Caught between PMLA and IBC: The Bhushan Power-JSW Saga

[Aniket Aggarwal is a commercial litigator and technology lawyer practicing in New Delhi]

A prima facie look at the Prevention of Money Laundering Act, 2002 [“PMLA” or “the Act”] and the Insolvency and Bankruptcy Code, 2016 [“IBC” or “the Code”] belies exclusivity and distinctness between the legislations. Indeed, the Delhi High Court observed these laws to be consistent with each other in light of the purpose, text, and context being totally different. The statutes were deemed to be construed and enforced in harmony.

However, attachment of property by the Enforcement Directorate [“ED”]—the investigative authority under the PMLA—routinely obstructs operation of the IBC; perhaps most notably in the corporate insolvency resolution process [“CIRP”] of Bhushan Power & Steel Ltd. [“BPSL”] which, despite being the sixth-largest non-performing account in the country, is awaiting resolution since nearly four years now. A month after NCLT Delhi approved JSW Steel’s successful resolution plan, the ED provisionally attached assets worth Rs. 4025 crores in October 2019. The NCLAT stayed both the resolution plan approval and the attachment order on appeal. Even so, the ED refused to release the attached assets and continued to contend that a direction to do so must be obtained from the relevant adjudicator under the Act. BPSL’s Committee of Creditors [“CoC”] then moved the Supreme Court for relief, which granted an interim stay on the attachment in December 2019.

Close on the heels of the apex court’s order, section 32A was introduced into the IBC by way of an ordinance. The provision, which was later enacted as an amendment, extinguished the liability of a corporate debtor [“CD”] for any offence committed prior to the commencement of the CIRP and provided that no prosecution could lie against a CD or its assets once a resolution plan was approved. Citing this, the NCLAT in JSW Steel v. MK Khandelwal upheld JSW’s resolution plan and rendered it immune from attachment by the ED in February 2020.

However, as of date, the implementation of the successful resolution plan continues to remain in jeopardy. The ED approached the Supreme Court against the NCLAT judgment asserting that section 32A could not be given retrospective effect—given that the resolution plan was approved prior to said provision’s introduction—while JSW Steel too moved the apex court seeking immunity from the ED. Amidst JSW’s apprehensions towards implementing the resolution plan, BPSL’s CoC sought vindication as well. All these matters are sub judice.

In the meantime, the vires of section 32A was challenged at the Supreme Court. In Manish Kumar v. Union of India, the three-member bench headed by Justice RF Nariman took note of the various safeguards incorporated into the provision and upheld its constitutionality, a move celebrated as one with the potential to ease the implementation of several resolution plans, including JSW’s. Accordingly, this post comments upon the ED’s stance and does so by juxtaposing the Act with the Code, while offering suggestions to reconcile the two. 

Understanding the conflict

Before dwelling further upon the implementation of JSW’s resolution plan for BPSL, it is pertinent to acquire context of the areas where PMLA and IBC overlap and create uncertainty. These are highlighted below.

Firstly, both the Act and the Code contain non-obstante clauses empowering them to override other laws [sections 71 and 238, respectively]. This contradiction is admittedly already settled, with a plethora of precedent endorsing the doctrine of lex posterior—later laws prevail over existing ones. The logic was recently reiterated in Solidaire India v. Fairgrowth Financial Services simply as: “If the legislature confers the later enactment with a non-obstante clause, it means that legislative intent wants that enactment to prevail.” The Supreme Court opined that if the prior conflicting law was intended to prevail, provisions to that effect would be included in subsequent law.

Secondly, while adjudicatory and appellate bodies have been constituted to try matters under the PMLA, the IBC debars the jurisdiction of other bodies in respect of matters over which NCLT exercises jurisdiction [section 63], which includes within its ambit any questions of law or fact under the Code [section 60(5)]. The appellate tribunal under the Act itself has recognized this ouster of its jurisdiction in Bank of Baroda v. Deputy Director, ED. With this being the position in place in 2018, it can be argued that ED’s attachment of BPSL’s assets in 2019 is non judice, i.e., without legal jurisdiction, and thus, inclined to be quashed.

Thirdly, section 14 of the IBC imposes a moratorium that suspends all suits and proceedings against the CD and restricts its assets’ alienation. This is necessary to keep the CD running as a going concern. The ED, on the other hand, is empowered to attach, confiscate, and sell assets in their investigations of money laundering, which, if done during the CIRP, is vitally detrimental to the CD’s going concern status [Sanjay Gupta v. Committee of Creditors]. The looming threats of asset attachment and continued scrutiny due to erstwhile management’s misdeeds discourage prospective resolution and derail the scheme envisaged under the Code.

Additionally, the moratorium does not apply to criminal proceedings or penal action, as propounded by the NCLAT in Varssana Ispat v. Deputy Director, ED. However, it can be contended that attachment action is relatively civil in nature—being devoid of any punitive essence—with the penal aspect of the money laundering offence being tried separately by the Special Courts constituted under the PMLA [sections 43 and 44] and not by the ED. Because of these reasons, attachment orders and proceedings cannot escape from the moratorium under IBC, which is a view affirmed by the appellate tribunal under PMLA as well [Bank of India vs. Deputy Director, ED].

The road ahead

From the preceding discussion, we observe that the issues arising out of the intersection between the Act and the Code are not res integra, and are, in fact, already settled by virtue of decisions (cited above) propounded during the pendency of BPSL’s CIRP. The precedent put forth by the appellate tribunals under both the PMLA and the IBC informs the inference that any attachment action by the ED that meddles with a CIRP is ultra vires the Act. In this milieu, the ED’s contention against the protection of BPSL’s attached assets via the retrospective application of section 32A stands on a slippery slope. Since the very act of attachment was arguably unlawful ab initio, the question of 32A’s applicability—whether retrospective or not—does not arise.

The punitive nature of PMLA cannot be casually extended to disenfranchise genuine interests under the Code. However, a criminal must not be allowed to enjoy the fruits of a crime. This fundamental conflict of spirit may be harmoniously settled through a combination of two ways.

Firstly, the punishment under PMLA envisages imprisonment as well as fines [section 4]. While the corporate personality cannot be put behind bars, the ED is entitled to recover fines by filing its claims in the capacity of an operational creditor under the scheme of the IBC, as held by the NCLAT in JSW Steel v. MK Khandelwal.

Secondly, since the Act is categorised under “revenue” as per the Government of India (Allocation of Business) Rules, 1961, the doctrine of piercing the corporate veil may be utilised to ensure no offender goes unpunished. In Kapila Hingorani v. State of Bihar, the apex court observed that “the corporate veil can indisputably be pierced when the corporate personality is found to be opposed to … the interest of revenue.” This doctrine, together with the provisions barring the re-entry of extant promoters and connected parties under IBC [section 29A], may be utilised in tandem towards identifying and penalising erstwhile management for its misdeeds. That the imprisonment and fine under PMLA ought to be imposed upon the erstwhile directors of a CD is also observed by the amicus in the SREI Infrastructure v. Sterling SEZ case, where Sterling’s CIRP was stalled due to attachment of property by the ED. Section 32A of the Code appears aligned with this position as well, with a proviso clarifying that former officers continue to be liable for prosecution and punishment, notwithstanding the extinguishment of the CD’s liability.

In this manner, the interests of the creditors and prospective management under the IBC may be protected by providing a clean slate to the corporate debtor, without having to offer escape to the actual culprits. The Delhi High Court also applied this approach in Tata Steel BSL v. Union of India, where the resolution of Bhushan Steel—which, interestingly, is BPSL’s group company—was upheld despite criminal complaints made by the Serious Fraud Investigation Office. In this starkly similar context, it is the author’s view that BPSL’s resolution and takeover by JSW too is imminent independent of the ED attachment.

Aniket Aggarwal

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