This article is written by Amarpal Singh, pursuing a Certificate Course in National Company Law Tribunal (NCLT) Litigation from LawSikho. 

Introduction 

The Insolvency Bankruptcy Code (IBC) came in conflict with the Prevention of Money-laundering Act (PMLA) in the course of its operation. The courts and tribunals, while exercising their concurrent jurisdiction gave different opinions on the same issue which created more confusion than clarity. Thereafter, the legislature provided a remedy to this issue by introducing Section 32 A in the IBC.

This article analyses the conflict between PMLA and IBC and provides an answer to the question – whether IBC should prevail over PMLA?

Insolvency and Bankruptcy Code, 2016 (IBC)

IBC was introduced to speed up and simplify the insolvency and bankruptcy process. The IBC ensures a time-bound process and also stresses upon the revival of the company by the resolution applicant. A resolution applicant is a person who submits individually or jointly with any other person the resolution plan to resolution professional pursuant to the invitation for submission of resolution plans under clause (h) of subsection 2 of Section 25.

Resolution applicant submits the resolution plan to the resolution professional or the interim resolution professional after the invitation. After the submission of the plan, it is presented to the Committee of Creditors (COC) for their approval. The Adjudicating Authority (NCLT) approves the resolution plan if it is approved by COC and satisfies the terms and conditions as stipulated under Section 30(2) of the IBC.

Consequently, the resolution applicant takes over all the assets and liabilities of the corporate debtor. The resolution plan submitted will contain how the liabilities will be an dealt with or taken over by the resolution applicant or paid and in what proportions.

Prevention of Money Laundering Act, 2002 (PMLA)

PMLA was enacted with the purpose to prevent money laundering and to inter alia provide for confiscation of property derived from the act of money laundering in the territory of India. 

The Deputy Director of the Enforcement Directorate can attach the property which is purchased from proceeds of crime. The attachment of property has to be done after the approval of the District Magistrate. Thereafter, a report is sent to the Adjudicating Authority which is constituted under Section 6 of PMLA. The Adjudicating Authority after hearing the aggrieved person and director give finality to order of attachment. 

The property which is attached is retained for 180 days. The period of attachment can be extended subject to the discretion of adjudicating authority.

What is the conflict between IBC and PMLA?

In the matter of M/S Nathella Sampath Jewelry Private Limited before the NCLT Division Bench, Chennai. An application was filed by the Resolution Professional on one day before the publication of expression of interest. The properties of the Corporate Debtor were attached by the Joint Director, Directorate of Enforcement (ED). The COC did not find any evidence and passed the resolution with requisite majority of 97.90% voting share to liquidate the company. The corporate insolvency resolution process was at standstill due to the appeal pending before the Hon’ble Appellate Tribunal of PMLA. The NCLT Division Bench, at Chennai, passed the order for liquidation and held that this order of liquidation does not affect the enforcement proceeding which is pending against the erring of the promoters. However, the NCLT Division Bench at Chennai did not answer whether the assets attached by the ED form part of the liquidation estate of Corporate Debtor or not. 

In the insolvency proceedings initiated by M/S Bhushan Power & Steel Limited. M/ S JSW Steels was the resolution applicant. In the meantime, the ED attached the properties of M/S Bhushan Power & Steel Limited stating that the assets were acquired from proceeds of crime. The resolution applicant approached the National Company Law Appellate Tribunal (NCLAT) seeking protection from attachment by the ED. The Hon’ble NCLAT opined that the ED would have claim over the assets in the nature of operational debt. The Ministry of Corporate Affairs, the respondent in the this matter filed an affidavit before the NCLAT stating that once the resolution is approved it is binding on every stakeholder including the government agencies.

The NCLAT opined that there is a need to solve the tussle between two wings of the Central Government. The matter was still pending before the NCLAT when the Hon’ble President of India promulgated an ordinance, which later became an act wherein Section 32A was introduced in IBC. The NCLAT based on the amendment ordered that the right to object is available till the time resolution plan is not approved. When the resolution plan is approved it is binding on all stakeholders. Thus, the resolution plan by JSW Steels stands approved and all the proceedings against Corporate Debtor were abated.

The parties in the matter preferred and appeal and the matter is sub-judice before the Supreme Court.

What is Section 32 A of IBC?

Section 32 A was introduced to provide immunity to the corporate debtor against the prosecution and action which is taken against the property of Corporate Debtor. After the company goes into the corporate resolution insolvency process or liquidation. The provision can be divided into three categories –

• Blanket immunity to new directors

Section 32 A (1) is a non-obstante provision. It provides blanket immunity to the new directors who would replace the old directors of the Corporate Debtor from the offences committed by an old director or promoters before the company went into the corporate resolution insolvency process or liquidation, from the date of approval of resolution plan by the Adjudication Authority.

• Prohibition of action against property of corporate debtor

Section 32 A (2) prohibits all the actions that can be taken against corporate debtors undergoing Corporate Resolution Insolvency Process. Further, this clause denies all the claims of the attachment of property by the government agencies of the Corporate Debtor. The property should have been considered and approved under the resolution plan submitted to the  NCLT. The provisions of this section do not bar or provide immunity against the property of all actions by the guarantors.

• Assistance and co-operation for investigation 

Section 32 A (3) is also a non-obstante provision which states that notwithstanding anything contained in clause (2) and (3) of Section 32 Corporate Debtor and any person shall extend assistance and co-operation to the authority which was investigating an offence committed before the Corporate Insolvency resolution process.

The provision of this section will not be applicable under the circumstances where the Corporate Debtor falls under the category of Micro, Small and Medium Enterprise (MSME) and when the resolution plan is submitted by the promoters of the company. This is because there are exceptions under IBC which are provided to support MSME under Section 240 A of the Code that permits the promoters of MSME to submit a resolution plan to be considered by the COC.

Whether IBC will prevail over PMLA?

In the case of Deputy Director of Enforcement Delhi v. Axis Bank & Ors, an appeal was filed in five different cases. The banks and financial institutions had granted a credit against the hypothecation/ charge over assets. The owner of the assets which were hypothecated by the bank was charged under the provision of PMLA. The assets of these owners were attached by the ED. This affected the vested rights of financial institutions and banks under the other acts such as Recovery of Debt and Bankruptcy Act, 1993 (RDBA), Securitization and Reconstruction of Financial Assets and Reconstruction, 2002 (SARFAESI) and the IBC. The court, in this case, had framed various issues out of which one of the issues was –

Whether the provision of SARFAESI, RDBA and IBC will prevail over PMLA?

The court held that the provisions of SARFAESI, RDBA and IBC will not prevail over PMLA as the objective of PMLA is distinct from SARFAESI, RDBA and IBC. The three legislations should be construed harmoniously without derogating each other.

Analysis

If the assets of the Corporate Debtor are attached by the ED and after the investigation, it is proved that assets were acquired through the proceeds of money laundering then the management of the company is held liable.  After undergoing the Corporate Resolution Insolvency Process if there is a change in the management of the company then the new management will be held liable for the wrongdoings of the previous management. The purpose of corporate insolvency resolution process (CIRP) is to invite resolution plans from bonafide resolution applicants who are disqualified under Section 29 A. The threat of attachment of assets and investigations by the government agencies to the resolution applicant will defeat the purpose of CIRP and IBC.

Further, Section 238 of the IBC and Section 71 of PMLA contains non – obstante clauses. In the case of Solidary India Pvt Ltd. v. Fair growth Financial Services and Ors, the appellant had taken a loan from the respondent. The proceedings were initiated by Custodian under Section 3 of the Special Court (Trial of offences relating to the Transaction and Securities Act),1992. While the appeal was pending the appellant became a sick unit under the Sick Industries Companies Special Provision Act, 1985. The issue before the court was that if both are special acts and contain non-obstante clauses which act will prevail over the other. The court held that the Special Court (Trial of offences relating to the Transaction and Securities) Act, 1992 as it is enacted latter will prevail over the Sick Industries Special Provision Act, 1985.

The legislative intent on the conflict between PMLA and IBC is clear as after the ordinance which later became an Act introduced Section 32A in IBC which states that no liability will be attracted towards the corporate debtor and no proceeding can continue against the corporate debtor when the resolution plan is approved.

Conclusion

The issue of whether IBC will prevail over PMLA is sub-judice before the Supreme Court of India. However, the intention of the legislature is clear that IBC will prevail over PMLA otherwise the purpose of IBC will be defeated.

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