On April 21, 2018 the Fugitive Economic Offenders Ordinance, 2018 (FEO Ordinance) was promulgated to immediately bring into effect the provisions contained in the Fugitive Economic Offenders Bill, 2018 (FEO Bill). The Union Finance Minister Mr. Arun Jaitley, in his Budget speech, had announced that Central Government was considering the introduction of legislative changes to confiscate the assets of ‘big time offenders’, including economic offenders, who flee the country to escape the Indian legal system.
As the process of extradition has often been challenging and ineffective, the Ordinance seeks to compel the fugitive offender to face trial in India through severe deterrents. Care will need to be taken, however, to ensure that the Ordinance does not adversely impact creditor rights. The deterrents and their impact on insolvency resolution are discussed below.
Scheme of the Ordinance
The Ordinance defines a ‘fugitive economic offender’ (FEO) as a person against whom an arrest warrant has been issued by any Indian court for committing a ‘Scheduled Offence’ and who has either left India to avoid criminal prosecution, or being abroad, refuses to return to India to face criminal prosecution.
The ‘Scheduled Offences’ are enumerated in the schedule to the Ordinance. The Ordinance further adds that the value of such Scheduled Offence must be at least Rs. 100 crores. The offences listed in the schedule include: counterfeiting, forgery, fraudulent removal of property and cheating under the Indian Penal Code, 1860, dishonor of cheque under the Negotiable Instruments Act, 1881; offences under the Reserve Bank of India Act, 1934; taking of gratification to influence a public servant under the Prevention of Corruption Act, 1988; money laundering offences under the Prevention of Money Laundering Act, 2002; fraud under the Companies Act, 2013; and defrauding creditors under the Insolvency and Bankruptcy Code, 2016 (Code)
Powers Under the Ordinance
In order to achieve its objective, the Ordinance provides for powers of attachment, including provisional attachment of properties in India or abroad by a Special Court and/or a Director during the proceedings under the Ordinance, and confiscation of such properties if such person is declared to be an FEO under the Ordinance. Upon confiscation, all rights and titles of the confiscated Properties, free from all encumbrances, vest in Central Government, and Central Government may appoint an Administrator to receive, manage and dispose of such properties.Unlike the Prevention of Money Laundering Act, 2002, the power of attachment under the Ordinance is not limited to the ‘proceeds of the crime’ and extends to any property owned by the FEO. In addition to the above, the Ordinance also provides for powers of search and seizure.
Once an individual is declared an FEO, he or she may be disallowed from proceeding with or defending any civil claim before any court or tribunal in India. Similarly, a company or a limited liability partnership may not be allowed to proceed with or defend any civil claim, if the individual who has been declared an FEO has either filed the claim on its behalf, is the promoter or key managerial personnel or majority shareholder of the company, or has a controlling interest in limited liability partnership.
The impact of proceedings under the Ordinance on creditor rights is considered below.
Impact on Insolvency Resolution under the Code
The Ordinance provides that if an individual is declared an FEO, the following properties (in India or abroad) stand confiscated to the Central Government:
- The proceeds of crime, in India or abroad, whether or not such property is owned by the FEO;
- Any other property or benami property in India or abroad owned by the FEO.
The Ordinance provides that all the rights and title in the confiscated property shall, from the date of the confiscation order, vest in the Central Government, free from all encumbrances. Further, as stated above, such properties are also subject to attachment including provisional attachment prior to adjudication of a person as an FEO.
The aforementioned provisions would necessarily have an impact on the insolvency proceedings of a corporate debtor in the event that a property shown on the books of the corporate debtor is either declared as being “proceeds of crime” or a “benami property” owned by an FEO. An attachment of property of a corporate debtor may depress the value of such asset during the corporate insolvency resolution process. Further, as a consequence of the confiscation under the Ordinance, the said property may have to be excluded from the insolvency resolution process.
Hence, the Ordinance may have a significant adverse effect on a corporate insolvency process where properties of the corporate debtor are attached or confiscated as proceeds of crime or benami properties. It may restrict the ability of financial creditors to realise their dues from such properties.
The Ordinance provides for exemption from confiscation of such proceeds of crime, in which any other person other than the FEO has an interest, if it is satisfied that such interest was acquired bona fide and without knowledge of the fact that the property was proceeds of crime. The Ordinance provides that such persons should not only be given notice of an application to declare a person an FEO but shall also be entitled to file a reply and be heard before an order of declaration of FEO and resulting confiscation of property is passed. However, efficacy of the aforesaid protections against confiscation of bona fide interest in property is largely dependent on identification by the director/deputy director’s identification of persons having an interest in the property sought to be attached/confiscated.
To avoid the unintended consequence of restricting the ability of banks to recover their dues from the companies of defaulting promoters, the exemption provided in the Ordinance must necessarily be exercised to assist the resolution process and allow the lenders to maximise their recovery. The laudable objections of the Ordinance of confiscation of assets will be defeated if a mechanism for protecting legitimate rights of lenders in relation to assets of FEOs is not put in place. Similar measures may also be needed for sale under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI). The attachment or confiscation of properties of the corporate debtor would otherwise have the effect of penalising the banks for the actions of an FEO.
In addition to the above, the Ordinance may also impact the recovery proceedings by the lenders against the individual promoters themselves as personal guarantors to the loans availed by defaulting corporate debtors. The provisions of the Code in relation to individual insolvency are yet to come into force. However, the effect of attachment and confiscation of properties of a guarantor under the Ordinance may defeat any proceedings under the Code if such attachment/confiscation is not released in favour of the lenders for effective recovery under the Code.
Whilst the Ordinance aims to assist banks and other financial institutions in the recovery of financial debts and brings within its ambit an individual who is, or becomes, an FEO, the provisions which provide for confiscation of properties and disposal of such properties by the administrator appointed under the Ordinance, have the potential of impacting the corporate insolvency resolution process under the Code.
The functionaries under the Ordinance must be sensitive to the interest of the lenders and should devise a mechanism to ensure that lenders’ interests in properties are identified before the properties are attached or confiscated. At the same time, lenders also need to put in place appropriate mechanisms to track proceedings under the Ordinance in order to take steps to prevent attachment and confiscation of properties in which they have an interest under the Ordinance.
 The FEO Bill was passed by the Lok Sabha on July 19 2018 and by the Rajya Sabha on July 25, 2018. The Bill is awaiting assent from the President. The provisions of the FEO Bill are as contained in the FEO Ordinance.
 Special Court means a Court of Session designated as a Special Court under sub-section (1) of section 43 of the Prevention of Money Laundering Act, 2002
 “Director” means the Director appointed under sub-section (1) of section 49 of the Prevention of Money-laundering Act, 2002. Significantly, a Director has been given powers to attach properties even prior to making an application to the Special Court provided that post such an attachment by a Director an application is made to the Special Court within thirty days from the date of such attachment.
 Section 12 of the FEO Ordinance
 Section 15 of the FEO Ordinance
 Section 14 of the FEO Ordinance
 Section 291)(k) defines “proceeds of crime” to mean any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a Scheduled Offence, or the value of any such property, or where such property is taken or held outside the country, then the property equivalent in value held within the country or abroad;
 “Benami Property” under the Ordinance is defined with reference to the definition of the said term under the Prohibition of Benami Property Transactions Act, 1988 (“Benami Act”). Under the Benami Act “Benami Property” means any property which is the subject matter of a benami transaction and also includes the proceeds from such property”. “benami transaction” is defined under the Benami Act to mean,—
(A) a transaction or an arrangement—
(a) where a property is transferred to, or is held by, a person, and the consideration for such property has been provided, or paid by, another person; and
(b) the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration, except … or…