India: Clash Of The Titans: NCLAT Rules On The Interplay Between PMLA And IBC

Introduction

On 9 April 2021, the National Company Law Appellate Tribunal, Delhi (NCLAT) passed a landmark judgment in The Directorate of Enforcement v. Sh. Manoj Kumar Agarwal and Ors. ¹ (Manoj Kumar Agarwal) on the interplay between the provisions of The Prevention of Money Laundering Act, 2002 (PMLA) and The Insolvency and Bankruptcy Code, 2016 (IBC). The issue before the NCLAT was whether an attachment of property made under the PMLA would be impacted by the imposition of moratorium following the initiation of the corporate insolvency resolution process (CIRP) under the IBC. The NCLAT held that there is no conflict between the PMLA and the IBC and a property attached under the PMLA which belongs to the corporate debtor should become available to fulfil the objects of the IBC following the commencement of the CIRP.

The attachment and confiscation of property involved in money laundering is central to the objective of the PMLA, i.e., to recover the property from the wrong doers and compensate the affected parties from the sale of such assets. Similarly, the taking over of the properties of the corporate debtor by the interim resolution professional (IRP)/resolution professional (RP) following the commencement of the CIRP is essential to achieve the resolution/liquidation under the IBC. The NCLAT's pragmatic approach in Manoj Kumar Agarwal will ensure that the properties of the corporate debtor are available for the purposes of CIRP for targeting the successful resolution of the corporate debtor. This is not only in the interests of the economy but will also repose confidence in the prospective resolution applicants as the attachments made under the PMLA will not remain in force once the CIRP commences. The Manoj Kumar Agarwal decision is discussed below.

Brief facts

The NCLAT in Manoj Kumar Agarwal was considering the correctness of two orders dated 12 February 2019 (Orders) passed by the National Company Law Tribunal, Mumbai (NCLT, Mumbai). By these orders, the NCLT, Mumbai had directed the Directorate of Enforcement (ED) to release its attachment on the assets of two group companies² and hand them over to the RPs of these companies. Some dates which are relevant to appreciate the dictum in Manoj Kumar Agarwal are mentioned below:

NCLAT's decision

The NCLAT while upholding the orders passed by the NCLT, Mumbai laid down the following principles of law:

1. Adjudicating Authority's power under S. 60(5) IBC: The NCLAT rejected ED's contention that NCLT, Mumbai did not have the jurisdiction to interfere with the PAOs and the RP should have approached the Adjudicating Authority under the PMLA for seeking release of the attachment of properties. It was held that issues such as taking over and management of corporate debtor's property fall within the purview of IBC. Any hindrance created by the attachment or taking over of the possession of property would be a question of priority arising out of or in relation to the CIRP or liquidation proceedings which can be decided under S. 60(5)(c) of IBC.
2. Impact of moratorium on attachment proceedings under the PMLA: After the provisional attachment of property under S. 5 PMLA, when the matter goes before the Adjudicating Authority under the PMLA for confirmation of the said attachment, such proceedings would be civil in nature³. If CIRP has commenced, the institution and continuation of such proceedings before the Adjudicating Authority under the PMLA would be barred by S. 14 IBC. The provisional attachment cannot be confirmed and will be treated as non-est in law.⁴
3. Overriding effect of IBC: While recognizing that both IBC and PMLA are special statutes, the NCLAT held that the IBC (enacted later in time) will override the PMLA by virtue of S. 238 IBC⁵. S. 238 IBC provides that the provisions of IBC have effect notwithstanding anything contained in any other law. Hence, the authorities under the PMLA cannot resist the handing over of the attached properties of the corporate debtor to the IRP/RP/Liquidator as that would obstruct the corporate debtor from being kept as a going concern till the resolution takes place or liquidation proceedings are completed.⁶ The NCLAT clarified that the attachment made under the PMLA will remain in force in the following two scenarios: (i) when the application admitted under S. 7 IBC is withdrawn under S. 12A IBC, and (ii) the order of admission into CIRP is set aside in appeal.
4. Availability of corporate debtor's properties during CIRP and S. 32A IBC: The NCLAT took note of the various steps which are required to be taken during the CIRP for maximizing the value of the properties to achieve the successful resolution of the corporate debtor.⁷ The NCLAT also took note of S. 32A IBC (enacted after the Orders were passed) which provides immunity against prosecution of the corporate debtor, action against its property and the successful resolution applicant in relation to an offence committed prior to the commencement of the CIRP, subject to the fulfilment of certain conditions. The NCLAT impliedly accepted the contention of the ED that S. 32A IBC is not helpful in the present case as the matter had not reached the stage of acceptance of resolution plan or the stage of liquidation.

Comment

The Manoj Kumar Agarwal decision marks a watershed development in the IBC-PMLA jurisprudence in India. It will ensure that the properties of the corporate debtor are available for achieving the salutary objectives under the IBC i.e., to provide time bound insolvency resolution, maximization of value of assets, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. The decision is timely and puts to rest a contentious issue where assets of a corporate debtor may also be considered as 'proceeds of crime' under PLMA and subject to attachment. The decision rightly gives primacy to the IBC whose objective is to provide a quicker and time bound resolution for the debt-ridden companies. Under the PMLA, the properties attached by the ED are required to be confirmed by an order of the Adjudicating Authority and a determination is required to be made during a trial as to whether an offence of money laundering has been committed and if so, whether the assets are proceeds of crime.

The Manoj Kumar Agarwal decision should not be viewed as providing amnesty to the properties being the proceeds of crime or from appropriate action under the PMLA only because of the commencement of CIRP and initiation of moratorium under the IBC. The NCLTs in India have come across instances where the corporate debtors collude with the creditors to get themselves admitted under the CIRP regime in order to avoid actions from the investigation agencies. Such instances will have to be adjudicated on a case-to-case basis. The authorities under the PMLA and the IRP/RP will be at liberty to approach the Adjudicating Authorities/Appellate Tribunals under the PMLA and the IBC for issues arising in respect of the attachment of properties. We hope that the decision in Manoj Kumar Agarwal will be used to remove bottlenecks in the insolvency resolution process and not to prejudice money laundering investigations. There will be a need for some jurisprudence or a final word from the Supreme Court to strike the right balance between the attainment of objects under the IBC to resolve bad debts and the State's ability to recover the proceeds of crime under the PMLA without affecting the rights of bona fide stakeholders in a CIRP.

Footnotes

1. The judgment was passed in two connected appeals in The Directorate of Enforcement v. Sh. Manoj Kumar Agarwal and Ors. (Company Appeal (AT) Insolvency No. 575/2019) and The Directorate of Enforcement v. Sh. Vishal Ghisulal Jain & Ors. (Company Appeal No. 576/2019).

2. Sterling SEZ & Infrastructure Ltd. and Sterling International Enterprises Ltd.

3. A provisional attachment order under S. 5 of the PMLA cannot remain in effect for more than 180 days (subject to the exclusion of periods mentioned therein). This order is required to be confirmed by the Adjudicatory Authority under S. 8(3) of PMLA which continues for a period not exceeding 365 days or during the pendency of proceedings relating to any offence under the PMLA before a court or under a corresponding law before a competent court outside India.

4. The NCLAT placed reliance on the representation made by the Government of India before the Supreme Court in Pareena Swarup v. UOI (2008) 14 SCC 107 that the Adjudicating Authority under the PMLA while considering the issue of confirmation of provisional attachments under the PMLA performs a civil function. The NCLT, Mumbai in the Orders had placed reliance on two judgments passed by the Appellate Tribunal under the PMLA (Bank of India v. Deputy Director, Enforcement Directorate 2019 SCC Online ATPMLA 23 and Punjab National Bank v. Deputy Director, Directorate of Enforcement, Raipur 2019 SCC Online ATPMLA 5) which held that the proceedings before the Adjudicating Authority under the PMLA are civil in nature and in view of S. 14 IBC, such proceedings cannot continue.

5. The NCLAT's view is at variance with the Delhi High Court judgment in The Deputy Directorate of Enforcement Delhi & Ors. v. Axis Bank & Ors. 259 (2019) DLT 500 which inter alia held that IBC cannot prevail over the PMLA. A Special Leave Petition (SLP (Crl.) No. 7927/2019) against the said judgment is pending before the Supreme Court.

6. Similar to S. 238 IBC, S. 71 of the PMLA provides that its provisions shall have an overriding effect notwithstanding anything contained in any other law. In the Orders, the NCLT, Mumbai gave the following reasons to support the overriding effect of the IBC over the PMLA: (i) IBC being later in time; (ii) considering the economic interest of the beneficiaries, the IBC will provide a quicker solution to the corporate debtors as well as the creditors as it provides timelines within which the resolution is to be achieved, and (iii) the criminal proceedings under the PMLA will take a longer time and by that time there will be erosion in the value of the assets of the corporate debtor.

7. Some of the provisions taken into consideration by the NCLAT are: S. 14(1)(b) IBC requires the Adjudicating Authority to declare moratorium prohibiting the transfer, encumbering, alienation or disposal of corporate debtor's property; S. 18(1)(f) requires the IRP to take control and custody of any assets over which the corporate debtor has ownership rights as recorded in its balance sheet or as recorded with the information utility etc.; S. 20 IBC requires the IRP to endeavour to protect and preserve the value of the properties of the corporate debtor; Regulation 27 of the CIRP Regulations requires the RP to appoint two registered valuers to determine the fair value and registered value of the corporate debtor in accordance with regulation 35.

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