[By Ayush Kumar and Vanshika Manglani]
The authors are students of Hidayatullah National Law University.
The Delhi High Court (Hon’ble Court) in the case of Rajiv Chakraborty Vs. Directorate of Enforcement (“the case”) provided that the restraint of Section 32A of the Insolvency and Bankruptcy Code, 2016 (“IBC”) is not attracted in case of attachment of assets which are considered a ‘proceeds of crime’. The Enforcement Directorate is entrusted with this power by the Prevention of Money Laundering Act, 2002 (“PMLA”). The Judgement has once again opened the pandora’s box. Moreover, the presence of a non-obstante clause in Section 71 of PMLA and Section 238 of IBC has also raised the question of the overriding effect of one legislation over the other.
This article aims to provide an analysis of the conundrum by providing a historical jurisprudence of the cases dealing with the current subject matter and analysing the aforementioned judgement. IBC and PMLA, both are special legislations in their own paradigm and deal with different aspects. But the two legislations come to loggerheads when the Corporate Insolvency Resolution Process is initiated against the corporate debtor and simultaneously, he is charged with scheduled offenses under PMLA. Consequently, the judiciary has envisaged the need for harmonious implementation of the two laws time and again.
DELVING INTO THE PAST JURISPRUDENCE
The judiciary has missed numerous opportunities to settle the aforementioned conundrum but there have certainly been cases where the gap has been tried to be bridged between the two laws to a certain extent. By the virtue of the doctrine of posteriores priores contraries abrogant (the latter enacted legislation shall prevail in case of a non-obstante clause present in the two) the IBC was to prevail over PMLA but NCLAT in Varrsana Ispat Limited v. Deputy Director, Directorate of Enforcement took a different approach and held that PMLA would prevail over IBC if the assets relate to ‘proceeds of crime’.
The NCLAT, along the same lines held in Andhra Bank V. Sterling Biotech Ltd. that if the assets of the corporate debtor come under the proceeds of crime, the Enforcement Directorate (“ED”) is entitled to seize them. However, the NCLAT differed from its previous stance in Directorate of Enforcement V. Manoj Kumar Agrawal, wherein it recognized that any attachment of properties by ED is barred after the moratorium is placed under Section 14 of IBC. For settling the conundrum, the question was posed before a larger bench of NCLAT in the case of Kiran Shah V. Directorate of Enforcement in which it was held that section 14 of IBC does not prevent ED personnel from using their PMLA authority. The ruling is this case was completely at odds with the Manoj Kumar Agrawal case ruling.
FACTUAL MATRIX
The ED in exercise of the power conferred under Section 102 of Criminal Procedure Code, 1973 (CRPC) froze 74 bank accounts of EIEL (“Corporate Debtor”). EIEL (“Petitioner”) filed a writ petition against the aforementioned action which resulted in quashing of the orders. However, the court refrained from interfering into one of the orders which provided for provisional attachment of certain properties by ED under Section 5 of PMLA. Aggrieved by this, the petitioner filed an application before National Company Law Tribunal (NCLT) to quash the orders of ED. Added to this, an Interlocutory Application was also filed regarding the attachment of two more properties. While the suit was pending, the Adjudicating Authority confirmed the orders. In due course, more properties were provisionally attached by ED and confirmed by the Adjudicating Authority. The Resolution professional of the CD filed the present writ challenging the confirmation of attachment orders by the ED under Section 8(3) of PMLA.
CONUNDRUM OF OVERRIDING EFFECT: AN ANALYSIS
In this decision, the court attempted to interpret how the IBC and PMLA interact with regard to the moratorium under Section 14 and the impact it has on the ED ability to seize assets derived from “proceeds of crime.” It is pertinent to note that the provisions of PMLA could not be interpreted as being “subservient” to the IBC and giving preference to one of these two independent pieces of legislation over the other would be contrary to the fundamental reason why they were passed. The PMLA was enacted with the purpose of taking away property which does not belong to the person possessing it and is gained through unlawful means. If the same is allowed to become a part of the resolution plan then it will be considered as the property of the corporate debtor and the entire purpose of the act will be defeated.
The property which is gained through illicit means should not be allowed to form a part of the Corporate Insolvency Resolution Process (“CIRP”). It is a reparation measure which seeks to strip and deprive criminals of benefits derived and retained by the adoption of illegal and dishonest action. Moreover, the “proceeds of crime” as defined under section 2(1)(u) of PMLA is not the same as “operational debt” defined under section 5(20) of IBC. Thus, a narrowed and strict interpretation should be given to the term operational debt and operational creditor so as to exclude ED from its purview. Therefore, when the ED exercises its power to seek attachment leading to confiscation of properties of the corporate entity it is not acting as a ‘creditor’ and thus the provisions of section 14 which bars the institution of suits against the corporate debtor would be inapplicable to that extent.
Further, the taking of the property as an attachment does not nullify the corporate debtor’s property rights; rather, it is only a symbolic taking over of the property while the PMLA proceedings are ongoing.
It is also imperative to look at the objective of the acts to decide on the dilemma surrounding the applicability of the two laws. The object clause of the PMLA clearly states that, “An Act to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto”. From the bare reading it is clear that it was enacted to combat the offense of money laundering and to confiscate properties that are gained through “proceeds of crime”. Thus, the court would have to look at the core objectives of the act before interpreting the said principle and apply the doctrine of harmonious construction so as to avoid any sort of repugnancy.
One of the arguments raised in this dichotomy pertaining to the IBC and PMLA is that since the former was implemented after the latter and both statutes have a non-obstante clause, the former should take precedence. Regarding this, it is stated that the concept “latter act shall prevail,” which states that if two acts contain a non-obstante clause, the act that went into effect later will take precedence and have an overriding impact, is not an inviolable rule. This is to say that the principle will only be looked at when there is an apparent conflict between the two legislations which cannot be reconciled.
CONCLUSION AND WAY FORWARD
IBC and PMLA have been at odds for a very long time, and there is no clear legal precedent as to which statute should take precedence and have the greater impact. Due to the inconsistent interpretations used by the adjudicatory authorities in various judgements it has led to the laws being implemented haphazardly and creating ambiguity. The conflict between the two statutes arises from the fact that the resolution applicant assigns an enterprise value to the corporate debtor’s assets while creating a resolution plan. The assets, however, are more likely to be subject to attachment under section 5 of the PMLA if they were acquired as “proceeds of crime.”
The court’s ruling in the Rajiv Chakraborty case reopened the discussion by highlighting the fact that PMLA cannot be interpreted as preceding IBC. It is done in order to prevent the corporate debtor from unfairly benefiting from assets acquired through illegal means. Otherwise, the whole objective of PMLA will be defeated and it will have a severe impact on the economy of the nation. Therefore, the decision is a positive step toward ensuring that both statutes are read harmoniously to strike a balance and prevent any conflicts.