Property under Proceeds of Crime: Conflicting Actions in PMLA and IBC
INTRODUCTION
The legislative intent of the Parliament while enacting The Insolvency and Bankruptcy Code, 2016 ("IBC") in all its wisdom was clear, i.e. to make the business environment in the country, creditor friendly, wherein the value of the assets of a debtor gets maximised and remains free from the factors of its failure while going into insolvency.
The said intention was strengthened vide Section 32A of the IBC, which was introduced by the Insolvency and Bankruptcy Code (Amendment) Act, 2020 ("2020 Amendment Act").
Even the Standing Committee on Finance ("Standing Committee") on the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 ("2019 IBC Amendment Bill") noted the following while discussing the proposed amendments contained therein:
"2.5. The Committee note that the Insolvency and Bankruptcy Code, 2016 was promulgated on concepts such as promoting maximisation of value of assets, transparent and predictable insolvency resolution framework, avoiding destruction of value of the debtor, and recognising the difference between malfeasance and business failure."
To realize this intent of the IBC, it is imperative to get rid of any / all factor(s) (during the process of insolvency) which may affect the value of the assets of the corporate debtor and create any apprehensions in the mind of prospective bidder/buyer of the assets of the corporate debtor during the liquidation process.
Although, the same stood clarified by Section 32A which was introduced to keep the aforesaid intention of legislature intact. Recently, the Hon'ble Supreme Court ("SC") has expressed concern over the same in the case of Committee of Creditors through Punjab National Bank and Anr.v. Ravi Prakash Goyal and Ors. While, the proceedings are pending, the said issue can be analysed through the ruling of the High Court of Delhi ("DHC") in the case of Nitin Jain Liquidator PSL Limited v. Enforcement Directorate ("Nitin Jain Case") and of the National Company Law Appellate Tribunal ("NCLAT") in the case of Directorate of Enforcement v. Manoj Kumar Agarwal ("MK Agarwal Case").
The present piece delves into the enquiry of the aforesaid issue in light of Section 32A of the IBC and the judgments in the Nitin Jain case and MK Agarwal case.
II. Safeguard to the bonafide bidder/buyer under the IBC
Sub clause (2) of Section 32A of the IBC provides for a statutory safeguard to the property of the corporate debtor from any such action that may arise as a result of any offense committed by the corporate debtor prior to the commencement of the corporate insolvency resolution process ("CIRP"). The provision can also be interpreted to mean that the tainted property of corporate debtor, even if, constitutes 'proceeds of crime' under Section 2(u) of the Prevention of Money Laundering Act, 2002 ("PMLA") and thereby, an offence of money laundering under Section 3 of the PMLA by way of possession or acquisition of proceeds of the crime, would therefore be insulated from the effects of the said offence only if such tainted property has been transferred by way of liquidation of assets and bought as proceeds of crime by the corporate debtor before the commencement of CIRP.
The provision in its simple and ordinary meaning is fairly straightforward and does not create any exception for any offence, including offence of money laundering. However, question about the effect of the PMLA on the IBC, specifically with regards to liquidation process has been time and again raised by the PMLA Authorities.
III. Legislative intent of Section 32A of the IBC
Section 32A was introduced in the 2020 Amendment Act. The Standing Committee on 2019 IBC Amendment Bill noted the following about the section:
"3.9. The Secretary, Ministry of Corporate Affairs during the sitting held on 15th January, 2020 remarked : - 'If the bidder, who is coming and participating under the court-supervised competitive process, does not get security and is not indemnified, there may be a problem.'"
The SC in the case of Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company, while observing the overriding effect of the IBC in case of inconsistency between two laws (under Section 238), noted the following statements of Hon'ble Finance Minister in Rajya Sabha:
"There is also this question about indemnity for successful resolution applicant. The amendment now is clearly making it binding on the Government. It is one of the ways in which we are providing that. The Government will not raise any further claim. The Government will not make any further claim after resolution plan is approved. So, that is going to be a major, major sense of assurance for the people who are using the resolution plan. Criminal matters alone would be proceeded against individuals and not company. There will be no criminal proceedings against successful resolution applicant. There will be no criminal proceedings against successful resolution applicant for fraud by previous promoters. So, I hope that is absolutely clear. I would want all the Hon'ble Members to recognise this message and communicate further that this Code, therefore, gives that comfort to all new bidders. So now, they need not be scared that the taxman will come after them for the faults of the earlier promoters. No. Once the resolution plan is accepted, the earlier promoters will be dealt with as individuals for their criminality but not the new bidder who is trying to restore the company. So, that is very clear. ..."
Click here to continue reading. . .
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
