[Pallavi Meena is a IV Year BSW, LL.B (Hons.) student and Ridhi Arora a IV Year B.A., LL.B (Hons.) student, both at Gujarat National Law University]
In Nitin Jain, Liquidator, PSL Limited. v. Enforcement Directorate (15 December 2021), the Delhi High Court ruled that the power under the Prevention of Money Laundering Act, 2002 (“PMLA”) to attach properties ceases to exist when an order of liquidation has been delivered under the Insolvency and Bankruptcy Code, 2016 (“IBC”). In this post, the authors analyse the judgment of the court while discussing the scheme for distribution of a corporate debtor’s assets both under the IBC and the PMLA.
The corporate insolvency resolution process (“CIRP”) was initiated against the corporate debtor (PSL Limited) in February 2019. The petitioner herein was appointed as the liquidator and upon the expiry of the statutorily mandated time for the proposal of a resolution plan, an application for the liquidation of the corporate debtor was made. After approval of the application, a sale notice was issued by the liquidator, which was not met with any summons. It was during this time that liquidator was called on by the Enforcement Directorate (“ED”) for the first time in January 2021. Subsequently, an offer for sale of the corporate debtor was made by M/s Lucky Holdings, which was approved by the adjudicating authority. It was provided that the distribution of the assets of the corporate debtor would abide by section 53 of the IBC. However, when the matter came for hearing before the Delhi High Court, the ED had not passed a provisional order of attachment of properties of the corporate debtor. Thus, the primary contention that came up for consideration before the Delhi High Court was whether the scheme of liquidation would get inhibited by the statutory process for attachment of properties provided under the PMLA.
Contentions Raised by the Liquidator
The liquidator of the corporate debtor emphasized on the underlying objective of section 32A of the IBC. In Manish Kumar v. Union of India, the Supreme Court upheld the validity of section 32A of the IBC. This provision states that jurisdiction and the authority under PMLA is legislatively mandated to cease once a resolution plan gets approved by the adjudicating authority. It was further contended that the liquidation process would make an impact on the value of the property as well as the interest that may be manifested by prospective applicants.
Relying on section 238 of the IBC, it was argued that liquidation must be exclusively governed by the provisions of the IBC. Therefore, any orders passed must be held to prevail over proceedings initiated or pending under any other laws for the time being in force. In lieu of fairness, the rights of bona fide creditors must not be staked for any misdeed of the management of the corporate debtor.
Contentions Raised by the ED
On the other hand, the ED argued that liquidation of the corporate debtor, to follow the proceeds of crime and confiscation of property, falls under the jurisdiction of the PMLA. It was also contended that the IBC cannot be an “amnesty route” to escape the statutory mandate of the PMLA. Any sale under the IBC would defeat the basic objectives of the PMLA since both the statutes operate in separate and distinct fields. It is further contended that proceeds against the properties of a corporate debtor are autonomous. A resolution process under chapter II of IBC is in contradiction with the liquidation process under chapter III. The process under chapter II has a different track which attracts section 32A and, thus, does not hold its application under chapter III.
In Deputy Director Directorate of Enforcement Delhi v. Axis Bank, the Delhi Court found that the government exercising powers under PMLA to confiscate proceeds of crimes cannot be said to be a creditor. Hence, under the PMLA, a person alleged of the offence of money-laundering cannot be said to acquire the status of debtor. Moreover, any proceeding initiated under the PMLA is not subject to challenge under proceedings undertaken under the IBC. Thus, the IBC does not overrule the PMLA and the statutes have no ‘overriding effect’ over one another.
The Delhi High Court analysed the schemes provided both under the IBC and the PMLA. It was observed that both the statutes are special legislations and, while the IBC was enacted in order to restructure companies and evolve the erstwhile insolvency regime, the PMLA focused on punishing the crime of money laundering. The objectives of both the legislations are clearly provided, but there is no reason for both the statutes to not co-exist. The Court held that while the order of liquidation had already been made by the adjudicating authority, there was no reason for the petitioner herein, the liquidator of the corporate debtor, to not cooperate with the process being followed by the ED.
Scheme under PMLA, 2002.
The provisions under the PMLA deal with offences of money laundering. Section 2(u) defines “proceeds of crime” as property derived or obtained through a criminal activity. Sections 3 and 4 govern the offence of money laundering and its punishment respectively. Section 3 provides that a person committing the offence of money laundering shall be punishable with rigorous imprisonment for a term not less than three years and extending to seven years under section 4. Competent authority as prescribed under the statute is likely to seize the proceeds of crime, and it may attach the property for a period not exceeding 180 days.
In accordance with section 5(1), the PMLA mandates presenting a report against the offence before a Magistrate under section 173 of Code of Criminal Procedure, 1973. Adjudicating authorities are bound to exercise the powers enshrined in section 8. It is the adjudicating authority that confirms the order of attachment to direct the retention of seized property which goes in the hands of the union government.
Scheme of the IBC, 2016
In Innoventive Industries Ltd. v. ICICI Bank, the Supreme Court held that the objective of the IBC is to bring the insolvency law under a single umbrella to speed up the insolvency process. For this reason, the IBC provides a time bound resolution process that has to be strictly adhered to when a company is undergoing CIRP. Thus, if the time bound process is not followed, the very essence of the legislation falters.
Moreover, on previous occasions, the courts have dealt with the interplay of the provisions of the IBC and the PMLA. In Directorate of Enforcement v. Axis Bank, the Delhi High Court held that the IBC and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 would not have superiority over the PMLA. In this case, the ED preferred an appeal against the order of the adjudicating authority that in order to give weightage to the claims of third party financial institutions, the PMLA had to take a back seat. Allowing the appeal, the Court reasoned that both the statutes operate in different spheres and, in order to seek release of a property that had been attached under the PMLA, third parties could approach the adjudicating authority to keep their interest. However, this judgment had been made prior to the insertion of section 32A to the IBC.
The judgment in Nitin Jain does give primacy to the time bound process provided under the IBC, but it does not restrict the power under the PMLA to prosecute private individuals of a company for crimes of money laundering. This ensures that companies and the individuals governing the companies do not use the IBC as a mechanism to escape liability under different legislations. Moreover, the judgment ensures that both the statutes, which operate in distinct spheres, do not have to lose their ethos. As the insolvency regime grows, it becomes more important for the IBC to be harmoniously interpreted with different legislations.
-Pallavi Meena & Ridhi Arora