India: Insolvency And Bankruptcy Code Overrides Prevention Of Money Laundering Act

Last Updated: 4 March 2019
Article by AMLEGALS  

"No attachment can be ordered under the Prevention of Money Laundering Act, 2002 with respect to the assets of the Coprorate Debtor undergoing insolvency process."

IN THE NATIONAL COMPANY LAW TRIBUNAL, MUMBAI
STERLING SEZ INFRASTRUCTURE LTD. VS. DEPUTY DIRECTOR, DIRECTORATE OF ENFORCEMENT, PREVENTION OF MONEY LAUNDERING ACT
[MA 1280/2018 in C.P 405/2018] dated: 12.02.2019

FACTS

The Corporate Debtor herein is Sterling SEZ and Infrastructure Limited (hereinafter referred to as the Corporate Debtor) and is the subsidiary of a Public Limited Company based in Baroda, namely Sterling Biotech Limited (hereinafter referred to as SBL).

SREI Infrastructure Financial Limited (hereinafter referred to as Financial Creditor) had initiated Corporate Insolvency Resolution Proceedings (hereinafter referred to as CIRP) against Sterling SEZ and Infrastructure Limited in July 2018.

The Resolution Professional of Sterling SEZ and Infrastructure Limited is the Applicant herein.

The SBL group had obtained credit facilities of more than 5000 Crores from Banks and Financial Institutions and those loans turned into Non Performing Assets.

Further, the credit facilities availed by the SBL group to the extent of Rs.8100 Crores was declared as fraud account by the concerned Banks.

The promoters of the SBL Group left the country under suspicious circumstances. On 29.05.2018 proceedings were initiated against the Corporate Debtor by the office of the Enforcement Directorate.

As a part of the proceedings, the Enforcement Directorate had attached the assets belonging to the corporate debtor vide order dated 29.05.2018 under Section 2(1)(u) of the PMLA Act.

On 16.07.2018, a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 filed by SREI Infrastructure Financial Limited was admitted by the Tribunal against the Corporate Debtor wherein the Applicant was appointed as the Interim Resolution Professional and a moratorium was also imposed under Section 14 of the IBC. The Applicant was subsequently confirmed as the Resolution Professional.

On 05.09.2018, the Applicant herein intimated the Directorate of Enforcement about the initiation of CIRP against the Corporate Debtor and the imposition of moratorium.

The Applicant further requested the Enforcement Directorate to withdraw the attachment of the assets of the Corporate Debtor since he was required to take charge and custody of the same as the Resolution Professional.

Through the current application, the Applicant has approached the National Company Law Tribunal, Mumbai Bench for an order:

  • To direct the Enforcement Directorate to release the provisional attachment against properties of the Corporate Debtor, and
  • To direct the sub-registrar at Jambusar to register and hand over two original lease deeds dated 28.08.2018 between the Corporate Debtor and P.I. Industries Ltd.

Hence, the current application has been filed against:

  • An order of attachment dated 29.05.2018 passed by the Enforcement Directorate under provisions of the Prevention of Money Laundering Act, 2002 (hereinafter referred to as the PMLA Act), and
  • The Corrigendum dated 14.06.2018 issued by the Respondent as confirmed adjudicatory authority under PMLA Court.

ISSUE BEFORE THE TRIBUNAL

The issues for consideration before the Tribunal were:

  • Whether the provisions of the Insolvency and Bankruptcy Code, 2016 have an overriding effect over Prevention of Money Laundering Act, 2002.
  • Whether the properties and assets of the Corporate Debtor are liable to be attached under the provisions of Prevention of Money Laundering Act, 2002.

OBSERVATION

In order to examine the aforementioned issues, the NCLT examined the arguments raised by the Applicant, the Respondent and the Amicus Curiae. The contentions of all these parties have been briefly summarised herein below.

CONTENTIONS OF THE APPLICANT:

  1. As per Section 18 of IBC, the Resolution Professional has to take control of all the assets of the Corporate Debtor. This responsibility of management and running of the business of the Corporate debtor shall include retrieving possession of the assets attached by the Enforcement Directorate.
  2. As per Section 14 of IBC, a moratorium is imposed after admission of application under Section 7. During the Moratorium period, institution of suits or proceedings against the Corporate Debtor including execution of any judgment, decree or order of any court of law, tribunal or any other authority is prohibited. Hence, the order of the Enforcement Directorate cannot me executed.
  3. Section 238 of the IBC is a non-obstante clause which stipulates that the provisions of the Code shall have an over-riding effect over anything inconsistent therewith in any other law. Reliance was placed on the Hon'ble Apex Court's judgment in Solidaire India Ltd v. Fairgrowth Financial Services Pvt. Ltd., (2001) 3 SCC 71.
  4. The Tribunal established under the PMLA Act is a criminal court and it only has the jurisdiction to decide whether the properties attached during investigation from the possession of the Corporate Debtor could be said to be the properties acquired by them by using the proceeds of crime.
  5. Only the NCLT had the jurisdiction to decide on the distribution of properties and assets of the Corporate Debtor under liquidation and that the liquidator must get the possession of the properties attached by the Enforcement Directorate. Hence, all the properties should be available for legitimate distribution to various creditors for settlement.
  6. The CIRP cannot be proceeded with unless the attachment of the assets and properties of the Corporate Debtor is withdrawn.

CONTENTIONS OF THE RESPONDENT:

  1. The properties of the Corporate Debtor that have been attached constitute value of proceeds of crime as defined under Section 2(1)(u) of the PMLA Act. Hence, even if a direct link cannot be established between the crime proceeds and the property, the value thereof can be attached.
  2. The PMLA is a special legislation and the main objective of IBC and PMLA are different. IBC is a civil legislation and cannot be given precedence over the PMLA, Act. Thus the NCLT lacks jurisdiction in the matter.
  3. The moratorium declared by the NCLT shall not be applicable to the attachment order passed by the Enforcement Directorate or to the Criminal proceedings initiated against the Corporate Debtor.

CONTENTIONS OF THE AMICUS CURIE:

  1. The writ petition that was filed on behalf of the Corporate Debtor challenging the vires of the PMLA and the impugned attachment order was affirmed by the directors of the Corporate Debtor and does not indicate the authority of the Resolution Professional or the Committee of Creditors. Further, the petition does not disclose the fact that the NCLT had already admitted application for initiation of CIRP.
  2. The over-riding effect of IBC as stipulated under Section 238 of the IBC has been agreed with.
  3. In the absence of anything on record indicating that the assets of the Corporate Debtor had been attached under PMLA, the Resolution Professional must be given control of the assets as per Section 18 of the IBC.
  4. NCLT does not possess the jurisdiction to raise the issue of attachment under PMLA. In the present case, the provisions under Section 60(5) of IBC would be applicable, wherein the NCLAT has the jurisdiction to pass orders and decide issues relating to the Corporate Debtor. However, in the interim, the Resolution Professional could take possession of the attached property and assets under Section 18 of the IBC.
  5. It was also contended that Section 4 of the PMLA provides for the punishment for money laundering which can be imprisonment and fine. So, if the charges against the Corporate Debtor are proved then it being an artificial person would be awarded with the appropriate fine while the Directors would be liable for imprisonment along with fine.
  6. If it is established before the Special Court under the PMLA that the property is involved in money Laundering are the proceeds of crime then such is liable to be confiscated by the Central Government under section 8(5) and 9 of PMLA. The said aspect has to be borne in mind by the Resolution Professional and the required disclosures must be made accordingly.
  7. The decision by the Special Court under PMLA that the property in question is proceeds of crime will erode the title of Corporate Debtor and the Applicant would not be entitled to claim the right on the grounds of initiation of CIRP by NCLT or liquidation under IBC.
  8. The ultimate beneficiaries under both the enactments are the secured creditors or the financial creditors who have raised their claims before the Resolution Professional.

CONCLUDING VIEW

The Hon'ble Tribunal held that the attachment order of the Enforcement Directorate under the PMLA Act is null and void and hence will not be having any binding value.

The Hon'ble Tribunal reiterated that the Enforcement Directorate established under the PMLA Act had no jurisdiction in respect of the properties and assets in the current civil proceedings of the Corporate Debtor undergoing CIRP.

The Hon'ble Tribunal held that as per Section 14(1)(a) of the IBC, the moratorium on any kind of proceedings shall be imposed, particularly with regard to the attachment of the property.

Conclusively, the Hon'ble Tribunal ordered the Resolution Professional to proceed and take charge of the properties and control and deal with them under IBC as if no attachment order existed.

JUDGMENTS RELIED UPON

The following judgments were relied upon by the NCLT Mumbai bench to come to the aforementioned conclusion:

  • Jaipur Metals & Electricals Employees Organization v. Jaipur Metals & Electricals Ltd.
  • Bank of India v. Deputy Directorate Enforcement, Mumbai
  • Punjab National Bank v. Deputy Director, Directorate of Enforcement, Raipur

REASON OF JURISPRUDENCE

This Hon'ble Tribunal placed reliance upon several judgments to conclude that the main objective and purport of IBC is the resolution of the Corporate Debtor by maximizing the value that can be received by the Creditors and stakeholders.

The IBC provides for fixed time frames within which the resolution has to be arrived while under the PMLA Act the main objective is to recover the property from wrongdoers and compensate the affected parties by sale of the assets confiscated. It also provides for additional punishment to the wrongdoer.

The court observed that in the present scenario, the beneficiaries are the corporate creditors and the criminal proceedings under PMLA would take a longer time. This extended time-frame would erode the value of the attached property, hence compromising the interest of the Corporate Creditors herein.

Additionally, as per Section 238, the IBC would have an overriding effect over PMLA Act considering the economic interest of the beneficiaries being the Corporate Creditors herein. IBC being the later legislation would prevail over PMLA Act being the earlier legislation.

While considering the economic aspect of the present case, the Tribunal observed that IBC would provide a quicker resolution to the issue and the quantum of amount locked in the assets of the Corporate Debtor can be released at the earliest.

Finally, the Tribunal observed that the attachment order passed by the Enforcement Directorate under the PMLA Act is hit by moratorium under section 14 of IBC considering the overriding effect of IBC.

AMLEGALS REMARKS

The NCLT Mumbai's order in the instant case firmly establishes the applicability of the non-obstante clause contained in Section 238 of the Insolvency and Bankruptcy Code, 2016.

Further, it also clarifies that the applicability of any legislation should be determined based on the object and purport of the concerned legislation in accordance with the date on which the Act came into force.

This decision has categorically appraised the criterion that needs to be examined while determining the applicability of the Prevention of Money Laundering Act, 2002 and the Insolvency and Bankruptcy Code, 2016.

The preceding stand of the Judiciary is clearly reflected in the jurisprudence appropriated by this Hon'ble Tribunal for determination of the issues.

The decisions that have been relied upon by this Bench are a standing precedent in matters related to the overriding effect of one statute over the other.

The jurisprudence appropriated by this Bench showcases the shared intent of the legislators as well as the Bankruptcy Law Reform Committee that the IBC will override over the anything contained in any other law for the time being in force.

Progressively, this order has accommodated the constantly developing interpretation of the Insolvency and Bankruptcy Code and has provided an insight into the fundamental applicability of its provisions.

This content is purely an academic analysis under "Legal intelligence series".

© Copyright AMLEGALS.

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or any advertisement. This document is not intended to address the circumstances of any particular individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a particular situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.

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