IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated: 17/09/2002 Coram The Hon'ble Mr. Justice P. SATHASIVAM Application No. 177 of 2001 in INSOLVENCY NOTICE. 39 of 2001 T.T.V. Dhinakaran ..... Applicant. -Vs- Dy. Director, Enforcement Directorate, Shastri Bhawan, Chennai-34. ..... Respondent. !For applicant: Mr. B. Kumar, Senior Advocate For M/s. A. Jenasenan and R. Loganathan. For respondent: Mr. V.T. Gopalan, Addl.Solicitor General for Mr. R. Viduthalai, Senior Central Government Standing counsel. :ORDER Aggrieved by the Insolvency Notice 39 of 2001 issued under Section 9(2) of the Presidency Towns Insolvency Act (III of 19 09), T.T.V. Dhinakaran, applicant herein, has filed Application No. 1 77 of 2001 to set aside the said Notice. 2. Enforcement Directorate (Foreign Exchange Regulation Act - now FEMA) through its Deputy Director, Shastri Bhavan, Chennai-6 - petitioning creditor has filed Insolvency Notice No. 39 of 2001 before this Court for issuance of Insolvency Notice to T.T.V. Dhinakaran, Chennai-20 under Section 9 (2) of the Presidency Towns Insoslvency Act and Form No.14A of the Insolvency Rules. In the affidavit filed in support of the above Notice, the Deputy Director of the petitioning creditor has stated that it has obtained an order in F.No. T.3/2 2-D/95 (32) on the file of the Special Director, Enforcement Directorate (Foreign Exchange Regulation Act - now FEMA) at New Delhi on 6-2-98, for a sum of Rs.31 Crores, towards payment of penalties, which was subsequently modified to a sum of Rs.28 Crores by the order dated 5 -5-2000 in Appeal No. 51 of 1998, on the file of the Foreign Exchange Regulation Appellate Board, New Delhi. Against the aforesaid order of the FERA Board, the debtor herein preferred C.M.A.No. 914 of 2000 on the file of this Court. The stay application filed in C.M.P.No. 8 587 of 2000 along with the said C.M.A. was argued at length and ultimately the Division Bench of this Court indicated that the orders of the FERA Board could be stayed, on the debtor herein depositing 50 per cent of the amount due and furnishing a bank guarantee for the balance. At this stage, the stay petition was withdrawn by him and the same was dismissed as withdrawn by order dated 28-7-2000. Therefore, as on date, there is no stay of the aforesaid order of FERA Board which has become due and payable by the debtor herein. The debtor has not paid any amount towards the due till now. In such a circumstance, the Enforcement Directorate has prayed for issuance of Insolvency Notice to the debtor-T.T.V. Dhinakaran under Section 9(2) of the Presidency Towns Insolvency Act and Form No.14A of the Insolvency Rules. 3. Pursuant to the order of the Master dated 01-03-2001 , Notice was issued on 02-03-2001 to the debtor. Questioning the said Insolvency Notice, the applicant-T.T.V. Dhinakaran has filed the above application praying for an order to set aside the said Notice for adjudicating him as an insolvent under Section 9(2) of the said Act. 4. In the affidavit filed in support of the said application i.e., A.No. 177 of 2002, the applicant has stated that the petition filed invoking the provisions of Insolvency Act by the Enforcement Directorate is a serious abuse and a misuse of the power, as the factors enumerated in the affidavit would show that the said petition filed by the Enforcement Directorate to adjudicate him as an insolvent is a wanton misuse of power. The allegation that he is an insolvent and liable to be declared so is prima facie defamatory. The object of any insolvency petition ought only to be distribution of the estate of the insolvent amongst the creditors. The application filed by the respondent does not even mention the barest requirement of the act; hence it is liable to be dismissed in limine. The Special Director of Enforcement Directorate under FERA issued a memorandum of show cause notice under Section 50 of the FERA. In the said notice, he has alleged that the petitioner was a Director of the company registered under the Companies Act of British Virgin Island. Qua a Director of the said company, he had received certain drafts which instrument were in the name of the company viz. Dipper Investments when the petitioner was out of India. He had sent the drafts for collection to the accounts maintained by the said company in England. It is on this Show Cause Notice was issued stating that the petitioner had acquired the foreign exchange and therefore he had committed a violation of Section 8(1) and 9(1)(d) of the FERA Act. Against the said order, an appeal was filed, but the same had been dismissed. The petitioner has filed further statutory appeal before this Court. A Division Bench of this Court has admitted the appeal in C.M.A.No. 51/2000 and the same is pending. The application issuing notice of insolvency is totally misconceived, absolutely without basis, motivated to disgrace the petitioner and to humiliate him. At all times the petitioner acted only as a Director. The drafts are all drawn in the name of Dipper Investments. Therefore, the petitioner had acted only as an agent of the company, the Director being an Agent of the company. Therefore, the application to declare the petitioner as an insolvent is an abuse of the power. The Enforcement Officer is not a creditor within the meaning of the Presidency Towns Insolvency Act. Further, the petitioner herein is a Deputy Director, Enforcement Directorate, Chennai. He is not the person to whom any money is payable under the order of adjudication. For contravention of violations or offence under the FERA a penalty is imposable. It is an extortion of law for violation of an enactment of a penal nature. The penalty is payable only to the Government. It is the Central Government that would claim any amount that is imposed as a penalty. Therefore, the Enforcement Officer is not a person to whom any amount is due from the petitioner. The present application filed by the Enforcement Officer is wholly not maintainable, as he cannot be considered as a creditor within the meaning of the Insolvency Act. 5. It is further stated that the amount claimed as due from the applicant is not and could not be within the concept of debt within the meaning of the Insolvency Act. The debt that is contemplated under the Insolvency Act having regard to the scope and object of Insolvency Legislation, is only a contractual obligation that would give rise to a civil liability of a debt for a breach of contract or damages arising on account of breach of contract. The explanation added to Section 9 makes the position clear. The penalty under Section 50 is not a debt arising out of any contract, so as to envisage an application of Insolvency Act. FERA is a self-contained Code and a special law containing provisions for investigation of offence under the Act, enquiry, search and seizure and imposition of penalty as well as for imposition of punishment for offence under the Act. FERA is a self-contained comprehensive Code by its scope and constitutes a special law prescribing a special form of procedure for imposition of penalty for committing an offence under the Act. Elaborate produce has been provided for recovery of the penalty. Therefore, the different mode of recovery provided under the FERA would completely and totally exclude the application of the Insolvency Act. Apart from the inapplicability of the Insolvency provisions for recovery of a penalty imposed for violation of an offence, the petitioner department had already elected to pursue the remedy under FERA and a prosecution is pending and taken cognisance of by the criminal court. Therefore, the Directorate is estopped and barred from pursuing the remedy under the Insolvency Act. Further, when a statutory appeal under Section 9 (2) of the Act is entertained by this Court and pending, the order of the appellate authority would no longer be enforceable within the meaning of Section 9 (2) of the Act. The petitioner department had not even mentioned the properties of the debtor to be administered in the insolvency. The petitioner is a Member of Parliament and he belongs to a party which is opposed to the party ruling the Central Government. In order to humiliate, disgrace and disqualify him, the Directorate has filed this application. An adjudication under the Insolvency Act is designed to bring about a change in the status of a debtor and to enable an Official Assignee or receiver to equally distribute the property of an insolvent among the creditors. Inasmuch as the petitioner is facing criminal prosecution on the same set of facts, the present proceedings under the Insolvency Act is not maintainable, and the same is liable to be set aside. 6. Heard Mr. B. Kumar, learned senior counsel for the applicant and Mr. V.T. Gopalan, learned Additional Solicitor General for respondent. 7. Mr. B. Kumar, learned senior counsel for the applicant, after taking me through the order of the Special Director, Enforcement Directorate (Foreign Exchange Regulation Act), the Order of the Foreign Exchange Regulation Appellate Board, the pendency of appeal (C.M.A.No. 914 of 2000) before the Division Bench of this Court, the provisions of the Foreign Exchange Regulation Act, 1973 (FERA), the Presidency Towns Insolvency Act, and the Insolvency Rules, 1958, has raised the following contentions: i) The Notice as issued by the petitioning creditor is liable to be rejected, as the same has not been issued on the orders of this Court and the service as has been made is neither prescribed nor it is under prescribed manner; ii) The pre-condition for issuance of notice under Section 9 (2) of the Presidency Towns Insolvency Act is not satisfied and the impugned Notice under Section 9 (2) is premature; iii) The penalty imposed under FERA could never be one that is contemplated under Section 9(2) of the Presidency Towns Insolvency Act; iv) FERA is a complete Code and the issuance of Notice under Section 9 (2) of the Presidency Towns Insolvency Act cannot be sustained; v) The Deputy Director (Enforcement Directorate) has no competency to represent Enforcement Directgorate; vi) The insolvency proceedings have to be construed with greatest strictness in favour of the debtor. 8. Mr. V.T. Gopalan, learned Additional Solicitor General for the respondent-Directorate, has raised the following submissions: i) In view of Statement of Objects and Reasons for introducing Section 9 (2) to (5) of the Insolvency Laws (Amendment) Act 1978, the amounts due under the orders of the FERA Appellate Board can also be enforced by resorting to insolvency proceedings by giving notice to the concerned debtor; ii) Mere pendency of an appeal does not take away the finality that would attach to a decree and that the finality of the decree is only with reference to executability and not as to whether any appeal is pending or not; iii) A debt arises not merely out of a contract between the parties or out of a civil decree enforceable by execution so as to attract the provisions of the Insolvency Act; (iv) Sub-section (3) of Section 70 of FERA authorises the Government to proceed under any other law notwithstanding the specific provisions contained in FERA. (v) The applicant cannot raise additional defence other than those specified in Section 9(5); and (vi) The quasi judicial adjudicating authority namely Enforcement Directorate can very well file an appeal or proceedings including the insolvency proceedings to recover the debt payable to them. 9. I have carefully considered the rival submissions. 10. Before considering the above contentions, it would be useful to refer the materials furnished in the affidavit filed in Insolvency Notice No.39 of 2001. One S. Subramanian, Deputy Director of the petitioning creditor (Enforcement Direcotorate) has sworn to an affidavit. The details furnished in the said Insolvency Notice are as follows: "2. The Petitioning Creditor has obtained an order in F.No. T.3/22-D/95(32), on the file of the Special Director, Enforcement Directorate (Foreign Exchange Regulation Act - now FEMA) at New Delhi, on 6-2-1998, for a sum of Rs.31 Crores, towards payment of penalties, which was subsequently modified to a sum of Rs.28 Crores by the order dt. 5-5-2000 in Appeal No. 51 of 1998, on the file of the Foreign Exchange Regulation Appellate Board, New Delhi. Against the aforesaid order of the FERA Board, the debtor herein preferred CMA No. 91 4 of 2000 on the file of the Hon'ble High Court, Chennai. The stay application filed in C.M.P.No. 8587 of 2000 along with the said C.M.A. was argued at length and ultimately their Lordships were pleased to indicate that the aforesaid orders of the FERA Board could be stayed, on the debtor herein depositing 50% of the am ount due and furnishing a bank guarantee for the balance. At this point the CMP for stay was withdrawn by the debtor herein and the same was dismissed as withdrawn by order dt. 28-7-2000. Therefore, as on date, there is no stay of the aforesaid order of the FERA Board, modifying the penalty amount to Rs.28 Crores, which has become due and payable by the debtor herein. As such there can be no impediment whatsoever for having the said amount of penalty realized from the debtor herein and the debtor has not paid any amount towards the due till now. 3. In the circumstances, mere pendency of the above said CMA will not destroy the finality of the aforesaid order of the Appellate Board modifying the order of the Special Director, Enforcement Directorate." Before going into the merits of the Insolvency Notice, at the foremost I shall consider the first contention raised by Mr. B. Kumar, learned senior counsel for applicant namely that the Insolvency Notice had not been issued on the orders of the Insolvency Court and the same is not in the prescribed form. The Insolvency Notice 39 of 2001 had been issued on 2-3-2001 on the orders of the Master of this Court dated 1-3-2001. A perusal of the said notice shows that the same is issued under Section 9 (2) of the Presidency Towns Insolvency Act, 1909 (hereinafter referred to as "the PTI Act") and Order VIII, Rule 1 (21) of the Insolvency Rules, 1958. The format and procedure adopted are in order. Though it is contended that the matters relating to Section 9 (2) is not one of them as specified under Section 6 (2) of the Act delegating the power by the Chief Justice of the High Court, after verifying the notification of the Chief Justice empowering the Master to issue Notice under Section 9 (2), the learned senior counsel for the applicant has not seriously pressed the said contention. On verification, I am satisfied that the Insolvency Notice is in terms of the format provided under the Rules and the Master of this Court is fully empowered to issue Insolvency notice under section 9 (2); accordingly I reject the first contention raised by the learned senior counsel for the applicant. 11. After considering the rival contentions, the following legal questions arise for consideration by this Court. a) Whether the order imposing the penalty had become final within the meaning of Section 9 (2) of the PTI Act in view of pendency of C.M.A.No. 914 of 2000 before the Division Bench of this Court; b) Whether the order of levy of penalty and its realisation could be said to be outside the purview of the PTI Act and whether the same can be regarded as debt within the meaning of the Act; c) Whether Section 9 (2) of the PTI Act contemplates only a decree passed on a contract or the transactions involving mutuality? d) Whether the FERA is a complete Code and as such in respect of the liability thereon, the provisions of the insolvency could not be resorted to? e) Whether any other defence apart from the three provided under Section 9 (5) of the PTI Act is available to the applicantdebtor? f) Whether the Enforcement Directorate is an independent entity and whether the proceedings initiated by the Deputy Director cannot be said to be by the Government of India? 12. Before considering the above legal aspects in seriatim, it is to be noted that the Enforcement Directorate - petitioning creditor has obtained an order on 6-2-98 on the file of the Special Director, Enforcement Directorate (Foreign Exchange Regulation Act), New Delhi for a sum of Rs.31 Crores towards payment of penalties. On appeal by the debtor herein, the same was modified to a sum of Rs.28 Crores by order dated 5-5-2000 in Appeal No.51/1998 on the file of the Foreign Exchange Regulation Appellate Board, New Delhi. Against the said order of FERA Board, the debtor herein preferred C.M.A.No.914/2000 before this Court under Section 54 of the FERA. There is no dispute that only on questions of law the appeal shall be entertained by this Court against any decision or order of the appellate Board. Here I have already referred to the fact that C.M.A.No.914/2000 preferred by the debtor has been entertained by the Division Bench of this Court and the same is pending. No doubt, though the debtor has filed a stay petition seeking stay of the order of the FERA Board, ultimately the said petition was dismissed as withdrawn by order dated 28 -7-2000. After the dismissal of the stay petition, the Enforcement Directorate has resorted to the insolvency proceedings by issuing the impugned Insolvency Notice 39 of 2001. 13. Now I shall consider the relevant provisions which we are concerned from the Presidency Towns Insolvency Act, 1909. "Section 2. Definitions.-In this Act, unless there is anything repugnant in the subject or context,- (a) "creditor" includes a decree-holder; (b) "debt" includes a judgment-debt, and "debtor" includes a judgment-debtor;" Part II Section 9 (1) provides acts of insolvency. The impugned insolvency notice has been issued under sub-section (2) of Section 9. Sub-sections (2) to (5) were inserted by the Insolvency Laws ( Amendment) Act 1978 (Act 28/78) which came into force with effect from 1.8.79. Among those sub-sections, sub-sections (2) and (5) are relevant for our purpose: Section 9 (2).- Without prejudice to the provisions of sub-section (1), a debtor commits an act of insolvency if a creditor, who has obtained a decree or order against him for the payment of money (being a decree or order which has become final and the execution whereof has not been stayed), has served on him a notice (hereafter in this section referred to as the insolvency notice) as provided in sub-section (3) and the debtor does not comply with that notice within the period specified therein: Provided that where a debtor makes an application under subsection (5) of setting aside an insolvency notice- (a) in a case where such application is allowed by the court, he shall not be deemed to have committed an act of insolvency under this sub-section; and (b) in a case where such application is rejected by the court, he shall be deemed to have committed an act of insolvency under this sub-section on the date of rejection of the application or the expiry of the period specified in the insolvency notice for its compliance, whichever is later: Provided further that no insolvency notice shall be served on a debtor residing, whether permanently or temporarily outside India, unless the creditor obtains the leave of the court therefore. (3)xx xx (4)xx xx (5) Any person served with an insolvency notice may, within the period specified therein for its compliance, apply to the Court to set aside the insolvency notice on any of the following grounds, namely:- (a) that he has a counter-claim or set off against the creditor which is equal to or is in excess of the amount due under the decree or order and which he could not, under any law for the time being in force, prefer in the suit or proceeding in which the decree or order was passed; (b) that he is entitled to have the decree or order set aside under any law providing for the relief of indebtedness and that- (i) he has made an application before the competent authority under such law for the setting aside of the decree or order; or (ii) the time allowed for the making of such application has not expired; (c) that the decree or order is not executable under the provisions of any law referred to in clause (b) on the date of the application. Explanation.- For the purpose of this section, the act of an agent may be the act of the principal, even though the agent have no specific authority to commit the act. Section 13. Proceedings and order on creditor's petition.- (1) xx xx (2) xx xx (4) The Court shall dismiss the petition- (a) if it is not satisfied with the proof of the facts referred to in sub-section (2); or (b) if the debtor appears and satisfies the Court that he is able to pay his debts, or that he has not committed an act of insolvency or that for other sufficient cause no order ought to be made." Mr. V.T. Gopalan, learned Additional Solicitor General appearing for the Enforcement Directorate, very much emphasized the Statement of Objects and Reasons for introducing sub-sections (2) to (5) of Section 9 by the Amendment Act 28/78. The Statement of Objects and Reasons are as under: " Amending Act 28 of 1978 1) The difficulties experienced by a litigant in India in executing even a simple money decree have been commented upon by the Privy Council as well as by the Law Commission and Expert Committee on Legal Aid. The Law Commission in its Third Report on the Limitation Act, 1908 has recommended that the most effective way of instilling a healthy fear in the mind of dishonest judgement-debtor would be to enable the Court to adjudicate him an insolvent if he does not pay the decretal amount after notice by the decree holder by specifying a period within which it should be paid on the lines of the amendment made to the Presidency Towns Insolvency Act, 1909 in Bombay. This recommendation was reiterated by the Law Commission in its Twenty Sixth Report on Insolvency Laws. ii) The Expert Committee on Legal Aid was also of the view that the above recommendation of the Law Commission should be implemented immediately without waiting for the enactment of a comprehensive law of insolvency. iii) It is therefore proposed to amend the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act 1920 to add a new act of insolvency namely that a debtor has not complied with the insolvency notice served on him by a creditor who has obtained a decree or order against him for the payment of money within the period specified in the notice. If the amount shown in the insolvency notice is not correct it would be invalidated if the debtor gives notice to the creditor disputing the amount. The debtor can however apply to the Court to have the insolvency notice set aside on the ground among others that he is entitled to have the decree re-opened under any law relating to relief of debtedness or that the decree is not executable under any such law. iv) The Bill seeks to achieve the above objects. (Gazette of India dated 18-3-1978 pt.II,S.2 Ext.p.188.)" By emphasizing the Statement of Objects and Reasons in introducing sub-sections (2) to (5) of Section 9, it is argued that the amounts due under the orders of FERA Appellate Board can also be enforced by resorting to insolvency proceedings giving notice to the concerned debtor and in the event of the concerned debtor not replying to the said notice within the time or having replied and his reply has been rejected by the Court, an act of Insolvency should be deemed to have taken place. It is also contended that thereafter further proceedings to adjudicate the debtor as insolvent may have to be taken by following further procedure from Section 10 onwards. Though the learned