The Insolvency and Bankruptcy Code, 2016 (Code), and the Prevention of Money Laundering Act, 2002 (PMLA), are both crucial pieces of legislation designed to address distinct issues within India's economic and legal landscape. While the Code aims to streamline insolvency processes and revitalize financially distressed companies, the PMLA focuses on combating money laundering and depriving offenders of illicitly acquired assets. Despite their clearly defined domains, there are instances where the enforcement of these laws overlaps, particularly when corporate debtors undergoing corporate insolvency resolution process (CIRP) are implicated in offenses under the PMLA.
Understanding the PMLA
The PMLA criminalizes money laundering and establishes a framework for the investigation, prosecution, and confiscation of proceeds derived from criminal activities. It covers a wide array of financial offenses and provides mechanisms for the attachment and eventual confiscation of assets tainted by illegal activities. This legislation addresses a multitude of crimes, including terrorism, drug trafficking, human trafficking, and corruption.
The Enforcement Directorate (ED) is the primary authority under the PMLA, endowed with extensive powers to investigate, attach properties, and initiate confiscation proceedings. PMLA enables the ED to seize properties linked to money laundering.
Understanding the Code
The Code was enacted for efficient insolvency and bankruptcy, ensuring the maximization of asset value and promoting entrepreneurship. It aims to reorganize and resolve insolvency cases without the delays witnessed under the erstwhile bankruptcy laws such as Sick Industrial Companies (Special Provisions) Act, 1985, Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Recovery of Debts due to Banks and Financial Institutions Act, 1993, etc.
By an amendment to the Code, Section 32A was introduced with effect from 28 December 2019. Section 32A stipulates that any liability of the corporate debtor for an offense committed prior to the CIRP will be extinguished from the date the resolution plan is approved by the National Company Law Tribunal (NCLT). This immunity is conditional upon the requirements set out in Section 32A: the approved resolution plan results in a change in the management of the corporate debtor to a person who (i) was not a promoter or involved in the management or control of the corporate debtor, or (ii) has not been implicated by the investigating authority for abetting or conspiring in the commission of the offense that led to the liability on the corporate debtor.
The rationale behind this amendment is to ensure that an incoming investor, who will invest significant money, resources, and time into revitalizing the corporate debtor, is not penalized for offenses committed by the previous management prior to the CIRP.
Conflict between the Code and PMLA
The Code and PMLA both consist of a non-obstante clause therefore both are exclusive of each other in a literal sense. However, when it comes to enforcement of the said laws, different courts and tribunals have different opinions regarding the overriding effect they have on each other, as detailed later in this article. This anomaly has led to a conflict between ED and the Insolvency & Bankruptcy Board of India (IBBI) – the regulator under the Code.
This issue is a matter of concern for resolution applicants bidding for corporate debtors undergoing CIRP under the Code. The resolution applicants who bid for the financially distressed assets have no means to know whether the asset may be attached by ED for money laundering.
The supposedly competing jurisdictions of PMLA and the Code over assets of a corporate debtor have been subject to judicial scrutiny time and again. The interpretation of Section 32A of the Code was considered in the case of JSW Steel Limited vs. Mahendra Kumar Khandelwal & Ors., by the National Company Law Appellate Tribunal (NCLAT). In this landmark ruling, the NCLAT not only interpreted Section 32A to have retrospective applicability, but also overturned all asset attachments made by the ED, thus, giving primacy to the Code over provisions of PMLA even though both statutes are 'special legislations.'
However, in the matter of Kiran Shah, RP of KSL and Industries Ltd. vs. ED, the NCLAT held that the NCLT is not empowered to deal with the matters falling under PMLA. A similar view was taken by the NCLAT in the matter of Varrsana Ispat Limited vs. ED.
Recently,the High Court of Bombay (High Court) in Shiv Charan vs. Directorate of Enforcement Government of India (Shiv Charan Judgement) upheld the NCLT's powers to direct the ED to release attached properties of a corporate debtor once a resolution plan in respect of the corporate debtor had been approved by the NCLT.
Facts of the Shiv Charan Judgement
In March 2018, the ED filed an Enforcement Case Information Report (ECIR) against DSK Southern Projects Private Limited (DSK Projects) and its erstwhile promoters. Pursuant to the ECIR, the ED attached assets of DSK Projects by way of a provisional attachment, which was later confirmed in August 2019 vide an order of the Adjudicating Authority under the PMLA.
Subsequently, in December 2021, DSK Projects underwent CIRP. In February 2023, the NCLT, Mumbai approved the resolution plan of Mr. Shiv Charan and two others (Resolution Applicants) for DSK Projects. Subsequently, in April 2023, the NCLT passed an order directing the ED to release the attached properties of DSK Projects.
The Resolution Applicants approached the High Courtseeking directions to release the attached properties in light of the approval of the resolution plan by the NCLT. On the other hand, the ED also approached the High Court seeking quashing of the April 2023 order of the NCLT. The sole issue under consideration before the High Court was whether the NCLT has the jurisdiction to direct the ED to release attached properties under Section 32A of the Code.
High Court's Ruling
The High Court affirmed that Section 32A of the Code supersedes the provisions of the PMLA in case of conflict, granting NCLT the authority to interpret and apply Section 32A. Emphasizing the legislative intent behind Section 32A, the High Court highlighted its purpose is to prioritize the Code and shield DSK Projects and its assets from antecedent proceedings under other laws, contingent upon a complete change in ownership and control in favor of unrelated parties.
The High Court held that under Section 60(5)(c) of the Code, the NCLT is empowered to answer any question of law arising out of or in relation to the insolvency resolution process, hence covering the questions arising out of PMLA as well, if they arise in relation with the insolvency resolution process.
The High Court noted that in the present case, the Resolution Applicants satisfied the conditions under Section 32A i.e., complete change in ownership and the resolution plan was subsequently approved by the NCLT. Therefore, DSK Projects stands discharged from prosecution and the ED should release its properties from attachment upon approval of resolution plan.
The High Court directed the ED to release the attached assets of DSK Projects and to notify the Resolution Applicants and DSK Projects of such release within a period of six weeks.
Our Thoughts
Section 32A of the Code holds immense potential to boost recovery of corporate debtors, fostering a thriving secondary market for stressed assets. Therefore, the Shiv Charan Judgement is pivotal since it endorses the legislative intent of Section 32A while also highlighting the need for adherence of Section 32A's conditions for seeking immunity from crimes committed before commencement of CIRP. The High Court's ruling will incentivize resolution applicants to participate freely, unburdened by pre-CIRP offences or investigation agency actions, in the resolution plan submission process thereby increasing the possibility of resolution of debts of corporate debtors.
It should be noted that in the Shiv Charan Judgment, the High Court did not deal with the issue of whether enforcement agencies must release the attachments once moratorium commences under the Code. This issue is the subject matter of several ongoing litigations and is currently pending before the Supreme Court of India in Ashok Kumar Sarawgi vs. ED. A definitive stance on this issue is eagerly awaited by all stakeholders as it will finally lay to rest the Code vs. PMLA tussle.
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