Resolving insolvency or fighting crime? The IBC ��� PMLA dilemma

Introduction

In India, the issue of money laundering has always been deep-rooted and the Prevention of Money Laundering Act, 2002 ("PMLA") seeks to deal with this issue. It is the Directorate of Enforcement ("ED”), which deals with "proceeds of crime" and is empowered by the PMLA to provisionally attach properties if it has reason to believe that the funds used to purchase those properties form a part of "proceeds of crime" and that they are likely to be concealed or transferred. 

The Insolvency and Bankruptcy Code (“IBC") was introduced in 2016 to provide a mechanism for commercially failing businesses ("Corporate Debtor”) to be revived through the Corporate Insolvency Resolution Process (“CIRP”). If a resolution plan is approved by the National Company Law Tribunal (“Tribunal”) with respect to a Corporate Debtor, then the Successful Resolution Applicant (“SRA”) takes over the business and make a fresh start. 

Although the two legislations prima facie seem to be working in different fields, there lies an overlap which can be explained by virtue of the following example. 

Properties of XYZ Private Limited have been provisionally attached by the ED under PMLA. During the trial, CIRP is initiated against the same company at the instance of a financial creditor. ABC Industries Limited submits its resolution plan and emerges as the successful bidder, and its plan is approved by the Tribunal. In such a situation, whether the SRA would be entitled to the properties that were attached by the ED or not is a question that arises.

A recent opinion of the Bombay High Court. 

The scope of this article is restricted to the recent judgement of the Bombay High Court, i.e., in the matter of Shiv Charan vs. Adjudicating Authority under the Prevention of Money Laundering Act. [1]

Under Section 60(5) of IBC, the Tribunal has jurisdiction to entertain all proceedings concerning the Corporate Debtor. Hence, the Tribunal also has the power to decide whether statutory immunity from liability for prior offenses under Section 32A has accrued to the Corporate Debtor or not. Although,while explaining the purport of attachment under Section 5 of PMLA, the Tribunal added that attachment can be confirmed only upon the conviction of the Corporate Debtor. Once immunity under Section 32A of IBC kicks in, no conviction can follow. By operation of law, ED attachment over properties of the Corporate Debtor ends as soon as the resolution plan is approved.

The correct interpretation

The Bombay High Court has rightly held that in the tussle between IBC and PMLA, it is IBC that must prevail. In the alternative, there would be little chance of the successful CIRP of any Corporate Debtor whose properties have been attached by the ED for the following reasons:

1.Any Resolution Professional would find no commercial sense in taking over a Corporate Debtor whose assets are unsure of realization.

2. when approving a Resolution Plan, the Tribunal is obligated under Section 31(1) proviso to review if this is capable of being implemented in an effective manner. If the ED attachments are not released, the Resolution Plan even if approved on paper, would never be effectuated in real life.

3. One must also appreciate that immunity under Section 32A of the IBC was added by the legislature in the year 2019 after having seen the practical working of the law for 3 (three)years, i.e., “to prevent action against the property of such corporate debtor and the successful resolution applicant …… and to fill the critical gaps in the corporate insolvency framework…”.[2]

The lacunae

That said, this position of law is problematic to some extent as it subverts the position of the ED. Proceedings under PMLA have a criminal undertone and if ED attachments are ordered to be released,should a Corporate Debtor go into CIRP then the ED would be left helpless. Given the countervailing public policy concerns involved, this is not an ideal position. 

There is also a chance that this position might be susceptible to misuse by Corporate Debtors who are looking to escape the lashes of PMLA by colluding with Financial Creditors to initiate CIRP proceedings in order to get the assets released.

Conclusion – all eyes on the Apex Court. 

The position of law is not settled. The Supreme Court had an opportunity to look at this issue in the case of Ashok Kumar Sarawagi vs Enforcement Directorate.[3] However, the matter was withdrawn by the Petitioner after notice was issued by the court to the other side. As things stand, even Shiv Charan (supra) is under challenge before the Supreme Court wherein vide interim order dated 12 August 2024; the apex court directed that the ED attachment on the properties of the Corporate Debtor would continue to operate pending disposal of the appeal nullifying the effect of the judgement for the time being. It can be expected that once this appeal is finally decided, it will settle the law on this matter once and for all.

References:

[1] 2024 SCC OnLine Bom 701

[2] The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019.

[3] SLP (Civil) No. 26459/2023.