Delhi High Court on superseding effect of IBC v. PMLA: An Analysis
Shraddha Tiwari, 2nd Year BA. LL.B. (Hons), School of Law Christ University, Bangalore
Tejaswini Kaushal, 2nd Year BA. LL.B. (Hons), Dr. Ram Manohar Lohiya National Law University, Lucknow
The IBC vs. PMLA conundrum has persisted for decades now in the Indian legislative diaspora, with several court decisions, judicial opinions and academic research facilitating the harmonised application of the two laws. It is indubitable that the Insolvency & Bankruptcy Code, 2016 enjoys distinct importance under the Indian business laws, serving as a critical exception to the latter. Yet, the Code’s non-obstante provision continues to draw much debate and controversy. Since its enactment, the Insolvency and Bankruptcy Code, 2016 (“IBC”) has remained engaged in an endless tussle with another major central legislation, The Prevention of Money Laundering Act, 2002 (“PMLA“), on matters revolving around the attachment of property by the Directorate of Enforcement (“ED“) during the moratorium. In light of this has come the latest judgement of the Delhi High Court in the case of Rajiv Chakraborty Resolution Professional of EIEL v. Directorate of Enforcement (2022) ibclaw.in 257 HC, attempting to clarify the position of the two laws. Yet, regardless of these efforts, whether an ultimatum has been achieved on this conundrum is a persisting matter of deliberation, and the authors, in this article, have tried to deliberate on the same.
In the case of Rajiv Chakraborty Resolution Professional of EIEL v. Directorate of Enforcement , 49 bank accounts of the Corporate Debtor (“CD”) were provisionally attached by the ED after the commencement of the Corporate Insolvency Resolution Process (“CIRP”). The IBC vs. PMLA conundrum has persisted for decades now in the Indian legislative diaspora, with several court decisions, judicial opinions and academic research facilitating the harmonised application of the two laws. It is indubitable that the Insolvency & Bankruptcy Code, 2016, acts enjoy distinct importance under the Indian business laws, serving as a critical exception to the latter. Yet, the Code’s non-obstante provision continues to draw much debate and controversy. Since its enactment, the Insolvency and Bankruptcy Code, 2016 (“IBC”) has remained engaged in an endless tussle with another major central legislation, The Prevention of Money Laundering Act, 2002 (“PMLA“), on matters revolving around the attachment of property by the Directorate of Enforcement (“ED“) during the moratorium. In light of this has come the latest judgement of the Delhi High Court in the case of Rajiv Chakraborty Resolution Professional of EIEL v. Directorate of Enforcement, attempting to clarify the position of the two laws. Yet, regardless of these efforts, whether an ultimatum has been achieved on this conundrum is a persisting matter of deliberation, and the authors, in this article, have tried to deliberate on the same.
The Provisional Attachment Order (“PAO”) was confirmed by the Adjudicating Authority under PMLA while a challenge against it was pending before the NCLT. More properties were subsequently attached proviso and then validated by the adjudicating authority. The Writ Petition came to be filed by the Resolution Professional of Era Infra Engineering Limited (EEIL) being admitted to insolvency proceedings under the provisions of the IBC, challenging the attachment orders issued by ED and raising a pertinent question that what will be the impact of a moratorium issued under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) would have on the powers of the Enforcement Directorate to enforce an attachment under Section 8(3) of the Prevention of Money Laundering Act, 2002 (PMLA).
Before proceeding, it is necessary to understand the major provisions in place concerning the matter in issue.
The term “moratorium” has been defined under Section 14 of the IBC. The NCLT noted that the purpose of imposing a moratorium had been outlined in the case of P. Mohanraj and Others v. Shah Brothers Ispat Private Limited (2021) ibclaw.in 24 SC. In that case, the SC had ruled that a moratorium is imposed to protect the corporate debtor from financial attacks in order to give it some breathing room so that it can proceed as a going concern and eventually recover itself. According to IBC Section 14, the corporate debtor is fully precluded from being sued or having legal actions undertaken against them, including having judgements, decrees, or orders executed in any court, tribunal, or arbitration panel.
Section 5 of PMLA permits authorities to seize property related to money-laundering investigations. The constitutionality of these sections was raised in the case of J Sekar vs Union Of India, where it was held to be constitutional.
Section 8 provides the ED with the power of arrest, attachment, search, and seizure of property in matters where the Adjudicating Authority is convinced of misdoings by the owners. While affirming the legality of Section 8 of the Prevention of Money Laundering Act (PMLA) in its most recent PMLA verdict, a Supreme Court bench headed by Chief Justice of India NV Ramana expressed the opinion that the interpretation provided the wide possibility for arbitrary application.
The major conflict between the IBC and the PMLA in India is that during the corporate insolvency process, IBC seeks to maximise the value of the assets of the financial creditors, while the PMLA seeks to confiscate and attach any property or asset that is involved in money laundering. According to Section 71 of the PMLA, the provisions of PMLA shall apply regardless of any contradictory or overlapping provisions of any other legislation for the time being in existence. On the other hand, IBC Section 238 provide for the very same. The aforementioned contentions make it evident that both enactments have a non-obstante clause, which overrides both Acts.
In the present case, the judgement by the single bench headed by Justice Yashwant Varma has put an end to this debate more or less. The High Court further stated that the Government could not be regarded as a creditor seeking to pursue a debt while acting in accordance with the PMLA. It is not a person to whom a debt is allegedly owed when it takes proceedings to seize property. The only goal of the ED is to deny the offender the ability to use the property. The High Court concurred and stated its views in Directorate of Enforcement v. Axis Bank  ibclaw.in 06 HC and that of the Supreme Court in P. Mohanraj v. Shah Bros. Ispat (P) Ltd., in light of the aforementioned.
Discussing the effect of attachment, the Hon’ble HC stated that the attachment orders under Sections 5 and 8 of the PMLA are still in effect. The making of such orders does not result in the seizure of any property or the transfer of any property’s ownership to the Union Government. As a result, the Union Government only acquires ownership of connected property once the Special Court issues an order under Section 8’s sub-sections 5 or 7, Section 58, or Section 60(2)(a) of the PMLA. This leads to the conclusion that the basic goals of Section 14 of the IBC would not be violated in any scenario by the provisional attachment of possessions. The High Court stated that although IBC was passed later than the other special legislation, the adoption of Section 32A in 2020 marks the Legislature’s final declaration of intent with regard to the non-obstante clauses in both of the special statutes. The High Court noted that the adoption of a resolution plan or the liquidation of the CD’s assets alone constitutes the pivotal point for the aforementioned purpose, and that is when the bar under Section 32A of the IBC would come into effect. The Legislature has authoritatively stated the end date, after which the PMLA’s powers will no longer be able to be used through Section 32A. Therefore, it is not possible to construe or accept that the non-obstante clause found in the IBC will have an effect that is significantly greater than that projected by Section 32A.
In light of the aforementioned, it is clear that when an order of attachment is made pursuant to the PMLA, neither the corporate debtor nor the Resolution Professional face an unavoidable situation. The statutes offer sufficient channels and options for resolving complaints and claims. A Resolution Professional might have the opportunity to request any legal remedies for tainted properties from the competent authorities under the PMLA. Similar to this, and as stated by Axis Bank, a PAO, an ED made under the PMLA, does not grant that authority a superior or superseding property claim. In the end, the claims of the parties over the potentially attachable property, as well as the issue of distribution and priorities, would need to be arbitrated separately and in accordance with the law.
Further, dealing with ED’s powers under PMLA despite the imposition of moratorium under IBC, the High Court observed that in the case of Rotomac Global Private Limited vs. Deputy Director  ibclaw.in 114 NCLAT, the NCLAT repeated the stance outlined in Varrsana Ispat when the issue of a moratorium pertaining to proceedings under the PMLA came up and then dismissed the appeal. The NCLAT, for the first time, held that in light of the objectives of the IBC, it would be impermissible for the authorities under the PMLA to exercise the powers of attachment after a moratorium had taken effect. The High Court noted that this was the only discordant statement made by the NCLAT in Directorate of Enforcement v. Manoj Kumar Agarwal (2021) ibclaw.in 182 NCLAT.
The legal position was ultimately laid to rest by a larger Bench of the NCLAT in Kiran Shah (2022) ibclaw.in 10 NCLAT, which reiterated Varrsana Ispat and disapproved the decision of Manoj Kumar Agarwal for being contrary to the principles of stare decisis. In view of this, the High Court approved ED’s powers under PMLA despite the imposition of a moratorium.
Finally, in evaluating the effects of a moratorium, the High Court noted that the primary goal of a moratorium is different from that of attachment under the PMLA because Section 14 is intended to maximise the value and preserve the CD’s assets while the possibility of its revival is investigated and to prevent its creditors from taking any actions that could obstruct the resolution process, whereas the PMLA is a law that affects the disgorgement.
Hence, the High Court found that PMLA and IBC subserved completely different, divergent and distinct purposes and dismissed the writ petition. The Court further observes that the rights of the Enforcement Directorate over the properties subject to attachment would stand restricted to the extent that has been recognised in this decision, as well as the judgment of the Court in Axis Bank. Also, this order shall not preclude the petitioner Resolution Professional from seeking the release of the provisionally attached properties in accordance with the law. However, a crucial legal issue still needs to be resolved: whether ED is allowed to offer properties connected to the PMLA the protection of a moratorium under the IBC. This judgement is not very clear on this stance and leaves the scope for interpretation on the same. Hence, PMLA is not subservient to IBC.
Since the Delhi High Court has unambiguously established that PMLA is independent of IBC, this decision is crucial and will be highly useful in handling such issues in future. The Court also clarified that the Section 14 IBC moratorium has no bearing on ED’s ability to seize properties.
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