyzed the definitions of ‘creditor’ and ‘debt’ in the 1909 Act.  The High Court observed that both the definitions are inclusive definitions.  The High Court relied on some judgments.  The High Court held that they did not think that the terms creditor, debt and debtor should be given a restrictive or a conventional meaning as a judgment creditor, a decreed debt or a judgment debtor.

The High Court further observed that the Act provides for determination of penalty payable by a person who violates the provisions of the Act.  Section 56 of the Act enables prosecution and that is without prejudice to the power to levy penalty.  The penalty mentioned in this Act is not fine levied on the basis of conviction or a penalty as used under Article 20(1) of the Constitution of India.  It is more in the nature of recovery of loss that is caused to the exchequer for violations of the provisions of the Act.  Therefore the High Court did not agree to the findings that an order of Adjudicating Authority would not create a debt within the meaning of Section 2(b) of the 1909 Act. 

The High Court analyzed the provisions of Section 9(5) of the 1909 Act, which gives the grounds on which the insolvency notice can be set aside.  The High Court held that the insolvency notice issued is bad, since the order has not become final.  The High Court did not go into the competent of the Enforcement Directorate.

The High Court further observed that if monies are to be recovered as it is was a land revenue, resort has to be made either to the provisions of the relevant State Revenue Recovery Act or the Central Revenue Recovery Act. In this case the provisions of the Revenue Recovery Act, 1890 ought to be invoked and not the State Act.  Therefore the High Court set aside the notice issued on the ground that it is not competent for the Collector to recover the monies due to the Central Government by invoking the State Act.  The High Court directed that the Enforcement Directorate may seek to recover under the provisions of Central Act. 

The Act has been repealed.  The Foreign Exchange Management Act, 1999 came into effect.  This Act provides that penalties are to be recovered in the manner prescribed in Schedule II to the Income Tax Act, 1961.