ARTICLE
11 April 2024

NCLT's Jurisdiction In Interplay Between S 32A Of IBC With PMLA

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Naik Naik & Company

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In a recent case, Shiv Charan & Ors. v. Adjudicating Authority under the Prevention of Money Laundering Act, 2002, Department of Revenue & Anr...
India Government, Public Sector
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In a recent case, Shiv Charan & Ors. v. Adjudicating Authority under the Prevention of Money Laundering Act, 2002, Department of Revenue & Anr, the Bombay High Court has held that the National Company Law Tribunal has powers to direct the Directorate of Enforcement to release the properties attached by them under the Prevention of Money Laundering Act, 2002. When the property of a company admitted into Corporate Resolution Insolvency Process is additionally attached by the ED under PMLA, the question of priority and interplay of the provisions between the Insolvency and Bankruptcy Code & PMLA is raised.

PMLA and IBC are both special legislations enacted by the Parliament to address very different objectives. While IBC has been enacted for the speedy and effective restoration of a company, PMLA has been enacted to prevent money laundering along with confiscation of property derived from or involved in money laundering.

Section 32-A of IBC provides for ceasing of all cases prior to commencement of the company's CIRP and terminate all prosecution of such company if the resolution plan is approved by NCLT. In the case of Shiv Charan  (supra), the Bombay High Court was confronted with the question on the implications of Section 32-A of IBC upon the properties attached by the ED under Section 5 of the PMLA. The present article seeks to analyse the reasoning and decision of the Bombay High Court.

I. Factual Matrix

In the instant case, various First Information Reports were filed alleging offences of cheating and criminal breach of trust against DSK Southern Projects Private Limited (Corporate Debtor). Basis the said FIR's, the ED registered an Enforcement Case Information Report (‘ECIR'), with estimated “proceeds of crime” around INR 8,522.27 crores. Thereafter, an Original Complaint was filed by the ED attaching the assets of the Corporate Debtor. The Original Complaint was thereafter confirmed by the Ld. Adjudicating Authority (constituted under the PMLA) on 14 February 2019. Subsequently, the Corporate Debtor was admitted into CIRP on 9 December 2021. Thereafter, the NCLT approved the Resolution Plan propounded by the Resolution Applicants vide order dated February 17, 2023.

II. Bombay HC's Decision

The Bombay High Court while deliberating on the import of Section 32-A of IBC held that Section 32-A of IBC was a material legislative intervention enacted to provide a shield from prosecution and continued attachment of a qualifying Corporate Debtor from antecedent proceedings under any other law in force. While ruling, the Bombay High Court recognised that the enactment of Section 32-A of IBC as a ‘non-obstante provision' was a specific and conscious legislative intent to give preference to IBC in respect for the Corporate Debtor(s) who qualified for the protection enshrined.

The Bombay High Court reiterated that the immunity enshrined can only be invoked upon fulfilment of the following conditions:

  1. The approved resolution plan results in complete change of character of ownership and control of the Corporate Debtor; and
  2. The third parties who are not promoters or in control of management of the Corporate Debtor, takes over the management and control of the Corporate Debtor under the resolution plan and are not persons whom the Investigating Authority has reason to believe (based on materials) abetted or conspired for the commission of the offence in question.

The High Court while reading and analysing the purport of Section 32-A of IBC held that if both the above conditions are fulfilled, i.e. upon a complete dissociation of the individuals involved in the management and control at the time of commission of the alleged offence, then the Corporate Debtor is automatically discharged from prosecution under the offence. It was also held that the discharge from prosecution entails and includes that the property(ies) owned by the Corporate Debtor shall also attract immunity from further prosecution in all proceedings.

A pertinent distinction was drawn between the moratorium imposed under Section 14 of IBC and the immunity enshrined under Section 32-A of IBC. While relying upon the judgement of the Supreme Court in P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd, it was clarified that the decision of the Supreme Court makes it clear that the moratorium under Section 14 of IBC only casts a shadow on enforcement against the Corporate Debtor, whereas Section 32-A of IBC, which comes into operation only after the moratorium under Section 14 of IBC comes to an end, brings complete cessation of the prosecution against the Corporate Debtor.

In doing so, the Bombay High Court has emphasized the ratio laid down in Manish Kumar v. Union of India, wherein the Supreme Court upheld the constitutional validity of Section 32-A of IBC and held that Corporate Debtors who have completed resolution under Section 31 read with Section 32-A of IBC must be allowed to begin with a clean slate.

In the present decision the Bombay High Court has also scrutinised the role of the Adjudicating Authority (constituted under the PMLA) and held that the Adjudicating Authority is a quasi-judicial authority, and the process of adjudication is inherently a quasi-judicial activity. The Court also elaborated that judicial role of the Adjudicating Authority is different from the role of a prosecuting executive and in this regard the Adjudicating Authority has been conferred with the same powers as are vested in a Civil Court.

III. Impact Of Bombay HC's Decision

This decision of the Bombay High Court is a crucial and significant development in the jurisprudence of liaison between IBC & PMLA. With this ruling, third party resolution applicants are protected and encouraged to engage in the CIRP Process without worrying about the prosecution of the Corporate Debtor and continued attachment of the Corporate Debtor's properties.

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.

ARTICLE
11 April 2024

NCLT's Jurisdiction In Interplay Between S 32A Of IBC With PMLA

India Government, Public Sector

Contributor

Established in 2004, Naik Naik & Co. started out as a niche media practice which has metamorphosed into a full-service law firm. Headquartered in Mumbai with a pan-India presence, we advise and perform across all aspects of corporate, disputes, banking and finance, and intellectual property law. Our sectoral focus is our differentiator and we can boast of strong industry sector expertise for over two decades. Our practice is anchored in quality service, professionalism, and integrity.
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