The Bombay High Court has clarified that proceedings for attachment of property initiated under the Maharashtra Protection of Interest of Depositors (In Financial Establishments) Act, 1999, are in the nature of a public law remedy and civil forfeiture, intended to protect the interests of depositors from fraudulent activities.
Such proceedings are not ‘in respect of any debt’ as defined under the Insolvency and Bankruptcy Code, 2016, because no debtor-creditor relationship exists between the State and the party whose property is being attached, added the Court.
The High Court explained that the IBC admittedly not having any retrospective effect cannot reach back in time and assert any right of application on such assets which are now in effect State property for the purpose of the provisions of the MPID Act. Thus, the moratorium provisions under the IBC would have no effect on the properties attached under the provisions of the MPID Act or the further attachment.
Consequently, the Court held that the interim moratorium provided under Section 96 of the IBC does not apply to or stay attachment proceedings under the MPID Act. The Court therefore dismissed the appeal and imposed a cost of Rs. 10 lakh on the Appellant for filing the appeal as a dilatory tactic.
The Division Bench comprising Justice A.S. Gadkari and Justice Shyam C. Chandak examined the question of repugnancy between the two statutes by referring to Article 254 of the Constitution. The doctrine of repugnancy under Article 254(1) applies only when both a Parliamentary and a State law relate to the same subject matter falling within the Concurrent List and are directly inconsistent. The Bench noted that the IBC was enacted by Parliament under the Concurrent List (List III). Since the two laws do not relate to a subject in the Concurrent List and do not occupy the same field, the question of repugnancy does not arise.
The Bench analysed whether the attachment proceedings under Section 8 of the MPID Act could be considered a ‘legal action or proceeding pending in respect of any debt’ as contemplated by Section 96 of the IBC. It observed that the record does not indicate that the Appellant had obtained any money as a ‘debt’ from Respondent No. 1 (the State). Therefore, no ‘debtor-creditor’ relationship existed between them.
The Bench distinguished between the definition of ‘debt’ under Section 3(11) of the IBC and ‘deposit’ under Section 2(c) of the MPID Act. It held that the categories of ‘deposits’ under the MPID Act are not included in the definition of ‘debt’ under the IBC. The proceedings under the MPID Act are not for the recovery of a debt but for the attachment of property that was tainted with a crime, as depositors were induced to trade on the NSEL platform. In the absence of a ‘debt’ to be recovered, the moratorium under Section 96 of the IBC cannot be applied.
The Bench characterized the MPID Act as a special statute enacted as a ‘public law remedy’ to protect the interests of innocent depositors from fraud. It clarified that once a property is attached under Section 4 of the MPID Act, it vests in the State Government and is removed from the realm of the corporate debtor’s or personal guarantor’s property that could be part of an insolvency estate under the IBC.
Such an attachment is not a ‘creditor action’ but a sovereign action to deprive a person of the enjoyment of ill-gotten wealth. Therefore, the moratorium provisions under the IBC would have no effect on properties already attached or subject to further attachment under the MPID Act, added the Bench.
Briefly, the original case was filed for offences under Section 3 of the MPID Act and various sections of the IPC, including 120B, 406, 409, and 420. The State of Maharashtra (Respondent No. 1) filed case under Section 8 of the MPID Act against M/s. PD Agro Processors Pvt Ltd. and the Appellant (Dulisons Cereals). It was alleged that a forensic audit revealed PD Agro, a member of the National Spot Exchange Ltd. (NSEL), had a liability of Rs. 680.29 Crores and had malafidely transferred investors’ money to various entities, including the Appellant. The application sought to attach the Appellant’s properties to safeguard investors’ interests.
During the pendency of case, the Appellant filed an application, arguing that proceedings should be stayed. The basis for this was that the State Bank of India (SBI) had filed an application under Section 95(1) of the Insolvency and Bankruptcy Code, 2016 (IBC) to initiate an insolvency resolution process against Kanta Gupta, the proprietor of the Appellant firm. The Appellant contended that this triggered an interim moratorium under Section 96 of the IBC, which stayed all legal actions, including the attachment proceedings under the MPID Act.
The Respondents opposed this, arguing that the attachment under the MPID Act was not in respect of a ‘debt’ and there was no ‘debtor-creditor’ relationship between the Appellant and the State. They stated the action was a public law remedy to protect depositors from fraud, arising from a money trail of about Rs. 13.60 Crores transferred from PD Agro to the Appellant. The Special Judge accepted the Respondents’ contentions and rejected the application for a stay, leading to the present appeal under Section 11 of the Maharashtra Protection of Interest of Depositors (In Financial Establishments) Act, 1999 (MPID Act) against an order which rejected the Appellant’s application to stay proceedings.
Appearances:
Advocates Vinay Bhanushali, Abhiraj Rao, Sanmit Vaze and Diksha Sharma, for the Appellant
Advocates Leena Patil, P.P. Shinde, Arvind Lakhawat, Nimeet Sharma, Vinit Vaidya, Jalpa Shah, Himani Narula, and MZM Legal LLP, for the Respondent
