[By Naman Maheshwari]
The author is a student of Gujarat National Law University.
Introduction
The Insolvency & Bankruptcy Code, 2016 (IBC) was enacted with the prime objective to revive distressed corporate debtors through a time-bound Corporate Insolvency Resolution Process (CIRP). But since its enactment, IBC has been at loggerheads with the Prevention of Money Laundering Act, 2002 (PMLA), owing to an overlap in their area of application.
Legislative, judicial and other regulating authorities have faced difficulties in harmonizing the intent of the provisions of IBC and PMLA, since both the legislations contain a “non-obstante” clause. Section 71 of the PMLA provides an overriding effect to the provisions of the PMLA, while Section 238 of the IBC gives overriding effects to the provisions of the IBC, thereby restricting the operation of one legislation over the other.
Recently, the High Court of Delhi in Rajiv Chakraborty vs. The Directorate of Enforcement has added fuel to the fire of conflict between IBC and PMLA by holding that moratorium as given under Section 14 of the IBC would not prevent the authorities under PMLA from confiscating/attaching the properties by virtue of Sections 5 and 8 of the PMLA.
The author tries to provide a better understanding of the interplay of PMLA and IBC by analysing the judgement of the High Court of Delhi in Rajiv Chakraborty.
Facts of the Case
EIEL, the Corporate Debtor herein, was admitted to CIRP on 08.05.2018. Then came the Provisional Attachment Order (PAO) under Section 5 of the PMLA on 07.10.2019. The adjudicating authority confirmed the attachment by an order dated 17.03.2020. There was another PAO dated 08.07.2020, and the same was confirmed by the adjudicating authority on 01.01.2022.
A writ petition was filed before the High Court of Delhi against the NCLAT for setting aside the impugned PAOs. It was dismissed by the High Court.
Current Position of Law
In order to understand the current legal framework, and to provide analysis of the case, , the author divides the factual matrix into 3 different possible scenarios, where the Tribunals/Courts have taken different views.
Scenario I: PAO under Section 5 of PMLA is passed before the commencement of CIRP and before the commencement of the moratorium period under Section 14 of IBC
In the aforementioned scenario, tribunals and courts have held that proceedings of PMLA will supersede those of IBC, and therefore, a moratorium as prescribed under Section 14 will not be applicable.
The NCLAT, in the case of Varrsana Ispat Ltd. v. Deputy Director, Directorate of Enforcement has propounded that proceedings under PMLA relate to ‘proceeds of crime’. Therefore, PMLA would take precedence over IBC as a moratorium under Section 14 is not applicable to criminal proceedings. Further, the NCLAT held that attachment by ED is not in the capacity of a creditor of the corporate debtor, because ‘proceeds of crime’ would not amount to debt. An appeal was preferred before the Supreme Court of India and was consequentially dismissed.
The NLCAT reiterated the above decision in the case of Kiran Shah v. Enforcement Directorate and held that the adjudicating authority under IBC has no power to intervene in matters that fall under the purview of the authority under PMLA. With regard to the objectives of the legislation, NCLAT held that the objectives, text, and shape of the IBC and PMLA are distinct and different, and there is no inconsistency between both legislations. Therefore, both legislations can be invoked simultaneously without one necessarily having to precede over the other, and an appeal against any decision of the adjudicating authority of the PMLA lies before the Appellate Tribunal constituted under PMLA.
Scenario II: PAO under Section 5 of PMLA is passed after initiation of CIRP and after commencement of the Moratorium period under Section 14 of IBC
In the aforementioned scenario, tribunals and courts have held that IBC proceedings will supersede the proceedings under PMLA, and therefore, the moratorium provided under Section 14 would be applicable.
The PMLA Appellate Tribunal (PMLAT) in the case of Bank of India vs. The Deputy Director of Enforcement, Mumbai was of the considered opinion that proceedings under Section 8 of the PMLA are civil proceedings and in the case of secured charge created, much prior to the PAO, in respect of any property that is confiscated or attached by the authority under PMLA, the secured creditor will have the first right over the property. The Tribunal held that the continuation of proceedings that have been initiated after the moratorium has commenced under Section 14 runs contrary to the intent of the legislature and creates hurdles in the time-bound resolution process. The PMLAT, by attributing precedence to IBC further held that by virtue of the non-obstante clause under Section 238 of the IBC, authorities under PMLA have no jurisdiction and cannot continue with the proceedings in case a moratorium has commenced.
Scenario III: PAO under Section 5 of the PMLA is passed after the adjudicating authority has approved the resolution plan under Section 31 of the IBC
In such a factual matrix, tribunals/courts are of the view that IBC proceedings will supersede PMLA, and therefore, any attachment/confiscation/seizure has to be vacated by the authority under PMLA.
This conflicting scenario came before NCLAT in the case of M/s Bhushan Power and Steel (BPSL) vs. Enforcement Directorate. It was held that proceedings under PMLA are criminal proceedings. Consequently, the ED would have the power to order attachment. Later, the Ministry of Corporate Affairs intervened to resolve the difference between the two legislations. Immediately, an Ordinance was promulgated by the President of India, inserting Section 32A in the IBC. Through this amendment, it was made clear that once a Resolution Plan is approved by the adjudicating authority, all attachments/seizures/confiscations cease to operate. The NCLAT in the case of JSW Steel Limited abated all the criminal proceedings against the Corporate Debtor as soon as the Resolution Plan submitted by M/s JSW Steel got approved.
Analysis of the Judgement
The High Court of Delhi in the case of Rajiv Chakraborty misplaced the reliance on the judgement in the case of Varrsana Ispat and Kiran Shah. Varrsana Ispat and Kiran Shah, in my opinion, fall under Scenario I, whereas the present case falls under Scenario II, and therefore, their factual matrices are fundamentally different. A decision can only act as a precedent in a similar set of facts, and not otherwise. Hence, the High Court has erred by relying on these judgements. The NCLAT in Kiran Shah has expressly recognized the difference between Scenario I and II.
In my opinion, the Court ought to have placed reliance on the decision rendered in Directorate of Enforcement vs. Manoj Kumar Agarwal, wherein it was held that proceedings under PMLA involving attachment or confiscation and confirmation thereof by the adjudicating authority are civil in nature. Therefore, such civil proceedings will be barred, owing to the operation of a moratorium under Section 14 of IBC. It was also held that IBC will take primacy over the PMLA as IBC was the later enactment bearing a non-obstante provision.
This decision strikes at the foundation laid by the legislators in not giving primacy to the objectives of the IBC, particularly in terms of asset maximisation, time-bound resolution, etc. It is a very well-settled position that every applicant under the IBC should start with a clean slate, i.e. they should be able to enjoy rights free from any encumbrances. In order to ensure immunity from any action to its property, Section 32A was introduced to supplement the requirement of another proof of its intent to keep the process of CIRP/Liquidation free-flowing.
By ruling that PMLA is not subservient to the IBC, the High Court has caused a serious impediment in CIRP, since potential applicants might change their interest so as to participate in the process. This has also jeopardised the interest of creditors, who will now be rendered remediless insofar as the recovery of debts is concerned, except for CIRP.
Conclusion
There has been a constant rift between the views of different Courts and Tribunals on the closely contested issue of primacy between IBC and PMLA. An appeal in the case of Ashok Kumar Sarawagi vs. Enforcement of Directorate, where NCLAT held that NCLT has no power to deal with matters falling under PMLA, is pending before the Supreme Court.
It is essential that both these legislations are construed harmoniously. IBC is a boon for the corporate sector in India as it provides a mechanism by which corporates are rescued from being liquidated and at the same time it provides a mechanism for the creditors to have a remedy against the defaulters.
It is trite law that in case of two statutes having a ‘non-obstante’ clause, the latter enactment should prevail. Therefore, in my opinion, IBC should have precedence over PMLA for two reasons. One, it is a special statute and second, it has been enacted later than PMLA. By delivering contradictory judgements, Courts and tribunals have left the supremacy of IBC a gamble which can never be won.
As and when faced with the aforementioned question of law, the Supreme Court should overturn the judgement of NCLAT, and provide the recognition that they deserve to the precedents and intent of the legislators behind the enactments.