IBC 2016 AND PMLA: WHICH SHALL PREVAIL OVER OTHER?

 

IBC 2016 and PMLA: Which shall prevail oVER other?

 

The Delhi High Court recently had the occasion to deal with Insolvency & bankruptcy Code 2016 (In short “IBC”)  and Prevention of Money Laundering Act 2002 ( In short “PMLA”) and what shall precede other and that of primacy. In Nitin Jain Liquidator, FSL Ltd Vs Enforcement Directorate- W.P. (C) 3261/2021, it is held by Delhi High Court that power under PMLA 2002 shall no longer be available, if an order relating to liquidation of assets of corporate debtor is passed under IBC 2016. The adjudicating Authority is empowered to pass order as per IBC Code and as per Section 14 of IBC, there shall be moratorium in respect of any case initiated or pending against corporate debtor/s. Of course, the criminal cases shall not be covered under it. The proceedings before National Company Law Tribunal (NCLT) in this regard, is known as CIRP (Corporate Insolvency Resolution Process).

 

The principal question determined in Nitin Jain (Supra) was whether the authorities under the Prevention of Money Laundering Act, 2002 , would retain the jurisdiction or authority to proceed against the properties of a corporate debtor once a liquidation measure has come to be approved in accordance with the provisions made in the Insolvency and Bankruptcy Code, 2016?

 

The Liquidator had approached the high Court once summon issued by the respondent was received, who was investigating the affairs of the corporate debtor under the provisions of the PMLA and petitioner was directed by the Directorate of Enforcement (In short “ED”) not to dispose of the assets of the said company, as the matter was pending under PMLA, 2002 which allegedly had overriding effect over IBC and other laws governing such transactions.

However, the petitioner contended that summons by ED was untenable as there was no proceeding presently pending against the Corporate Debtor or any of its promoters. There is not even a provisional attachment order (In short, “PAO‘) at this stage and the hon’ble Supreme Court in Opto Circuit India Ltd. v. Axis Bank & Ors., 2021 SCC OnLine SC 55 has held:

“16 This Court has time and again emphasized that if a statute provides for a thing to be done in a particular manner, then it has to be done in that manner alone and in no other manner. Among others, in a matter relating to the presentation of an Election Petition, as per the procedure prescribed under the Patna High Court Rules, this Court had an occasion to consider the Rules to find out as to what would be a valid presentation of an Election Petition in the case of Chandra Kishor Jha v. Mahavir Prasad (1999) 8 SCC 266 and in the course of consideration observed as hereunder:

“It is a well settled salutary principle that if a statute provides for a thing to be done in a particular manner, then it has to be done in that manner and in no other manner. Therefore, if the salutary principle is kept in perspective, in the instant case, though the Authorised Officer is vested with sufficient power; such power is circumscribed by a procedure laid down under the statute. As such the power is to be exercised in that manner alone, failing which it would fall foul of the requirement of complying due process under law. We have found fault with the Authorised Officer and declared the action bad only in so far as not following the legal requirement before and after freezing the account. This shall not be construed as an opinion expressed on the merit of the allegation or any other aspect relating to the matter and the action initiated against the appellant and its Directors which is a matter to be taken note in appropriate proceedings if at all any issue is raised by the aggrieved party.”

 

In the backdrop of the fact that although investigation was continuing under the PMLA, no provisional order of attachment had been issued against the corporate debtor. Thus, communications addressed by the respondent to the Liquidator was kept in abeyance. It had further provided that the proceeds received from any sale of movable or immovable assets of the corporate debtor which may be disposed of by the Liquidator shall be placed in a separate bank account and an affidavit be filed before the high court with respect to the amounts that may be received. The Court further provided that the question of whether the movable or immovable assets and their sale during the liquidation process would be permissible under Section 32A of the IBC, would be taken up for consideration later.

THE CIRP

The corporate debtor was admitted to the Corporate Insolvency Resolution Process and the petitioner was appointed as a Resolution Professional by the Committee of Creditors. Expressions of Interest were invited and since no viable expression of interest was received, the Committee of Creditors passed a resolution recommending the liquidation of the corporate debtor. That resolution was backed by 93.43% of the creditors opining that the corporate debtor was liable to be liquidated in accordance with the provisions made in that regard under the IBC. While the CIRP remained open and was conducted over the maximum statutorily permissible period of 330 days, no viable proposal for the resolution of the debts of the corporate debtors or its resurrection were received. It was in the aforesaid backdrop that the application made by the petitioner here for liquidation of the corporate debtor pursuant to the resolution of the Committee of Creditors came be allowed by the Adjudicating Authority in terms of its order of 11 September 2020. No doubt, it is the date of this order passed by the Adjudicating Authority which is liable to be viewed as the ―liquidation commencement date‖ as defined in Section 5 (17) of the IBC. The petitioner was appointed as the Liquidator, and the first sale notice was issued on 27 November 2020. However, this did not culminate. On 15 January 2021, the Liquidator had received the first summons from the respondent and was followed by an e-mail of 25 January 2021 which was impugned in the writ petition. A second summons came to be issued by the Enforcement Directorate on 27 January 2021. The writ petition came to be filed around 5 March 2021. The interim order came to be passed on the petition on 17 March 2021. The petitioner moved CM Application No. 32220/2021 before the High Court disclosing that the assets and properties of the corporate debtor were placed for disposal by way of an e-auction initiated in accordance with the provisions of the IBC and after due sanction of the Adjudicating Authority. The Liquidator apprised the Court that, amongst the various options of sale prescribed, the sale of the corporate debtor as a going concern was the recourse adopted. It was further disclosed that the first sale notice came to be issued on 27 November 2020. However, since no concrete offers were received, a revised sale Notice of 19 March 2021 came to be published and the same has also been placed on the record. In the sale which was ultimately conducted on 09 April 2021, a bid of Rs.425.50 Crores was received from M/s Lucky Holdings Private Limited which proposed to take over the assets of the corporate debtor and continue its functioning as a going concern. Upon finding that the said bid was the highest, a Letter of Intent came to be issued in favour of M/s Lucky Holdings Private Limited on 19 April 2021. The aforesaid successful bidder is stated to have deposited Rs.5 Crores immediately upon acceptance of bid and subsequently on 23 April 2021, deposited a further sum of Rs.30 Crores. The petitioner further apprises the Court that the balance amount of Rs.390.5 crores plus any other additional net current operational liabilities would have to be deposited by the successful bidder in accordance with the provisions made in the IBC as well as the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. The sale as conducted by the Liquidator was approved by the Adjudicating Authority in terms of its order of 08 September 2021. The Adjudicating Authority while passing the aforesaid order and while approving the sale as conducted by the petitioner here also took note of the order of the High Court of 17 March 2021 and consequently provided that the distribution of assets would abide by the terms of that order and the provisions of Section 53 of the IBC. The CM afore noted seeks the disbursal of amounts representing workmen‘s dues and proceeded on the premise that since no provisional order of attachment has been issued, the provisions of Section 32A of the IBC would clearly apply and consequently no fetter operates upon the power of the Liquidator to proceed further and to distribute the sale proceeds as received in accordance with the provisions made in the IBC. The tentative list of distribution of the sale proceeds amongst the various secured and operational creditors as well as the workers of the corporate debtor in accordance with the priorities specified in Section 53 of the IBC was also set forth. It has accordingly been prayed that the Liquidator be permitted to distribute the proceeds as received out of the liquidation sale and  Liquidation Regulations, 2016 and presently placed in escrow in terms of the order of this Court of 17 March 2021. The order approving the sale was subsequently modified by the Adjudicating Authority by an order of 5 October 2021 in certain respects and the same has been brought on the record by way of application bearing no. CM 41811/2021.

It becomes relevant to note that when the matter was taken up for consideration on 24 November 2021, till that date no order of provisional attachment had admittedly been issued. However, on 03 December 2021, the Delhi High Court was apprised by ED that an order of provisional attachment has come to be issued on 2^nd  December 2021. It was further pointed out that the assets of the corporate debtor to the extent to Rs. 274.60 crores alone have been provisionally attached under the PMLA, since, upon investigation it was found that the same would represent proceeds of crime.

As noted above, the sale conducted by the petitioner and in which M/s Lucky Holdings Private Limited was identified as the successful auction bidder, was ultimately approved by the Adjudicating Authority on 08 September 2021. The Adjudicating Authority confirmed the sale The Successful Bidder shall complete the sale process by paying balance consideration amount within 30 days from the date of this order and upon payment of entire sale amount all the rights and title and interest in whole and every part of the Corporate Debtor including but not limited to intellectual property rights continue to vest in the Corporate Debtor. It was directed by the Adjudicating Authority that the Liquidator shall disburse the amount so received to all stakeholders/beneficiaries in terms of provisions of Section 53 of IBC, 2016 after necessary approval by the Hon‘ble Delhi High Court.

PROCEEDINGS IN HIGH COURT

It in this backdrop that the Liquidator moved the high Court seeking permission for disbursal of part of the sale proceeds, which had been received. The petitioner assails the action taken by the respondent in purported exercise of powers conferred by the PMLA principally on the anvil of Section 32A. It was contended that the validity of Section 32A has undisputedly been upheld by the Supreme Court in the matter of Manish Kumar v. Union of India (2021) 5 SCC 1. The jurisdiction and authority of the respondent under the PMLA is legislatively mandated to cease once a resolution plan is approved by the Adjudicating Authority or the sale of liquidation assets commences. It is further contended that Section 32A clearly mandates that no action shall be taken against the properties of the corporate debtor, once a resolution plan comes to be approved or the corporate debtor undergoes liquidation. The Report of the Insolvency and Law Committee in paragraphs 17.10 and 17.11 stipulates:

 

17.10. Thus, the Committee agreed that the property of a corporate debtor, when taken over by a successful resolution applicant, or when sold to a bona fide bidder in liquidation under the Code, should be protected from such enforcement action, and the new Section discussed in paragraph 17.7 should provide for the same. Here too, the Committee  agreed that the protection given to the corporate debtor‘s assets should in no way prevent the relevant investigating authorities from taking action against the property of persons in the erstwhile management of the corporate debtor that may have been involved in the commission of such criminal offence.

17.11. By way of abundant caution, the Committee also recognized and agreed that in all such cases where the resolution plan is approved, or where the assets of the corporate debtor are sold under liquidation, such approved resolution plan or liquidation sale of the assets of the corporate debtor‘s assets would have to result in a change in control of the corporate debtor to a person who was not a related party of the corporate debtor at the time of commission of the offence along with the corporate debtor.‖

 

The underlying objective of Section 32A which has essentially been placed on the statute book to ensure that a bona fide bidder in liquidation is protected from enforcement action. It has also been contended that the specter of attachment or a recognition of the right of the respondent to proceed against the assets of the corporate debtor either after a resolution plan has been approved or where liquidation has commenced, would clearly impact the value of the property as well as the interest that may be evinced by prospective applicants. Reliance was placed upon the judgment rendered by NCLAT in JSW Steel v. Mahender Kumar Khandelwal, 2020 SCC Online NCLAT 104, the following extracts of that decision, which are reproduced hereunder:-

“44. A plain reading of Section 32A(1) and (2) clearly suggests that the Directorate of Enforcement/ other investigating agencies do not have the powers to attach assets of a Corporate Debtor‘, once the 8 Resolution Plan‘ stands approved and the criminal investigations against the Corporate Debtor stands abated. Section 32A of the ‗I&B Code‘ does not in any manner suggest that the benefit provided thereunder is only for such resolution plans which are yet to be approved.

 In Deputy Director, Directorate of Enforcement Delhi vs Axis Bank 2019 SCC OnLine Del 7854 it is observed:ABOUT US

“112. Chronologically speaking, RDBA (in its original form and RDDBFI Act) was  enacted in 1993, followed by SARFAESI Act coming on the statute book in 2002, the PMLA being enacted in 2002, commencing in 2005, the Insolvency Code being the latest legislation enforced in 2016. These laws, enacted for different objects and reasons, have come with provisions declaring each of them to have the ―overriding effect‖”.

·        The hon’ble High Court in Nitin Jain (Supra) has noted in para 63 that:

• “The PMLA essentially represents the commitment of the Union to frame a comprehensive legislation to deal with the pernicious crime of money laundering as flowing from the Political Declaration and Global Programme of Action as adopted by the General Assembly of the United Nations on 23 February 1990, the Political Declaration adopted in the Special Session of the U.N. between 8 to 10 June 1998, the Financial Action Task Force held in Paris from 14 to 16 July 1989. Taking cognizance of the scourge of money laundering faced by governments across the globe and the legitimization of moneys derived from criminal activities as well as the imperative need to deprive the perpetrators of such action of the fruits derived from such activities, lead to the Government introducing the Prevention of Money- laundering Bill, 1998 in Parliament. The PMLA ultimately came to be enforced with effect from 1 July 2005”.

64. As is manifest from a reading of the long title of the PMLA, it has essentially been promulgated to prevent money laundering and to provide for confiscation of property derived from or involved in the crime of money laundering. The expression ―proceeds of crime has been defined in Section 2(u) of the PMLA to mean any property derived or obtained whether directly or indirectly by a person as a result of criminal activity relating to a scheduled offence or the value of any such property and where such property is taken or held outside the country, then property equivalent in value thereto.

The high court has categorically held that A Resolution Professional appointed under the Insolvency Code does not have any personal stake. He only represents the interest of creditors, their committee having appointed and tasked him with certain responsibility under the said law. The moratorium enforced in terms of Section 14 of Insolvency Code cannot come in the way of the statutory authority conferred by PMLA on the enforcement officers for depriving a person (may be also a debtor) of the proceeds of crime. A view to the contrary, if taken, would defeat the objective of PMLA by opening an escape route. After all, a person indulging in money-laundering cannot be permitted to avail of the proceeds of crime to get a discharge for his civil liability towards his creditors for the simple reason such assets are not lawfully his to claim.

Though the sequitur to the above conclusion is that the bona fide third party claimant has a legitimate right to proceed ahead with enforcement of its claim in accordance with law, notwithstanding the order of attachment under PMLA, the latter action is not rendered irrelevant or unenforceable. To put it clearly, in such situations as above (third party interest being prior to criminal activity) the order of attachment under PMLA would remain valid and operative, even though the charge or encumbrance of such third party subsists but the State action would be restricted to such part of the value of the property as exceeds the claim of the third party.

IBC VIS A VIS PMLA

The IBC is primarily concerned with the subject of restructuring of indebted corporate debtors, adoption of means for their revival, securing the interests of creditors and for adoption of steps for effective and timely resolution of corporate insolvency, whereas the PMLA, on the other hand, is a statute fundamentally concerned with trying offenses relating to money laundering, following the proceeds of crime and for confiscation of properties obtained in the course of commission of those offenses or connected therewith. It sets up an investigative and adjudicatory mechanism in respect of offenses committed, attachment of tainted properties and other related matters. It sets up Special Courts for trial of offenses and to bring the guilty to book. Viewed in that backdrop, it is evident that the two statutes essentially operate over distinct subjects and subserve separate legislative aims and policies. While the authorities under the IBC are concerned with timely resolution of debts of a corporate debtor, those under the PMLA are concerned with the criminality attached to the offense of money laundering and to move towards confiscation of properties that may be acquired by commission of offenses specified therein. The authorities under the aforementioned two statutes consequently must be accorded adequate and sufficient leeway to discharge their obligations and duties within the demarcated spheres of the two statutes. In a case where in exercise of their respective powers a conflict does arise, it is for the Courts to discern the legislative scheme and to undertake an exercise of reconciliation enabling the authorities to discharge their obligations to the extent that the same does not impinge or encroach upon other sphere.

 

REMARK

 

What emerges therefore from the discussion above that  the ED while conducting investigation under PMLA is free to deal with or attach the personal assets of the erstwhile promoters and other accused persons, acquired through crime proceeds. However, the assets of the Corporate Debtor which have been financed by Creditors and acquired by a bona fide third party Resolution Applicant through the statutory process supervised and approved by the Adjudicating Authority under the IBC shall have no further fetter. The Resolution Applicant, therefore, shall not be in wrongful enjoyment of any proceeds of crime after 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 CIRP 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.

What is of further significance that The Insolvency and Bankruptcy Code, 2016 (IBC) was promulgated on concepts such as promoting maximization of value of assets, transparent and predictable insolvency resolution framework, avoiding destruction of value of the debtor, and recognizing the difference between malfeasance and business failure. Even though the IBC has been globally recognized as a paradigm shift in India‘s insolvency resolution process, many areas have required judicial and legislative interventions to enable the process to achieve the desired results. While acknowledging the role played by IBC in arresting the growth of NPAs, it is expected that effective measures within the ambit of IBC would be taken to realize better results from the process. The average time taken for resolution has come down to 394 days which could be further reduced.

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Anil K Khaware

Founder & Senior Associate

Societylawandjustice.com