Page 79 – Vaish Associates Advocates

Additional Evidence may be adduced under Section 34 of Arbitration and Conciliation Act only in exceptional circumstances

The Supreme Court in M/s. Canara Nidhi Limited v. M. Shashikala and Others (decided on September 23, 2019) held that in proceedings under Section 34 of the Arbitration and Conciliation Act, 1996 (“Act”), additional evidence can be permitted to be adduced only in exceptional circumstances.

FACTS
M/s. Canara Nidhi Limited (“Appellant”) is a financial institution that had advanced a secured loan to M. Shashikala, (“Respondent”), the agreement of which was subject to an arbitration clause. On failure to repay the loan, the matter was referred to arbitration. Before the arbitrator, both the parties adduced oral and documentary evidence and an award was passed in the favor of the Appellant. In the Application under Section 34 of the Act in the Court of District Judge, Mangalore, the Respondent filed an application under Section 151 of the Civil Procedure Code (“CPC”) to permit the Respondent to adduce evidence against which the Appellant filed objections. The District Judge dismissed the application holding that there was no necessity of adducing fresh evidence and the grounds urged can be met by perusing the records of the arbitration proceedings.

The Respondent then filed writ petitions before the Hon’ble Karnataka High Court under Articles 226 and 227 of the Constitution of India, which relying on the decision in Fiza Developers and Inter-Trade Private Limited v. AMCI (India) Private Limited and Another [(2009) 17 SCC 796] (“Fiza Developers”) set aside the order of the District Judge, and directed the Judge to “recast the issues”, allowing the Respondent to file affidavits of their witnesses and allow their cross-examination. Aggrieved by this judgment, the Appellant moved a Special Leave Petition before the Supreme Court.

ISSUE
Whether in an application under Section 34 of the Act seeking to set aside the arbitration award, the parties can adduce evidence to prove any of the specified grounds under sub-section (2) of Section 34 of the Act?

ARGUMENTS
The Appellant submitted that proceedings under Section 34 of the Act is summary in nature with a limited scope, and the validity of the award has to be decided on the basis of materials produced before the arbitrator, with no scope for adducing fresh evidence before the court. Further, the High Court misread the ratio of the Supreme Court in Fiza Developers, and in any event, no exceptional grounds for permission to lead fresh evidence in the proceedings under Section 34 were made out. Additionally, the High Court has erred in interfering with the order passed by the trial court.

The counsel for the Respondent reiterated the finding of the High Court and submitted that in order to prove the grounds stated in the application filed under Section 34, adducing additional evidence is necessary. It was submitted that the scope of enquiry in the proceedings under Section 34 is restricted to a consideration whether any of the grounds mentioned, inter alia, in Section 34(2) were made out. The Respondent sought to adduce evidence to prove the grounds enumerated under Section 34(2)(a) of the Act as they were specific and therefore, necessarily need an opportunity to adduce evidence to plead and prove the grounds.

Further, the counsel for the Respondent submitted that in view of Rule 4(b) of the High Court of Karnataka Arbitration (Proceedings before the Courts) Rules, 2001, all the proceedings of the CPC shall apply to such proceedings filed under Section 34 of the Act, insofar as they could be made applicable.

OBSERVATIONS OF THE SUPREME COURT
The Hon’ble Supreme Court first pointed out that the Rule 4(b) of the Karnataka High Court Arbitration Rules are only procedural, and the Supreme Court in Fiza Developers made it clear that there is no wholesale or automatic import of all the provisions of the CPC into the proceedings under Section 34 of the Act as that will defeat the very purpose and object of the Act. It then considered the dicta in Fiza Developers which concerned whether the issues as contemplated under Order XIV Rule 1 of CPC should be framed in the application under Section 34 of the Act. The Court came to the conclusion that such framing of issues was not required in a Section 34 application, which proceeding is summary in nature. However, an opportunity to the aggrieved has to be afforded to prove the existence of any of the grounds under Section 34(2) of the Act, thus, allowing the filing of the affidavits.

The Supreme Court however, then observed that subsequent to the decision in Fiza Developers, section 34 was amended by Act 3 of 2016 adding sub-sections (5) and (6) that specified the time period of one year for the disposal of the application under Section 34. Additionally, noting the inconsistent practices subsequent to the Fiza Developers judgment, the Justice B. N. Srikrishna Committee suggested an amendment to Section 34(2)(a) of the Act substituting the words ‘furnishes proof that’ with the words ‘establishes on the basis of the Arbitral Tribunal’s record that’, which was implemented by the Arbitration and Conciliation (Amendment) Act, 2019.

The Supreme Court then relied on its judgment in Emkay Global Financial Services Limited v. Girdhar Sondhi [(2018) 9 SCC 49] (“Emkay”) which stated that the Fiza Developers judgment must now be read in light of the amendments made in Section 34(5) and 35(6) of the Act, and noted that speedy resolution of arbitral disputes is the object of the Act and its amendments. Therefore, “if issues are to be framed and oral evidence taken in a summary proceeding under Section 34, this object will be defeated.”

The Supreme Court in relying on Emkay thus, concluded that “Section 34 application will not ordinarily require anything beyond the record before the arbitrator and that cross-examination of persons swearing in to the affidavits should not be allowed unless absolutely necessary.”

On applying the established principles, the Supreme Court concluded that there are no specific averments in the affidavit filed under Section 151 of the CPC as to the necessity and relevance of the additional evidence sought to be adduced. It did not indicate the aim of adducing additional evidence or state the specific documents or evidence required. Additionally, considering the objective of the Act, the summary nature of proceedings, and the fact that parties had sufficient opportunity to adduce oral and documentary evidence, the Supreme Court noted that the grounds urged in the application can very well be considered by the evidence adduced in the arbitration proceedings, and that the Respondents have not made out grounds that it is an exceptional case to permit them to adduce evidence.

Further, the High Court directions amount to retrial on the merits of the issues decided by the arbitrator, and the High Court in exercise of its supervisory jurisdiction under Articles 226 and 227 of the Constitution, ought not to have interfered with the order of the District judge, when it did not suffer from perversity.

DECISION OF THE SUPREME COURT
Allowing the appeals, the order passed by the High Court was set aside and the order of the District Judge was affirmed. The District Judge was directed to dispose of the application under Section 34 of the Act, expeditiously in accordance with law.

Vaish Associates Advocates View
The Supreme Court has maintained the sanctity of the arbitration process by unconditionally stating the principle of “exceptional circumstances” to be applied to applications under Section 34 of the Act, in order to adduce additional evidence at that stage. Although the Supreme Court has not clearly enunciated what the principles of exceptional circumstances are, it has created ample safeguards by holding that the grounds under Section 34(2) of the Act will have to be proved from the record of the arbitral tribunal, and the need for new evidence to prove these grounds is an untenable submission.

It has been further clarified that a summary procedure shall be applicable to Section 34 applications, and as the CPC does not strictly apply to such proceedings, leading evidence would be a matter of exception. Extraordinary factual circumstances will have to be demonstrated for this exception to be allowed by the courts.

For more information please write to Mr. Bomi Daruwala at [email protected]

NCLAT: Dissenting financial creditors cannot be discriminated against in a resolution plan

The National Company Law Appellate Tribunal (“NCLAT”) has, in the case of Hero Fincorp Limited v. Rave Scans Private Limited and Others (dated September 17, 2019) held that dissenting financial creditors cannot be discriminated against in a resolution plan.

FACTS
Corporate Insolvency Resolution Process (“CIRP”) was initiated against Rave Scans Private Limited (“Rave Scans”) on January 25, 2017. Accordingly, on October 17, 2019, the National Company Law Tribunal, Principal Bench, New Delhi approved a revised resolution plan submitted by Mr. Rahul Jain, which was earlier passed by Rave Scan’s committee of creditors which had approved the resolution plan with 78.55% of the votes in favour of the same. However, Hero Fincorp Limited (“Hero Fincorp”), which was a secured financial creditor of Rave Scans, challenged the approval of the revised resolution plan before the NCLAT. Hero Fincorp stated that the revised resolution plan submitted and approved is discriminatory, as it treats similar creditors differently.

ISSUE
Whether the revised resolution plan submitted is discriminatory in nature against Hero Fincorp?

ARGUMENTS
The Appellant argued that Hero Fincorp, despite being a secured financial creditor, was discriminated against with respect to similarly situated secured financial creditors. It was argued that the other similarly situated secured financial creditors were provided with a higher percentage of their claim amount, whereas Hero Fincorp was provided with a lower percentage of the same.

The Respondent argued that the resolution plan in question was passed by 78.55% of the votes in favour of the same by the committee of creditors in its meeting held on March 13, 2019. Further, it was argued that as per the resolution plan, the successful resolution applicant has offered upfront payment of INR 54 crores as against the asset value (liquidation value) of INR 36 crores. Therefore, the amount payable to Hero Fincorp vide the revised resolution plan was higher than the liquidation value, which is the estimated realizable value of the assets of Rave Scans.

OBSERVATIONS OF THE NCLAT
The NCLAT perused the statement of settlement of the dues of the stakeholders and observed that Hero Fincorp has been provided with 32.34% of its claim, ostensibly because it has dissented with the revised resolution plan. It was also observed that other secured financial creditors have been provided a higher percentage of their claims. To illustrate the same, Tata Capital Financial Services Limited has been provided with 75.63% of its admitted claim and other financial creditors such as Indian Overseas Bank has been provided with 45% of its admitted claim, the Bank of Baroda was provided with 45% of its admitted claim and the Punjab National Bank has been provided with 45% of its admitted claim.

It was observed, that the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process of Corporate Persons) (Fourth Amendment) Regulations, 2016, amended the provisions of Regulation 38 of the Insolvency and Bankruptcy Board of India (Corporate Insolvency Process of Corporate Persons) Regulations, 2016 (“CIRP Regulations”). Prior to the above amendment, Regulation 38(1)(c) of the CIRP Regulations stated that the resolution plan shall identify specific sources of funds that will be used to pay the liquidation value due to dissenting financial creditors and provide that such payment is made before any recoveries are made by the financial creditors who voted in favour of the resolution plan.

However, pursuant to the NCLAT’s decision in the case of Central Bank of India v. Resolution Professional of the Sirpur Paper Mills Limited and Others (dated September 12, 2019), where it was held that no discrimination can be made between the financial creditors in the resolution plan on the ground that one has dissented and voted against the resolution plan or the other has supported and voted in favour of the resolution plan, the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process of Corporate Persons) (Fourth Amendment) Regulations, 2016 was passed, which deleted the above-mentioned Regulation 38(1)(c) of the CIRP Regulations.

Reference was also made to the Hon’ble Supreme Court’s decision in the case of Swiss Ribbons Private Limited and Others v. Union of India and Others (dated January 25, 2019) where it was observed that:

“the NCLAT has, while looking into viability and feasibility of resolution plans as approved by the committee of creditors, always gone into whether the operational creditors are given roughly the same treatment as financial creditors, and if they are not, such plans are either rejected or modified so that the operational creditors’ rights are safeguarded.”

It was then observed that Insolvency and Bankruptcy Board of India has not provided for separate treatment to dissenting secured financial creditors who do not vote in favour of the resolution plan, and that the amended Regulation 38 of the CIRP Regulations does not discriminate against similarly situated creditors on basis of their affirmative/ dissenting vote on the resolution plan.

DECISION OF THE NCLAT
The NCLAT held that the revised resolution plan in its current form was discriminatory in nature and is violative of Section 30(2)(e) of the Insolvency and Bankruptcy Code, 2016. However, the NCLAT did not set aside the approved plan, but gave the successful resolution applicant the opportunity to remove the discriminatory provisions of the revised resolution plan and provide for payment of 45% of Hero Fincorp’s claim. It was also stated that if the successful resolution applicant does not make the above mentioned change, within one month of this order of the NCLAT, the order of the NCLT dated October 17, 2018 approving the resolution plan shall be set aside.

Vaish Associates Advocates View
This judgment correctly stated that a resolution plan cannot discriminate against a creditor merely on the basis of the vote they cast. Now, resolution plans will have to provide for similar treatment to creditors irrespective of their vote.

Interestingly, while the NCLAT directed the successful resolution applicant to repay 45% of Hero Fincorp’s claim in order to equate it with the claims filed by Indian Overseas Bank, Bank of Baroda and Punjab National Bank, it did not direct any changes to the money payable to Tata Capital Financial Services Limited, who were given 75.63% of their claim. This indicates that the NCLAT only was concerned in addressing negative discrimination, as the judgment was silent on the reasons for providing one secured financial creditor a higher percentage of his claims as compared to the other financial creditors.

For more information please write to Mr. Bomi Daruwala at [email protected]

Inter-corporate deposit to fall outside the ambit of ‘deposit’ under the Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999

In the recent judgment of Mr. Ashish Mahendrakar v. State of Maharashtra and Others (decided on September 13, 2019), the Hon’ble Bombay High Court declared that an inter-corporate deposit/loan, that is, a loan advanced/deposit made by a company with another company would not amount to a “deposit” within the meaning and for the purpose of the Maharashtra Protection of Interest of Depositors (In Financial Establishments) Act, 1999 (“MPID Act”).

FACTS
Birla Power Solutions Limited (“Company”) had accepted deposits from 2009 to 2013. Shri Hajarimal Somai Memorial Trust (“Trust”) on March 09, 2012 had made a deposit of INR 1 crore with the Company. The deposit was to be repaid along with an interest of 10.75% per annum. The date of maturity of the deposit was March 08, 2013. However, the Company defaulted in the repayment of the principal amount and the interest.

Thus, Bhagwan Suryakant Seth filed a first information report against the Company, the managing director and other directors. Accordingly, an investigation was conducted and a charge-sheet was prepared. In the said chargesheet, Mr. Ashish Mahendrakar (“Petitioner”), one of the authorized signatories for the Company, who had executed important documents of the Company, had been indicted as accused number 11. MPID Special Case No. 4 of 2014 is pending before the special court (“MPID Case”).

In the meantime, the State of Maharashtra (“Respondent”), exercising its powers under Sections 4, 8 and 12 of the MPID Act, had issued two attachment orders dated March 19, 2016 and November 24, 2016. Further, a forensic audit was conducted with relation to the amounts accepted by the Company. The outstanding amount stated in the forensic audit included the amounts payable to the Trust.

ISSUE
Whether an inter-corporate deposit/loan registered under the provisions of the Companies Act, 1956 would amount to a deposit within the meaning and for the purpose of the MPID Act?

ARGUMENTS
The counsel appearing for the Petitioner contended that an inter-corporate deposit/loan would fall outside the purview of the MPID Act and would be governed by the Companies Act, 2013 (“Companies Act”) and its rules. The definition of ‘deposit’ under Section 2(c) of the MPID Act, if properly construed, does not include inter-corporate deposits. Further, the counsel for the Petitioner asserted that inclusion of the inter-corporate deposits in the outstanding amount of the forensic audit and the consequent attachment orders by taking into account the outstanding amount is legally impermissible and therefore, requested the Bombay High Court to quash the names of the inter-corporate deposit holders/lenders from the list of depositors in the MPID Case.

The Petitioner submitted that the object of the MPID Act was to protect the interests of the public, that is, the middle class and poor people, from companies who would swindle their deposits by offering unprecedented higher rates of interests and awards. The aim of the MPID Act was not to govern inter-corporate debts or transactions. Secondly, the Petitioner submitted that inter-corporate transactions are regulated by the Companies Act. On the other hand, Chapter V of the Companies Act and the Companies (Acceptance of Deposits) Rules, 2014 (“Rules”) regulate the acceptance of deposits. In the definition of the term ‘deposits’ in the Rules, inter-corporate deposits have been specifically excluded. Lastly, it was stated by the Petitioner that since the Companies Act has been enacted by the central legislature, the provisions of the Companies Act, the rules framed thereunder, and other central legislations cannot be overridden by the provisions of the MPID Act, which has been enacted by the state legislature.

On the other hand, the counsel for the Respondent had submitted that the present matter lacked substance since the Petitioner did not have any locus to file the matter. This was because none of the attached properties were of the Petitioner. The Respondent further submitted, that the definition of ‘deposits’ in the MPID Act had an exhaustive list of exclusions and inter-corporate deposits was not part of this exclusion list. Therefore, MPID Act did govern inter-corporate deposits. Lastly, the Respondent had submitted that the purpose of the MPID Act was to provide an effective mechanism to help the investors, whether a corporate or non-corporate, who has been duped by the financial establishments.

OBSERVATIONS OF THE BOMBAY HIGH COURT
The Bombay High Court observed that the Petitioner was arraigned in the charge-sheet as an accused, and thus, the Petitioner did have locus to file the present matter. The Bombay High Court then reviewed the definition of ‘deposit’ as per the MPID Act, which stated that term deposit covers receipt of money or acceptance of any valuable commodity, except those which have been specifically excluded in the definition.

Further, the Bombay High Court observed that the statement of objects and reasons in a statute cannot determine the true meaning and effect of the provisions of such statute, but it may provide a gainful reference for understanding the background of the legislation, the state of affairs that preceded the enactment, the attendant and surrounding circumstances in relation to the statute and the mischief which the statute sought to curb.

The Bombay High Court relied on New Horizons Sugar Mills Limited v. Government of Pondicherry through Additional Secretary and Another [(2012) 10 SCC 575] wherein the Supreme Court dealt with issues of the objects behind the enactment of, and the legislative competence to enact, the Tamil Nadu Act, the Maharashtra Act and the Pondicherry Act. The apex court had stated:

“In addition to the above, it has also to be noticed that the objects for which the Tamil Nadu Act, the Maharashtra Act and the Pondicherry Act were enacted, are identical, namely, to protect the interests of small depositors from fraud perpetrated on unsuspecting investors, who entrusted their life savings to unscrupulous and fraudulent persons and who ultimately betrayed their trust.

The three enactments referred to hereinabove, were framed by the respective legislatures to safeguard the interests of the common citizens against exploitation by unscrupulous financial establishments mushrooming all over the country. That is, in fact, the main object indicated in the Statement of Objects and Reasons of the three different enactments….We have to keep in mind the beneficial nature of the three legislations which is to protect the interests of small depositors.”

The Bombay High Court thus observed, that MPID Act and the enactments passed by other state legislatures were to protect the interests of the depositors. On reviewing the MPID Act, no distinction had been made between a corporate and an ordinary deposit. Further, the term ‘depositor’ had not been defined under the MPID Act.

The Bombay High Court also observed that a corporate entity while making a business decision should have a feel of the financial market. The entity should weigh in a number of factors before making such a decision such as the creditworthiness of the other company, the business model of such company, the financial condition and the corporate structure and governance of the company. Moreover, the company should check whether such other company would be able to honour its financial commitment. A company, having key personnel should make an informed decision and should not be easily lured by a mere promise of higher percentage of return on investments. According to the Bombay High Court, this was the reason why inter-corporate deposits were excluded from the definition of deposits in the Companies Act and its Rules.

Another angle taken by the Bombay High Court was that if the corporate depositors are clubbed with other depositors as investors, then this would be detrimental to the small time depositors as, if such corporate depositor would compete with the small depositors and claim pari passu distribution, then the small depositors would be deprived of realization of their money to the full potential.

DECISION OF THE BOMBAY HIGH COURT
The Bombay High Court held that an inter-corporate deposit/loan would not amount to a “deposit” within the meaning and for the purpose of the MPID Act. Thus, the petition was allowed and the inter-corporate loan for the proceedings leading to the MPID Case would not be taken into consideration for such proceedings.

Vaish Associates Advocates View
The Bombay High Court has justly observed that the MPID Act is to protect the rights of the small investors, that is, the middle and poor class and not that of the companies, which are expected to make informed decisions after due diligence and not be easily lured by mere promise of high returns on investments unlike an unsuspecting small time depositor. The intent of the MPID Act is to protect the interests of small depositors, who invest their life’s earnings and savings in schemes for making profit which are floated by unscrupulous individuals and companies, both incorporated and unincorporated. More often than not, the investors end up losing their entire deposits. Thus, the remedy provided by the MPID Act is for small investors and not for enforcement of rights of one corporate entity against another.

Further, Section 186 of the Companies Act provides for loan and investment by a company to another company. The remedy for a company having deposited in another company and where such company has failed to repay the depositor company, would be regulated by section 186 of the Companies Act and not the MPID Act.

For more information please write to Mr. Bomi Daruwala at [email protected]

Competition News Bulletin – October 2019

We are pleased to share the October 2019 edition of our newsletter- Competition News Bulletin. Some highlights of this issue are as under:

CCI Imposes Penalty on LPG Gas Vendors for Cartelization in Bidding Process in tender floated by HPCL
CCI imposes penalty for collusive bidding in tender floated by Pune Municipal Corporation
CCI orders investigation against Maruti Suzuki for allegedly controlling discounts of its dealers in Western India
EC opens investigation into possible anti-competitive conduct of Amazon
CCI directs investigation into India specific warranty policy of Intel finding it potentially abusive of dominance
EC fines Qualcomm for engaging in predatory pricing in the market for UMTS baseband chipsets
CCI approves acquisition of shares of TVS Automobile Solutions Pvt. Ltd by Mitsubishi
EC approved acquisition of Pfizer’s Consumer Health Business by GlaxoSmithKline subject to conditions

The Bulletin is amongst India’s first comprehensive Newsletters on the subject published by Vaish Associates Advocates with an aim to supplement CCI’s efforts towards competition advocacy

For more information please write to Mr. M. M. Sharma at [email protected]

Jurisdiction determined as per Section 42 and the doctrine of Forum Conveniens

Aasma Mohammed Farooq and Ors. v. Union of India and Ors.
Link to Judgement / MANU/DE/4514/2018

In this case a writ petition had been filed before the Delhi High Court (Court) challenging the provisions of Section 5(1), 5(5), 8(3), 8(5) and 8(6) of the Prevention of Money Laundering Act, 2002 (‘Act’). The Petitioners sought quashing of provisional attachment, impugned original complaint and the show cause notice.

The notice to show cause under Section 8 of the Act had been issued by the Adjudicating Authority, based in Delhi.

On behalf of the respondent, the maintainability of the petition was objected on the ground that it would go against the principles of ‘forum conveniens’ and so the Court should not entertain this petition.

As per Section 42 of Act, i.e., Appeal to High Court – Any person aggrieved by any decision or order of the Appellate Tribunal may file an appeal to the High Court within sixty days from the date of communication of the decision or order of the Appellate Tribunal to him on any question of law or fact arising out of such order:

Provided that the High Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding sixty days.

Explanation.-For the purposes of this section, “High Court” means-

(i) The High Court within the jurisdiction of which the aggrieved party ordinarily resides or carries on business or personally works for gain;

and

(ii) Where the Central Government is the aggrieved party, the High Court within the jurisdiction of which the respondent, or in a case where there are more than one respondent, any of the respondents, ordinarily resides or carries on business or personally works for gain.

In this case, reference had also been placed on the judgment of Five Judges of this Court in the case of M/s. Sterling Agro Industries Ltd. v. Union of India & Ors. (AIR 2011 Delhi 174)[http://lobis.nic.in/ddir/dhc/DMA/judgement/01-08-2011/DMA01082011CW65702010.pdf] to contend that even if the impugned order has been issued by an Authority and the same constitutes a part of cause of action to make the writ petition maintainable in this Court, yet the same may not be a singular factor for this Court to decide the matter on merits and this Court can refuse to exercise its discretionary jurisdiction by invoking the doctrine of forum conveniens.

The Court held that because the notice under Section 8 of the Act has been issued by the Authority in Delhi it can entertain the writ petition because a part of cause of action has arisen under the jurisdiction of this Court but decided against it as it is not the forum conveniens.

Since the petitioner was based in Mumbai and the properties were located in Mumbai. Moreover, the provisional attachment order had been passed in Mumbai. The complaint though, filed before the Adjudicating Authority in Delhi, it encompassed all the facts that had arisen in Mumbai. It is only after filing of the original complaint as contemplated under Section 5(5) of the Act before the Adjudicating Authority, which is located in Delhi that the impugned notice had been issued from Delhi but the fact remains that nothing had happened in Delhi. Only notice to show cause had been issued by Adjudicating Authority based in Delhi.

Therefore, the Court decided that in this case the Bombay High Court shall be the forum conveniens and it is where the party aggrieved against the orders passed by the Appellate Authority shall approach, in terms of Section 42 of the Act and thus, this Court shall not entertain the present writ petition.

The writ petition was dismissed as infructuous, with liberty to the Petitioner to approach the Bombay High Court.

For more information please write to Mr. Vijay Pal Dalmia at [email protected]

Independence of proceedings of Special Courts and Enforcement Authorities under PMLA

Case: Navdeep Singh vs. Assistant Director, Directorate of Enforcement
Judgement Copy / MANU/PH/1764/2018

In this case before the High Court of Punjab and Haryana (Court), the petitioner, Navdeep Singh, had filed a petition for quashing of complaint under the Prevention of Money Laundering Act, 2002 (PMLA).

Prior to this, there was specific information with the police to the effect that the petitioner had indulged in sale of narcotics and it was pursuant to the said secret information that the petitioner and his co-accused, Srabjit Singh, were arrested and the petitioner was found in possession of 95 grams of heroin and an amount of Rupees 9 lacs was also recovered from him. Consequently, FIR was lodged for offence under Sections 21 and 25 of Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPS Act). Since offence under Section 21 of NDPS Act is listed amongst the scheduled offences in the ‘Schedule’ to the PMLA, therefore, an offence under Section 3 punishable under Section 4 of the PMLA was attracted.

When the proceedings under Section 5 of the PMLA Act for attachment of amount of Rupees 9 lacs were initiated and provisional attachment order was passed which was confirmed by the Adjudicating Authority, the trial in respect of the NDPS case was still pending. Even when the complaint was filed, the trial was still pending and it was afterwards that the trial concluded and the petitioner and his co-accused were convicted.

The material question before the Court was whether prosecution for offence under Section 3 of PMLA could be initiated during the pendency of attachment proceedings or before the attachment confirmation attains finality or before the conviction of the petitioner under the NDPS Act attains finality.

The counsel for respondents contended that there is no statutory bar for prosecuting the accused under PMLA either during pendency of proceedings under any other Act or even during pendency of the attachment proceedings under PMLA and placed reliance upon judgment of Delhi High Court in J. Sekar v. Union of India (2018 III AD ( Delhi ) 638) [http://lobis.nic.in/ddir/dhc/SMD/judgement/11-01-2018/SMD11012018CW53202017.pdf] in which the Division Bench, after examining the scheme of PMLA observed as follows:

“36. There are, therefore, two parallel streams-

(i) criminal proceedings before the Special Court for trial of the offences under Section 3 read with Section 4 PMLA and;

(ii) the departmental proceedings before the authorities instituted under the PMLA, i.e. the Director, the AA, and the AT, the orders of which are subject to appeal before the High Court.”

The Court held that the proceedings for attachment are separate and in the nature of interim measures required to be taken to avoid a situation where proceedings are rendered redundant on account of the property being squandered away. If the designated officer has reason to believe, based on the material in his possession, that a person is in possession of proceeds of crime and, such proceeds, are likely to be concealed, transferred or dealt with in any manner which may result in frustrating proceedings relating to confiscation of ‘proceeds of crime’, he may proceed to attach the property in question. In fact it is in anticipation of prosecution that attachment proceedings are initiated.

Additionally, the second proviso to Section 5(1), when read with the first proviso, would itself make it clear that attachment or pendency of attachment proceedings would not affect filing of a complaint under PMLA. While the first proviso to Section 5(1) envisages the provisional attachment being made simultaneously with the filing of the challan in the criminal Court for offences under Sections 3 and 4 of PMLA, the second proviso carves out an exception by providing that in case the Director or any other authorised officer has reason to believe that if such property involved in money laundering is not attached immediately the non-attachment of the property is likely to frustrate any proceeding under this Act, the attachment may be made prior to initiation of criminal proceedings.

While proceedings under Sections 5 and 8 of PMLA are conducted by Enforcement Authorities, a complaint for offence under section 3 of PMLA is dealt with by a Special Court presided over by a judicial officer. Needless to mention that the Special Court is neither bound not governed not influenced by any order passed by the Enforcement Authorities and has to act independently on the basis of evidence led before it.

IT was also held that it was not the order of attachment which is foundation for lodging a complaint under section 3 of PMLA but it is the factum of recovery of the amount of Rupees 9 lakhs, prima facie believed to be ‘proceeds of crime’ which forms the foundation for prosecuting the accused for offence under section 3 of PMLA.

Thus it was found that there is no ground for quashing the complaint and the petition was dismissed.

For more information please write to Mr. Vijay Pal Dalmia at [email protected]

Additional Evidence may be adduced under Section 34 of Arbitration and Conciliation Act only in exceptional circumstances

NCLAT: Dissenting financial creditors cannot be discriminated against in a resolution plan

Inter-corporate deposit to fall outside the ambit of ‘deposit’ under the Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999

Competition News Bulletin – October 2019

Jurisdiction determined as per Section 42 and the doctrine of Forum Conveniens

Aasma Mohammed Farooq and Ors. v. Union of India and Ors. Link to Judgement / MANU/DE/4514/2018

Independence of proceedings of Special Courts and Enforcement Authorities under PMLA

Case: Navdeep Singh vs. Assistant Director, Directorate of Enforcement Judgement Copy / MANU/PH/1764/2018

Aasma Mohammed Farooq and Ors. v. Union of India and Ors.
Link to Judgement / MANU/DE/4514/2018

Case: Navdeep Singh vs. Assistant Director, Directorate of Enforcement
Judgement Copy / MANU/PH/1764/2018