Contributed by: P&A Law Offices
The provisions of the Insolvency and Bankruptcy Code 2016 (“IBC”) have, since their enactment, come into conflict with several existing legislations. One such legislation is the Prevention of Money Laundering Act 2002 (“PMLA”). Both the PMLA (Section 71) and the IBC (Section 238) contain a ‘non-obstante’ clause which is often used to restrict the applicability of the former over the latter, and vice-versa. Harmonizing the intent of the IBC and its provisions with those of the PMLA has therefore proven to be a difficult task.
Section 238 of the IBC states that: -
“The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”
Section 71 of the PMLA states that: -
“The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.”
The Courts, tribunals and authorities across the country have rendered conflicting decisions regarding the relationship between the PMLA and the IBC, which, in turn, has led to a lack of clarity on this subject.
The conflict between the PMLA and the IBC arises primarily from the special nature, purpose, scope and intent of these legislations. On one hand, IBC enumerates a systematic Corporate Insolvency Resolution Process (“CIRP”) which imposes a moratorium under Section 14 of IBC on the Corporate Debtor and prevents the initiation or continuation of suits or pending suits or proceedings, including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority against the Corporate Debtor; including transferring, encumbering, alienating or disposing of by the Corporate Debtor, any of its assets or any legal right or beneficial interest therein. On the other hand, PMLA under Section 5 empowers the Enforcement Directorate (“ED”) acting through its Director or any other officer not below the rank of Deputy Director authorized by the Director; to provisionally attach any property which it has reason to believe originates from proceeds of crime (the reason for such belief to be recorded in writing), and on the basis of material in his possession has reason to believe that (a) any person is in possession of any proceeds of crime; and (b) such proceeds of crime are likely to be concealed, transferred or dealt with in any manner which may result in frustrating any proceedings relating to confiscation of such proceeds of crime.
There are situations where the assets (movable and immovable) of the Corporate Debtor protected under the order of moratorium passed under IBC, are provisionally attached by the ED or where the assets (movable and immovable) of the Corporate Debtor are already provisionally attached by the ED and later the order of moratorium is passed under IBC. These scenarios raise the question of whether the provisions of the IBC override the provisions of the PMLA or vice-versa. Against this background, this article considers the issue of the primacy of the moratorium imposed under the IBC vis-à-vis the attachment proceedings instituted under the PMLA. Referring to the findings by courts, authorities and tribunals, this article aims to highlight three (3) scenarios; First, where a moratorium is imposed under the IBC before the provisional attachment proceedings are initiated by the ED under the PMLA. Second, where a moratorium is imposed under the IBC after the provisional attachment proceedings are initiated by the ED under the PMLA. Third, where the provisional attachment proceedings are initiated by ED under the PMLA, after the successful approval of a Resolution Plan by the NCLT under the IBC.
a) Moratorium is imposed under the IBC before the provisional attachment proceedings are initiated by the ED under the PMLA:
In Punjab National Bank vs. Deputy Director, Directorate of Enforcement, Raipur (FPA-PMLA-2633/RP/2018), a moratorium under the IBC was declared prior to the initiation of provisional attachment proceedings under the PMLA. The Prevention of Money Laundering Appellate Tribunal (“PMLAT”) observed that there are inconsistencies between the PMLA and IBC as well as an overlap between the two legislations. The PMLAT, whilst emphasizing upon the aspect of declaration of a moratorium under Section 14 of the IBC (before confirmation of a provisional attachment order under PMLA), clarified that the order of attachment under the PMLA would be construed as a civil proceeding, which would be stayed upon the passing of an order of moratorium. It was also held that in view of the non-obstante clause contained in Section 238 of the IBC, the Adjudicating Authority under the PMLA could not have continued with the attachment proceedings under the PMLA.
b) Moratorium is imposed under the IBC after the provisional attachment proceedings are initiated by the ED under the PMLA:
The PMLAT reaffirmed its decision given in Punjab National Bank’s case in another matter titled Bank of India vs. Director, Directorate of Enforcement, Mumbai, (FPA-PMLA-2173/MUM/2018) wherein a moratorium was imposed under the IBC after a provisional attachment order had been passed under the PMLA. Whilst dealing with the economic aspect of the properties being attached under the IBC or the PMLA, the National Company Law Tribunal, Mumbai (“NCLT, Mumbai”) opined that “the quantum of amount locked in the assets of the Corporate Debtor can be released at the earliest when resolution is found through IBC instead of taking a long route under PMLA”. The NCLT, Mumbai also noted that in view of the overriding provision of Section 238 of the IBC, which came into force after the PMLA, the provisions of IBC would prevail. Moreover, pursuant to Section 14 (1)(a) of the IBC, which grants the power to declare moratorium on any kind of proceeding against the Corporate Debtor, the provisional attachment order passed under the PMLA would squarely fall within the ambit of the IBC.
At this juncture, it is important to note the decision of Hon’ble Delhi High Court in the matter titled Deputy Director, Directorate of Enforcement vs. Axis Bank & Ors. (259 (2019) DLT 500), wherein it held that the IBC does not prevail over the PMLA and observed that these legislations are to be construed harmoniously, without one being in derogation of the other. The Hon’ble Court also noted the lack of inconsistency between the PMLA and the IBC; in view of their clearly distinguishable objectives and concluded that both legislations could exist concurrently. Interestingly, the Hon’ble Delhi High Court upheld the interest of a bona fide third-party creditor in the attached property who acquired interest in such attached property prior to the commission of the prescribed offence as per the PMLA. The Hon’ble Delhi High Court held that such a claim made by a bona fide third-party creditor cannot be frustrated by the attachment of such property under Section 8 of the PMLA. The aforesaid finding was subsequently affirmed by the PMLAT in the matter titled Indian Overseas Bank vs. The Joint Director, Directorate of Enforcement, New Delhi & Ors. (FPA-PMLA-1530/DLI/2016).
In order to ensure that the provisions of the IBC and the PMLA co-exist harmoniously, the PMLAT opined that in the case of bonafide third party claimants, it would be appropriate that the PMLA attachment though remaining valid and operative, takes a backseat, thereby allowing the secured creditors to enforce their claims by disposal of the subject property. Thereafter, the remainder of the subject property’s value, if any, shall be made available for purposes of PMLA (M/s PMT Machines Ltd. vs The Deputy Director, Directorate of Enforcement, Delhi, FPA-PMLA-2792/DLI/2019).
However, the Hon’ble National Company Law Appellate Tribunal (“NCLAT”) in the matter of Varsana Ispat Limited vs. Deputy Director, Directorate of Enforcement, Company Appeal (AT) Insolvency No. 493 of 2018 had taken a different view by instead laying emphasis on the fact that the attachments under the PMLA were made prior to the initiation of the CIRP under IBC. In view of this, the NCLAT clarified that Section 14 of the IBC does not apply to criminal proceedings and given that the proceedings under the PMLA relate to “Proceeds of Crime”, Section 14 of the IBC will not apply to such proceedings. The Hon’ble NCLAT further opined that the PMLA relates to a different field of penal actions for offences involving the proceeds of crime, and can be invoked simultaneously with IBC, without one necessarily overriding the other. An appeal was filed before the Supreme Court of India against this order of the NCLAT. However, the Hon’ble Supreme Court of India declined to interfere with the Tribunal's decision. The aforesaid decision was also subsequently reiterated by the NCLAT in the matter titled Rotomac Global Private Limited vs. Deputy Director (Company Appeal (AT) Insolvency no. 140 of 2019).
Notably on 09 April 2021, the Hon’ble NCLAT in matter titled Directorate of Enforcement vs Manoj Kumar Agarwal and Ors (Company Appeal (AT) Insolvency no. 575 of 2019), took note of the fact that the functions of Adjudicating Authority under PMLA are civil in nature to the extent that it does not decide on the criminality of the offence nor does it have power to levy penalties or impose punishment. It has observed that the attachment proceedings before the Adjudicating Authority under PMLA are civil in nature. To support its findings, the Hon’ble NCLAT specifically placed reliance and demarcated the provisions of PMLA by stating that the offences under the PMLA are tried under Chapter 7 by the Special Courts as per the provisions of The Code of Criminal Procedure 1973, whereas the provisional attachment of properties by ED under Section 5 of PMLA and the confirmation of the said attachment of properties under Section 8 of PMLA by the Adjudicating Authority are civil in nature.
Notably, through this recent decision passed in matter titled Directorate of Enforcement vs Manoj Kumar Agarwal and Ors, the Hon’ble NCLAT has categorically held that the provisional attachment proceedings before the Adjudicating Authority under PMLA are civil in nature and hence, would come under the purview of Section 14 of IBC. As such, any further action before the Adjudicating Authority under PMLA must be prohibited. This recent approach of NCLAT reaffirms and adopts the long-standing view taken by PMLAT in plethora of its judgments passed in the subject matter. The Hon’ble NCLAT has diverged from its earlier position and overturned its decisions on the instant issue passed in matters titled Varsana Ispat Limited vs. Deputy Director, Directorate of Enforcement and Rotomac Global Private Limited vs. Deputy Director.
c) Attachment proceedings initiated after successful approval of the Resolution Plan by NCLT under the IBC:
The Hon’ble NCLAT on 17 February 2020, in a landmark decision in JSW Steel Limited vs. Mahender Kumar Khandelwal and Anr. (Company Appeal (AT) Insolvency No. 957 of 2019), clarified the position of law in a dispute that had arisen in relation to the attachment of properties by the ED after the approval of the resolution plan submitted by the Resolution Applicant, i.e., JSW Steel Limited. In view thereof, the legislature amended the IBC by incorporating Section 32A. The NCLAT clarified that there could not be any attachment or confiscation of the assets of the Corporate Debtor by any enforcement agencies after the approval of the resolution plan by the NCLT. This was a vital clarification with respect to the prevalence of the IBC over the PMLA proceedings.
Later, on 16 March 2020, the Hon’ble Delhi High Court in Tata Steel BSL Limited & Anr. vs. Union of India & Anr. (W.P. (Crl.) 3037/ 2019 and Crl. M.A. 39126/2019), relied on the approved Resolution Plan and Section 32A of the IBC to hold that the Corporate Debtor shall not be liable for any offence committed prior to the commencement of CIRP and, as such, the Corporate Debtor could not be prosecuted for any offence after the Resolution Plan had been approved by the Adjudicating Authority (NCLT).
On 22 July 2020, the National Company Law Tribunal, Kolkata (“NCLT Kolkata”) in SBER Bank vs. Varrsana Ispat Limited (in liquidation) (C.P. (IB) No. 543/KB/2017) dealt with the issue of sale of assets of the Corporate Debtor undergoing liquidation, which were previously attached under the PMLA. The NCLT Kolkata opined that Section 32A of the IBC is also applicable to liquidation proceedings. While allowing the application filed by the official liquidator for sale of attached assets, the NCLT Kolkata observed that the attachment and confiscation of properties of the Corporate Debtor undergoing CIRP or liquidation becomes void under Section 32A of the IBC. Thus, the NCLT Kolkata was of the view that in order to complete the process of liquidation in a time bound manner, a liquidator could proceed with the sale of the assets of the Corporate Debtor under the IBC, even when the assets of the Corporate Debtor were under attachment. Thereafter, upon completion of the sale proceedings, the buyer could take appropriate steps to lift the attachment.
The Hon’ble Supreme Court of India in its recent decision passed on 19 January 2021, in the matter titled Manish Kumar vs Union of India (2021 SCC Online SC 30), has observed that, once the resolution plan of the Corporate Debtor is approved then the criminal liability of the Corporate Debtor is extinguished, however, the liability of the wrongdoers would continue to remain.
There have been several other cases in which the details of the ED attachment and date of moratorium have not been highlighted. However, courts have opined with respect to the primacy of PMLA proceedings over IBC proceedings, or vice versa. The NCLT, Kolkata in Surendra Kumar Joshi vs. REI Agro Limited (CA (IB) NO. 453/KB/2018 IN CP (IB) NO. 73/KB/2017) held that the Ld. Adjudicating Authority established under the PMLA Act is a criminal court having jurisdiction to decide whether the properties of the Corporate Debtor attached during the investigation could be said to be the properties acquired by them using the proceeds of crime. However, on the other hand, only the National Company Law Tribunals having jurisdiction under the provisions of the IBC have the power to decide how such properties and assets of the Corporate Debtor under liquidation could be appropriated.
The foregoing analysis illustrates the instances wherein various courts, tribunals and authorities across the country have attempted to address the question on the prevalence of moratorium imposed under the IBC over attachment proceedings under the PMLA. The three scenarios discussed hereinabove in this article can be relied upon for differentiating the facts and circumstances of each case. But, after the passing of the judgement by the Hon’ble NCLAT on 09 April 2021 in the matter titled ‘Directorate of Enforcement vs Manoj Kumar Agarwal and Ors’, the question of the prevalence of moratorium imposed under the IBC over attachment proceedings under the PMLA has received another affirmation to the earlier findings by PMLAT in plethora of its judgments, discussed above. The Hon’ble NCLAT by departing from its earlier findings in Varsana Ispat Limited’s case and Rotomac Global Private Limited’s case, has provided a vital and highly anticipated clarification, which is a welcome step towards settling the long-drawn dispute of supremacy of moratorium imposed under the IBC over attachment proceedings under the PMLA.
**The views expressed are solely those of the authors and should not be attributed to the author’s firm or its clients, or any other organization.
Contributed by: P&A Law Offices
The above article has been authored by Mr. Gaurav Mahajan(Partner), Ms. Prerita Aggarwal(Senior Associate), and Mr. Saksham Babbar.