India: Tussle Between IBC And PMLA: Attachment Of Corporate Debtor's Assets By Enforcement Directorate During Moratorium Under Section 14 Of IBC, 2016

Through the judgment dated 11th November 2022, the Hon'ble Delhi High Court ("Hon'ble HC") in the case of Rajiv Chakraborty v. Directorate of Enforcement¹ ("the Case/Present Case") observed that the Directorate of Enforcement ("ED") under the Prevention of Money Laundering Act, 2002 ("PMLA") is entrusted with the authority to attach a corporate debtor's assets perceived to be "proceeds of crime" given that the embargo within the ambit of Section 32A of the Insolvency and Bankruptcy Code, 2016 ("IBC") is not attracted. The aforesaid decision has brought into light the never-ending tussle oscillating between the two laws, IBC and PMLA, and the question of prevalence.

BACKGROUND

Both the legislation, PMLA and IBC are special legislations in their own spheres, which govern different aspects. However, if the corporate debtor and its erstwhile management is involved in scheduled offences as prescribed under PMLA and proceedings have been initiated in terms of PMLA, simultaneously to the corporate insolvency resolution process has been initiated in accordance of IBC, then both proceedings shall create friction.

According to the current factual matrix of the case, the Resolution Professional of Era Infra Engineering Limited, challenged the orders of attachment passed by the ED under PMLA before the Hon'ble HC.

The said challenge was based on the provisions of Section 14 of the IBC, which contended that once the moratorium had come into effect, the ED stood denuded of jurisdiction to exercise powers under the PMLA. The predicament that came up before the Hon'ble HC was whether the provisions of Moratorium enshrined under Section 14 of the IBC would qualify as an embargo on the attachment of tainted property of Corporate Debtor as enshrined under the provisions of Sections 5 and 8 of the PMLA.

ATTACHMENT OF PROPERTY DURING MORATORIUM: AN ANALYSIS OF HC JUDGMENT

Before delving deep into the murky waters, it is of utmost importance to adjudge the applicability of the moratorium under IBC to the attachment proceeding as provided for in PMLA. Thus, first and foremost, it becomes of paramount importance to analyze the statutory objective behind its formulation. Moratorium facilitates for a period, giving space for negotiations. It gives the creditors and the corporate debtors the opportunity to apply their minds sans additional stress during the closure of the Insolvency Resolution Process ("IRP"). Additionally, it gives them the chance to deliberate upon the viability of the revival of the corporate entity.

The declaration of moratorium whilst the IRP is in process prevents the company's assets from downfall, enabling the corporate entity to continue with its operations without the fear of judicial nemesis during the IRP. Thus, the moratorium seeks to reinforce its legislative wisdom that is, providing value maximization.

Accordingly, Section 14 (1)(a) of the IBC grants the National Company Law Tribunal ("NCLT") the power to declare moratorium on, inter alia, the institution of suits or continuation of pending suits or proceedings against the corporate debtor, including the execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority. Yet it is important to note that, a judicial grey area remains unsolved insofar as determining whether the moratorium declared under IBC would prevail over proceedings under PMLA, especially in the realm of attachment of properties and assets of the corporate debtor by the prescribed authority.

However, in the present case, the Hon'ble HC paved the way for ED and noted that the intent and objective of the moratorium provision incorporated in the IBC is that it principally subserves the purpose of preservation of the assets of the debtor, enables all stakeholders to explore the possibility of its revitalization and if ultimately those efforts fail, for its expeditious liquidation. Thus, the purpose of a moratorium is clearly distinct from the purpose and objectives of attachment action taken under the PMLA. PMLA is not concerned with the recovery or enforcement of a debt. Proceedings for attachment that may be initiated in terms thereof cannot, by any stretch of the imagination, be viewed as being akin to an action for enforcement or recovery of a debt.

Placing reliance on Nitin Jain Liquidator of PSL Limited v. Enforcement Directorate,² the Hon'ble HC noted that the moratorium would not prevent the authorities under the PMLA from exercising the powers conferred by Sections 5 and 8 of PMLA, notwithstanding the pendency of the CIRP.

The Hon'ble HC observed that while proceeding to attach the tainted property, the respondents were not in essence, effacing the property rights that may be claimed by an individual. It is a symbolic taking over of the custody of the property and for its preservation till such time as the proceedings that may be initiated under the PMLA come to a conclusion. Thus, attachment is not liable to be viewed as an effacement of all rights that may exist or be claimed to be exercisable in respect of a property.

The Hon'ble HC further stated that it is essentially an action aimed at bringing into the control of a court or an authority, the property over which multiple claims may exist. In any case, since the act of attachment does not result in the effacement of rights in property, it would clearly stand and survive outside the scope of a moratorium or an action, relating to an action in respect of a debt due or payable.

The Hon'ble HC opined that, however, both the orders under Sections 5 and 8 of PMLA remain orders of attachment. The passing of those orders neither result in confiscation of those properties nor do those properties come to vest in the Union Government upon such orders being made. Thus, attached property comes to vest in the Union Government only upon the passing of such an order as may be passed by the Special Court either under sub-Sections 5 or 7 of Section 8 or Section 58-B or Section 60(2)(a) of PMLA. This concludes that the provisional attachment of properties would, in any case, not violate the primary objectives of Section 14 of IBC.

Lastly, the Hon'ble HC also observed that attachment under the PMLA is not an attachment for debt but principally a measure to deprive an entity of property and assets which comprise of proceeds of crime.

Attachment under the PMLA does not result in an extinguishment or effacement of property rights. It is essentially a fetter placed upon the possessor of that property to deal with the same till such time as proceedings under the aforesaid enactment come to a definitive conclusion on the question of confiscation. Thus, since the act of attachment does not result in the effacement of rights in property, it would clearly stand and survive outside the scope of a moratorium or an action in respect of a debt due or payable.

AN ANALYSIS OF JUDICIAL PRECEDENTS

In the case of Varrasana Ispat Ltd v. Deputy Director of Enforcement,³ the focus was laid on the interplay between IBC and PMLA, and it was opined by the NCLAT that the PMLA concerns itself with proceeds of crime coupled with the offence of money laundering, henceforth, rendering Section 14 of the IBC as inapplicable to proceedings initiated under PMLA. Along the same lines, the NCLAT, in the case of Andhra Bank v. Sterling Biotech Ltd,⁴ observed that the ED is always empowered to seize the assets of the corporate debtor if they qualify as proceeds of crime under PMLA.

The decision given in Sterling Biotech was re-enforced in Rotomac Global v. Deputy Director of Enforcement.⁵ The only case where the supremacy of IBC was found in the Directorate of Enforcement v. Manoj Kumar Agarwal,⁶ wherein it was held that any attachment under PMLA impermissible after the moratorium under Section 14 came into effect.

However, in view of settling the said controversy, a larger bench of NCLAT in the case of Kiran Shah v. ED,⁷ held that Section 14 of the IBC does not come in the way of ED officials exercising their powers under PMLA paving a way for a decision diametrically opposite to the one held in the Manoj Kumar Agrawal case.

As far as Section 32A is concerned, the Hon'ble HC drew the Lakshman Rekha for the ED and observed that it has the effect of shutting out PMLA proceedings only in two trigger cases. (i) when the resolution plan is approved; and (ii) when a measure in aid of liquidation is adopted.

CONCLUSION

In the present case, the Hon'ble HC ruled that the Moratorium under Section 14 of IBC would not affect the attachment of tainted property of CD under Sections 5 and 8 of PMLA. Moratorium under Section 14 of IBC would not affect the attachment of property under Sections 5 & 8 of PMLA, notwithstanding the pendency of CIRP as such attachment is not an action for enforcement of debt. Attachment under the PMLA is not an attachment for debt but principally a measure to deprive an entity of property and assets which comprise proceeds of crime.

The Hon'ble HC further ruled that the principle that the "latter Act shall prevail" is not an inviolable rule applicable in case of conflict between two special statutes, both having non-obstante clauses.

Therefore, by virtue of this principle, one cannot mechanically conclude that moratorium under IBC would gain an overriding effect over attachment actions under Sections 5 and 8 of PMLA without having regard to Section 32A of IBC, which was enacted later in 2020 to clarify the extent to which the provisions of the PMLA are to give way to proceedings initiated under the IBC.

It is also necessary to understand that the position of the government under the PMLA is not similar to a secured creditor, thereby equating the position and blatantly stating that the IBC shall over-ride PMLA, after the insertion of Section 32A in IBC shall severely affect the legislative aim and policies of PMLA.

Both the legislation shall be construed in harmonious manner to not frustrate the intent and objects of the legislations. However, the protection prescribed under the newly inserted provision is with regard to the new management of the corporate debtor and the assets of the corporate debtor only to the extent of compliance of Section 32A of IBC. Thereby, it is quintessential to struck balance between the two different legislations, otherwise, persons involved in proceeds of crime shall abuse the law relating to insolvency and bankruptcy to escape from the liability resultantly affecting the revenue.

At this juncture, it becomes pertinent to note that the current judgment given by the Hon'ble HC does not put an end to the unending battle between the IBC and PMLA, thus giving the debate over the effect of insolvency proceedings on the powers of ED no closure.

In furtherance, very recently, the Hon'ble SC in the matter of Ashok Kumar Sarawagi v. ED case,⁸ issued a notice which sought to challenge the decision of the NCLAT in the Varrasana Ispat and Kiran Shah cases. Conclusively, it is yet to be deciphered as to how the apex court would bring the matter to rest and crystallize the abstruse legal position.

Footnotes

1. Rajiv Chakraborty Resolution Professional of Eiel v. Directorate of Enforcement, 2022/DHC/ 004739.

2. Nitin Jain Liquidator of PSL Limited v. Enforcement Directorate, 2021 SCC OnLine Del 5281.

3. Varrsana Ipsat Ltd. v. Deputy Director, Directorate of Enforcement, 2019 SCC OnLine NCLAT 236.

4. Andhra Bank v. Sterling Biotech Ltd. and Others, 2019 SCC OnLine NCLAT 1049.

5. Rootmac Global Private Limited v. Deputy Director, Directorate of Enforcement, 2019 SCC OnLine NCLAT 961.

6. Directorate of Enforcement v. Sh. Manoj Kumar Agarwal, Resolution Professional and Others, 2021 SCC OnLine NCLAT 121.

7. Kiran Shah v. Enforcement Directorate, Kolkata, 2022 SCC OnLine NCLAT 2.

8. Ashok Kumar Sarawagi v. Enforcement Directorate and Another, Special Leave Petition (Civil) Diary No(S). 30092/2022.

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