IBC PMLA

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

Introduction

The main purpose of The Prevention of Money-Laundering Act, 2002 (PMLA) is to prevent siphoning off of funds by business entities or companies or by individuals and to punish those persons who are behind such acts. This act is specially designed for dealing with offences related to the economy and to seize properties obtained by such offences.

The Insolvency and Bankruptcy Code (IBC) came into force in the year 2016, with the objective to resurrect the sick and financially distressed industries and to save them from going into liquidation.

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Conflict between PMLA & IBC

There is always a conflict between PMLA & IBC after it came into force. As per the provision of Section 71 of PMLA, PMLA holds overriding effects over every other law as the time being in force. Whereas Section 238 of IBC also holds that IBC has overridden effect on every other law for the time being in force and Section 14 of IBC stays every kind of proceedings against the Corporate Debtor (Company) once an insolvency proceedings admitted under the code.

This article is to give an overview about which law holds precedence over whom.

Discussions

Apart from the two sections discussed above, Section 32A of IBC states that once the resolution plan is approved by the NCLT offence committed by the Corporate Debtor prior to the commencement of corporate insolvency resolution process shall be discharged and no action against the property of the Corporate Debtor can be taken after approval of resolution plan.

The immunity that was given by section 32 of IBC, 2016 is creating more conflict between the two Acts. Let’s discuss it by the reference of some case laws. 

In a judgment given by Delhi High Court, The Deputy Director Directorate of Enforcement Delhi vs. Axis Bank & Ors, decided on 2nd April, 2019 it was held that –

  1. the objective of the Prevention of Money Laundering Act is different from other financial laws such as RDBA, SARFAESI Act and Insolvency Code.
  2. PMLA by virtue of section 71 holds precedence over every other existing law. 
  3. PMLA, RDBA, SARFAESI Act and Insolvency Code shall co – exist with each other and there shall be harmony in between them without one being in derogation of the other.
  4. the order of attachment of property under PMLA is not invalid, only because a secured creditor has created prior security interest on such property but the attachment under PMLA can be released by a secured creditor if such property is acquired by bona – fide means.

In the above case law, it can be seen that PMLA has precedence over IBC & other financial laws such as RDBA & SARFAESI.

In another judgment by National Company Law Appellate Tribunal in, JSW Steel Ltd vs Mahender Kumar Khandelwal & Anr decided on 17 February, 2020 it was held that –

JSW Steel Ltd vs. Mahender Kumar Khandelwal & Anr

Brief facts of the case 

In the Corporate Insolvency Resolution Process (CIRP) of Bhushan Power & Steel Limited, the resolution plan of JSW Steel Limited was approved by the Adjudicating Authority but after approval of the plan when the monitoring committee was monitoring the assets of the corporate debtor, the Directorate of Enforcement attached the property of the Corporate Debtor for the offence of money laundering.

Against such attachment, JSW Steel Limited preferred an appeal before National Company Law Appellate Tribunal (hereinafter referred to as NCLAT). Union of India was asked to submit its view through the Ministry of Corporate Affairs that whether the Directorate of Enforcement has any power to seize the assets of the Corporate Debtor after approval of resolution plan under the Insolvency & Bankruptcy Code.

insolvency

Decision of the NCLAT 

The Union of India stated in its affidavit in reply that the ED (Enforcement Director) is free to deal with or attach the personal assets of the erstwhile promoters and other accused persons, acquired through crime proceeds but not the assets of the Corporate Debtor which is financed by the creditors and acquired by a third party bona – fide resolution application which supervised by the Adjudicating Authority under IBC. In so far as a Resolution Applicant is concerned, they would not be in the wrongful enjoyment of any proceeds of crime after the acquisition of the Corporate Debtor and its assets, as a Resolution Applicant would be a bona – fide asset acquired through a legal process.

Therefore, upon an acquisition under a CIR Process by a Resolution Applicant, the Corporate Debtor and its assets are not derived or obtained through proceeds of crime under the Prevention of Money Laundering Act, 2002 (“PMLA”) and need not be subject to attachment by the ED after approval of Resolution Plan by the Adjudicating Authorities.

The NCLAT affirm this submission of the Union of India by stating that after completion of the corporate insolvency resolution process there cannot be any threat of criminal proceedings against the ‘Corporate Debtor’, or attachment or confiscation of its assets by any investigating agency, after approval of the ‘Resolution Plan’. In any event, by virtue of Section 238 of the ‘I&B Code’, it has an overriding effect over anything inconsistent therewith in any other law.

In this case law, it can be seen that IBC prevails over PMLA.

Now, in a recent judgment The Directorate of Enforcement Vs. Sh Manoj Kumar Agarwal & Ors decided on 09th April, 2021 by NCLAT which is all over media that IBC is holding precedence over PMLA.

The Directorate of Enforcement vs. Sh Manoj Kumar Agarwal & Ors

Facts of the Case

The appeal is filed by the Directorate of Enforcement in the matter of Sterling SEZ Infrastructure Ltd (Corporate Debtor) after the NCLT, Mumbai bench had set aside the order of attachment by the Adjudicating Authority under, PMLA under the purview of Section 14 (1)(a), Section 63 and 238 of IBC.

Note

  1. Section 14 (1)(a) of IBC – Section 14 of IBC deals with the provision of Moratorium which means a temporary stay or suspension of activity and 14 (1)(a) of IBC states that once Moratorium is declared by the Adjudicating Authority every kind of legal proceedings against the Corporate Debtor will be stayed.
  2. Section 63 of IBC – Section 63 of IBS states that Civil Courts have no jurisdiction in matters which fall under the purview of IBC.

The Appellant in this present appeal preferred appeal before NCLAT against the order of the NCLT, Mumbai bench on the ground that the properties were validly attached and Moratorium is not applicable in criminal matters.

Apart from the above two grounds, the appellant had also stated that in another proceeding in another bench of the same Tribunal similar relief for setting aside the order of attachment was prayed but the Hon’ble Tribunal did not interfere. 

Decision of the NCLAT

In respect of the non applicability of Section 14 of IBC, 2016 in criminal proceedings NCLAT relied upon the judgment of Supreme Court of India, P. Mohanraj & Ors. vs. Shah Brothers Ispat Pvt. Ltd. (2021) SCC Online SC 152, in which it was held that “a quasi criminal proceedings will come in the purview of proceedings and thus section 14(1)(a) of IBC will attract to such proceedings.”

Thus if the Adjudicating Authority under PMLA passes an order for attachment the institution of such proceedings will be hit by the provisions of Section 14 of IBC.

The NCLAT further stated that if section 14 does not help section 238 would still apply. Though PMLA is a special statute and has an overriding effect, Section 238 of IBC is also a special statute. The IBC has a specific object and that is to consolidate and amend laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals within a stipulated period of time for increasing the value of assets of such persons and to promote entrepreneurship, availability of credit and balance the interest of all stakeholders including alteration in the order of priority of payment of Government dues.

The NCLAT also stated that if the authorities under PMLA seizes and resist to hand over the properties of the Corporate Debtor to the Interim Resolution Professional (IRP), Resolution Professional (RP) or the Liquidator it will create hindrances for them to manage the Corporate Debtor as a going concern till resolution process or liquidation process completes.

The IRP, RP or the Liquidator will have to work in a time bound manner and if the assets of the Corporate Debtor will not available it will be difficult for them to run the Corporate Debtor as a going concern or to get maximum value out of it during sale thus any kind of obstruction is required to be removed which creates hindrances in insolvency or liquidation process.

From the above case law, it is clear that IBC holds precedence over PMLA if PMLA creates obstruction in insolvency, liquidation or any other proceedings under IBC.

Conclusion

From the above discussion, it is clear that IBC has an overriding effect over PMLA if it creates hindrances in any proceedings under IBC. As per the provisions of section 32A, seizure of assets of the Corporate Debtor cannot be done once the resolution plan is approved by the Adjudicating Authority.

Though IBC holds precedence over PMLA, though nothing can stop the Directorate of Enforcement to seize the personal assets of the erstwhile prompters or other persons obtained through crime.

References

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