2019 (8) TMI 1928 - Tri - IBC

Applicability of moratorium imposed under Section 14 of IBC to proceedings for determination of the penalty under Section 16(3) of the FEMA and the consequential recovery proceedings - HELD THAT - In Innoventive industries Limited Versus ICICI Bank 2017 (9) TMI 58 - SUPREME COURT The Hon ble Apex Court while dealing with the repugnancy and overriding affect between the provisions of Maharashtra Relief Undertakings (Special Provision) Act 1958 ( Maharashtra State Act ) and the provisions of the Code held that Maharashtra State Act cannot stand in the way of the Corporate Insolvency Resolution Process under the Code and the action contemplated under the Maharashtra State Act cannot be proceeded with in view of the moratorium imposed under Section 14 of the Code against the Corporate Debtor. The Hon ble National Company Law Appellate Tribunal in Jagmeet Singh Sabharwal and Others Versus Rubber Products Ltd. and Others 2019 (6) TMI 849 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL NEW DELHI held that Government Authorities in respect of their claim for recovery of tax dues are to be treated as Operational Creditors and cannot have any better footing than the other Operational Creditors. The conspectus of the above referred decisions clearly takes to the conclusion that the moratorium under Section 14 of the Code has no application to the criminal proceedings such as proceedings under Section 138 of the Negotiable Instruments Act 1881 and whereas the same is applicable to all civil proceedings for recovery of any money from the corporate debtor. As observed above the proceedings sought to be initiated and proceeded against the Corporate Debtor by the applicant are not criminal proceedings but civil proceedings before an appropriate Adjudicating Authority. Conclusion - i) The moratorium declared under Section 14 of the Code is applicable to the proceedings under Section 16(3) of the FEMA. ii) The applicant cannot proceed against the corporate debtor as long as the moratorium is in force. iii) However if under the provisions of FEMA if any of the Directors/Officers are individually liable for any actions done prior to the commencement of CIRP the applicant may proceed against those Directors/Officers of the corporate debtor. The Resolution Professional shall cooperate in this regard with the applicant by furnishing the required information/documents if available with him. Application disposed off.

Summary

The core legal questions considered by the Tribunal in this matter are:

1. Whether the moratorium imposed under Section 14(1) of the Insolvency and Bankruptcy Code, 2016 (the 'Code') applies to proceedings initiated under the Foreign Exchange Management Act, 1999 ('FEMA'), specifically proceedings for determination of penalties under Section 16(3) of FEMA and related recovery actions against the Corporate Debtor undergoing Corporate Insolvency Resolution Process ('CIRP').

2. Whether the Enforcement Directorate (applicant) can proceed against the Corporate Debtor for alleged contraventions of FEMA during the moratorium period.

3. Whether the moratorium under Section 14(1) of the Code prohibits all civil recovery proceedings or only those that affect the assets of the Corporate Debtor.

4. The extent to which precedents relating to moratorium under the Code and other statutes such as Income Tax Act, SEBI regulations, Negotiable Instruments Act, and Arbitration and Conciliation Act apply to the present FEMA proceedings.

5. Whether the Resolution Professional is required to cooperate with the Enforcement Directorate by furnishing documents and information relevant to the FEMA investigation during the moratorium period.

Issue-wise Detailed Analysis:

Issue 1 & 2: Applicability of Moratorium under Section 14 of the Code to FEMA Proceedings

The relevant legal framework includes Section 14(1) of the Code which declares a moratorium prohibiting, inter alia, institution or continuation of suits or proceedings against the Corporate Debtor, execution of any judgment or order, and recovery of any property by lessors or owners occupied by the Corporate Debtor. Section 14(4) clarifies that moratorium lasts till completion of CIRP or approval of resolution plan or liquidation. Section 63 bars any civil court or authority from entertaining suits or proceedings on matters within the jurisdiction of the Tribunal under the Code. Section 238 establishes the overriding effect of the Code over inconsistent laws.

The Enforcement Directorate's investigation under FEMA alleges serious contraventions involving large sums and seeks to initiate proceedings before the appropriate Adjudicating Authority under Section 16(3) of FEMA for determination of penalties and recovery. The applicant contends that the moratorium under Section 14(1) of the Code does not apply to FEMA proceedings as they are civil in nature and distinct from insolvency proceedings. The applicant relies on a Delhi High Court judgment which held that moratorium under Section 14(1)(a) does not apply to all proceedings, particularly arbitration proceedings under Section 34 of the Arbitration and Conciliation Act, 1996, which do not affect the assets of the Corporate Debtor.

The Resolution Professional counters that once CIRP is admitted and moratorium declared, no recovery proceedings or suits can be initiated or continued against the Corporate Debtor until the moratorium is lifted, including FEMA proceedings. The investigation started before CIRP admission does not entitle the applicant to proceed during moratorium. The management and control of the Corporate Debtor vest with the Resolution Professional who must be the party to any proceedings.

The Tribunal examined the nature of proceedings under FEMA, which provide for adjudication and imposition of penalties but do not envisage imprisonment. The proceedings are civil in nature and involve recovery of money from the Corporate Debtor. The Tribunal noted that the moratorium under Section 14(1) is intended to prohibit all proceedings and recovery actions against the Corporate Debtor, including those under other enactments, until CIRP concludes or moratorium is lifted.

Precedents were considered extensively. The Supreme Court in Innoventive Industries Ltd. v. ICICI Bank held that the Code overrides inconsistent laws and moratorium applies to all recovery actions. The Supreme Court in Principal Commissioner of Income Tax v. Monnet Ispat held that income tax dues do not have priority over other creditors during CIRP. The NCLAT in Jagmeet Singh Sabharwal v. Rubber Products Ltd. held that government authorities claiming tax dues are operational creditors and have no superior rights during CIRP. The NCLAT in Bohar Singh Dhillon v. Rohit Sehgal held that SEBI cannot recover amounts or sell assets during moratorium though it can proceed against individuals. The NCLAT in Shah Brothers Ispat Pvt. Ltd. clarified that criminal proceedings (e.g., under Section 138 NI Act) are not covered by moratorium, but civil recovery proceedings are.

The Tribunal also reviewed the Delhi High Court's decision in Power Grid Corporation of India which held that moratorium under Section 14(1)(a) does not bar proceedings under Section 34 of the Arbitration Act (challenge to arbitral awards), which are preliminary and do not affect assets, but execution of awards is barred. The Tribunal distinguished arbitration proceedings from FEMA adjudication proceedings, noting that the latter involve recovery actions covered by moratorium.

Further, the Tribunal referred to a Mumbai Bench NCLT decision on PMLA proceedings which held that civil proceedings for attachment of properties of a Corporate Debtor undergoing CIRP are barred by moratorium.

Issue 3: Scope of Moratorium - Civil Recovery vs Criminal Proceedings

The Tribunal emphasized that moratorium applies to civil recovery proceedings but not to criminal proceedings. Since FEMA proceedings under Section 16(3) are civil adjudications for penalty and recovery, they fall within the moratorium's scope. Criminal proceedings or prosecutions involving imprisonment are not barred. This distinction aligns with the NCLAT's ruling in Shah Brothers Ispat and others.

Issue 4: Treatment of Precedents and Conflicting Arguments

The Tribunal carefully analyzed the competing arguments and precedents. The applicant's reliance on Power Grid Corporation of India was found inapplicable as the facts differ; arbitration proceedings under Section 34 are not recovery actions and thus not barred, but FEMA penalty proceedings are recovery actions and barred. The Tribunal also noted that the Resolution Professional must be kept informed and involved in any proceedings against the Corporate Debtor to ensure proper management of affairs during CIRP.

Issue 5: Cooperation of Resolution Professional

The Tribunal held that while the moratorium bars proceedings against the Corporate Debtor, the Resolution Professional must cooperate with the Enforcement Directorate by furnishing available documents and information relevant to the investigation, especially if individual Directors or Officers may be liable for actions prior to CIRP commencement. The moratorium does not protect individuals from proceedings against them personally.

Conclusions:

The Tribunal concluded that the moratorium under Section 14 of the Code applies to proceedings under Section 16(3) of FEMA and bars initiation or continuation of such proceedings against the Corporate Debtor during CIRP. The Enforcement Directorate cannot proceed against the Corporate Debtor until the moratorium is lifted. However, proceedings against Directors or Officers individually liable for pre-CIRP actions may continue, and the Resolution Professional shall cooperate by providing relevant information.

Significant Holdings:

"The moratorium declared under Section 14 of the Code, is applicable to the proceedings under Section 16(3) of the FEMA."

"The applicant cannot proceed against the corporate debtor as long as the moratorium is in force."

"If under the provisions of FEMA, if any of the Directors/Officers are individually liable for any actions done prior to the commencement of CIRP, the applicant may proceed against those Directors/Officers of the corporate debtor. The Resolution Professional shall cooperate in this regard with the applicant by furnishing the required information/documents, if available with him."

Core principles established include the overriding effect of the Code's moratorium on all civil recovery proceedings against the Corporate Debtor during CIRP, the distinction between civil and criminal proceedings for moratorium purposes, and the requirement for Resolution Professionals to cooperate with investigating authorities while protecting the Corporate Debtor from recovery actions during moratorium.