[By Masad Khan & Ameya Sharma]
The authors are students of NALSAR University of Law, Hyderabad.
INTRODUCTION
In the case of Ashok Kumar Sarawagi v. Enforcement of Directorate, the National Company Law Appellate Tribunal, New Delhi (“NCLAT/ Appellate Authority ”) upheld the decision of National Company Law Tribunal (“NCLT/ Adjudicating Authority”) declaring that it is not empowered to deal with the matters falling under Prevention of Money Laundering Act, 2022 (“PMLA”) and rejected Mr. Sarawagi’s prayer of staying impugned provisional attachment order against the corporate debtor under PMLA after the initiation of Corporate Insolvency Resolution Process (“CIRP”).
In this article, the authors have argued that the aforesaid decisions are bad in the eyes of the law and the Adjudicating Authority should have stayed the provisional attachment order issued against the corporate debtor.
BRIEF BACKGROUND OF THE CASE
The CIRP was commenced on 20 November 2019 in respect of Kohinoor Steel Private Limited, or the Corporate Debtor, and Mr. Ashok Kumar Sarawagi was appointed as its Resolution Professional. On 31 December 2021, after two years of initiation of CIRP, a provisional attachment order against the property of corporate debtor was issued by the Enforcement Directorate (“ED”) under Section 5 of the PMLA. The impugned order was challenged by the resolution professional under Section 14 and Section 238 of the Insolvency and Bankruptcy Code (“IBC”).
The NCLT placed reliance on the NCLAT’s judgement in Varrsana Ispat Limited Vs. Deputy Director of Enforcement wherein it held that provisions under the PMLA relate to ‘proceeds of crime’ and Section 14 of the IBC is not applicable to such proceedings. Also, in its order, the NCLT holds that it is bound by the full bench judgement of the NCLAT in the case of Kiran Shah v. Enforcement Directorate.
MISPLACED RELIANCE ON VARRSANA AND KIRAN SHAH
Both, the NCLAT and the NCLT, placed consequential reliance on the Varrsana and the Kiran Shah judgements and held that they were bound by the precedents. In both these cases, the property was attached by ED much prior to initiation of CIRP. However, in the instant case, the provisional attachment order was issued after nearly two years of the initiation of CIRP. It signifies that the facts of the present case are manifestly different from the facts in the aforementioned cases.
The Supreme Court, in several judgements, has held that ‘a decision is precedent on its own facts’[i] and even a close similarity between one case and another is not enough to consider it as precedent because a single significant detail may alter the entire aspect.[ii] Hence, the Varrsana and the Kiran Shah judgements cannot be considered as precedent in the present case and the reliance placed by the Adjudicating Authority on them is heavily misplaced.
INCONSISTENCY WITH THE ESTABLISHED LAW
While relying heavily on the cases mentioned above, the Adjudicating Authority as well as the Appellate Authority may have missed certain judgements that are acutely similar in their factual scenarios to the present case.
Importantly, the NCLAT held in the case of Directorate of Enforcement v. Manoj Kumar Agarwal that there cannot be any attachment of a corporate debtor’s property or assets under the PMLA during the continuation of CIRP. In this case, the Appellate Authority has categorically laid down the law with respect to the impugned controversy and it should have been followed by the NCLT and the NCLAT alike.
In JSW Steel Ltd vs. Mahender Kumar Khandelwal, a judgement delivered by NCLAT, herein the tribunal upheld ED’s decision to attach after the approval of the resolution plan. However, the outcome of this judgement would have been entirely different had it not been for the restrictions of prospective legislation. The amendment to Section 32, which inserted Section 32A, of the IBC was brought in during the pendency of this case, and hence could not be retrospectively applied. Notwithstanding this limitation, it is clear that the tribunal would have favoured the corporation, i.e., an injunction against the attachment order under PMLA would have been duly issued as per orders. The present case was brought after Section 32A of the IBC came into effect, hence, its application renders the impugned order of the NCLT inconsistent with the IBC.
Arguably, the Supreme Court’s judgement in Ghanashyam Mishra & Sons (P.) Ltd. V. Edelweiss Asset Reconstruction Co. Ltd. is highly relevant in the present context. This case gave primal importance to the fulfilment of the objectives of the IBC and declared the binding nature of a resolution plan once it was approved. It unequivocally expresses the binding nature of the approved CIRP on the Central as well as State Governments and any local authority. It is also essential to bring to the fore that Section 238 of the IBC categorically provides that it shall prevail in case of inconsistency between two laws, as has been cited in the aforementioned judgment.
The verdicts delivered in the aforementioned cases clearly lean in favour of putting on hold the attachment orders during CIRP in the long-standing dispute between IBC and PMLA. It is further pertinent to acknowledge that the factual matrices of the above precedents corroborate well with the present case. These cases find equal relevance in the context of the present controversy at hand. While JSW Steel is based on similar facts, the Ghanashyam Mishra judgement deals with the high value of trust placed by the Supreme Court on the IBC in the realm of corporate legislation and resolution. Hence, these judgements should have been followed consistently by the tribunals in the present case.
ILL-EFFECTS OF THE RULING
The NCLAT decision, in the present case, has jeopardised the legitimate interests of the corporate debtor’s creditors, including its workers and employees, without having any of their fault. They would not have the chance or remedy to recover any debts owed to the corporate debtor. The CIRP procedures would become ineffective due to the impugned attachment order since no one would be interested in purchasing the corporate debtor’s attached property or assets. The liquidation procedure that ultimately follows, because of the failed CIRP, will also be a pointless formality because the assets that the ED had attached under PMLA will not be available for sale. Also, the present ruling, in contrast to the Supreme Court’s Ghanashyam judgement, runs contrary to the principles and objectives of the IBC as the attachment order will cause serious hurdles in ‘maximization of value of assets’ in a time bound manner and ‘balance the interest of all stakeholders’.
CONCLUSION
The appellant has appealed to the Supreme Court against the judgement of NCLAT. Now the ball is in SC’s backyard to adjudicate the issue and settle the controversy once and for all regarding the dichotomy between IBC and PMLA. The SC’s prospective judgement will hold seminal ground, in the nascent insolvency regime of India, as it will be a North Star in guiding future disputes between the IBC and other laws.
With the foregoing discussions, the authors argue that the NCLAT’s judgement must be set aside by the Supreme Court as it fails to give due importance to the previous precedents and established law. It should declare the primacy of IBC, in consonance with its principles and objectives, and attachment orders under PMLA after the initiation of CIRP must be held void.
[i] Centre for Public Interest Litigation v. Union of India, (2012) 3 SCC 1.
[ii] Megh Singh v. State of Punjab, (2003) 8 SCC 666.