IBC vs. PMLA: Conundrum of Primacy
The interplay between the Insolvency and Bankruptcy Code, 2016(hereinafter referred to as ‘I&B Code’) and the Prevention of Money Laundering Act, 2002(hereinafter referred to as ‘PMLA’) has been the focus of much discussion. The conflict between both statutes becomes evident from their respective provisions. The I&B Code aims at maximizing the value of the assets of the financial creditors during the corporate insolvency process. Whereas on the other hand PMLA acting as a loggerhead, provides for the confiscation of assets arising from or engaged in money laundering. This becomes a major hindrance for the resolution professional while considering assets for valuation during the corporate insolvency process.
Inconsistency between the statutes
The factor of inconsistency assumes importance in deciding if the provisions of the Code will prevail.[i] Hence, only if the provisions of the Code were to be rendered inconsistent with the provisions of another Code, it would have an override. Apex Court while delivering the judgment of Innoventive Industries Ltd. v. ICICI Bank  ibclaw.in 02 SC reiterated the principle laid down in numerous judgments and emphasized that the inconsistencies shall be clear, direct, and irreconcilable. Furthermore, the contradiction should be so severe that the legislations tend to be in “direct collusion” with one another, making it difficult to follow them both at the same time. In the current situation, a successful resolution claimant cannot handle the corporate debtor’s affairs as a going concern without control of its properties. It is evident that the I&B Code needs the corporate debtor’s activities to be handled as a going concern. However, PMLA on the other hand sets down under Section 5 to provisionally attach the property under the act putting limitations over its transfer, converting, disposing, and moving. Both the statutes seem to have conflicting clauses putting the CIRP process on standstill.
Furthermore, As per Section 18 of the I&B Code, the Resolution Professional has to take control of Corporate Debtor’s assets. This duty of managing and operating the Corporate Debtor’s business shall include regaining control of the properties attached by the Enforcement Directorate. In addition to this as per Section 14 of the I&B Code, a moratorium is imposed after the admission of the application under Section 7. Suits or proceedings against the Corporate Debtor, including the execution of any decision, decree, or order of any court, tribunal, or other authority, are prohibited during the Moratorium period.
The doctrine laid down in Solidaire India Ltd. v. Fairgrowth Financial Services Private Limited is applicable
In the landmark decision of Solidaire India Ltd. v. Fairgrowth Financial Services Private Limited, the Honorable court held that the legislation enacted later should prevail over the former as, the later law was well aware of the earlier legislation and its non-obstante provision at the time it was enacted. Hence, the Legislature wanted the enactment to prevail. Thus, If the Legislation did not want the later enactment to prevail, it would have explicitly stated that the earlier enactment would continue to apply. This rationale can also be viewed by referring to the Latin maxim ‘Leges posteriores priores contraries abrogant’ that states that if two special statutes contain non-obstante clauses, the non-obstante clause in the later special legislation shall take precedence. Similarly, in the present case, it can be seen that both legislations i.e., PMLA and I&B Code contain a non-obstante clause under Section 71 and Section 238 of their respective acts and hence the issue comes to a logical end with the latter overriding the former.
The aforesaid judgment of the Hon’ble Apex Court has been followed in the context of the Code having an overriding effect over the provisions of PMLA by NCLT, Kolkata Bench in Surendra Kumar Joshi v. REI Agro Ltd and Code having an overriding effect over other statutes by NCLT, Allahabad in Raman Ispat Pvt. Ltd. v. Executive Engineer, Pashimanchal Vidyut Vitran Nigam Ltd. Moreover, the above doctrine has been reiterated in numerous cases. NCLT Mumbai in SREI Infrastructure Finance Limited v. Sterling SEZ and Infrastructure Limited, referring to the decisions of NCLAT in the cases of Punjab National Bank v. Deputy Director, Directorate of Enforcement, Raipur, and Bank of India v. The Deputy Directorate of Enforcement of Mumbai (2018) ibclaw.in 01 PMLA concluded that the Adjudicating Authority under PMLA, 2002 couldn’t continue to keep the property attached after the declaration of moratorium due to the applicability of Section 238 of the I&B Code. Hon’ble Justice Manmohan Singh speaking for the Appellate Tribunal in both the above cases has held that: “The non-obstante clause contained in I&B Code, which is a later statute shall prevail over the non-obstante clause contained in Section 71 of PMLA.” The jurisprudence appropriated by this Bench showcases the shared intent of the legislators as well as the Bankruptcy Law Reform Committee that the I&B Code will override over anything contained in any other legislation in effect at the team.
It is seen that the ultimate beneficiaries under both PMLA 2002 and I&B Code 2016 are the secured Creditors/ Financial Institutions who have filed a claim before the Resolution Professional. This can be noted by referring to Section 31 of the I&B Code which provides for a Resolution plan in CIRP aiming at expediting the insolvency process and to secure maximization of values of assets of Corporate Debtor for distribution to all stakeholders and Section 8 of the PMLA where the Special Court under PMLA may direct the Central Government to restore confiscated part or property to the claimant who has a legitimate interest therein.
The I&B Code offers timelines within which the resolution must be reached. Apart from enforcing punishment, the object of the PMLA is to recover property from wrongdoers and compensate affected parties by confiscating and selling the wrongdoer’s properties. Hence considering the economic interest of beneficiaries, the I&B Code will provide a solution at the earliest both to the Corporate Debtor as well as Creditors. In this aspect NCLT in SREI Infrastructure Finance Limited v. Sterling SEZ and Infrastructure Limited held that compared to the time-bound process of the I&B Code, 2016, criminal proceedings under the PMLA would take a long time, resulting in the erosion of the value of the assets. The I&B Code, 2016 should therefore be given priority, taking into account the economic aspect of the case as well. Furthermore, the Appellant Tribunal for PMLA in Punjab National Bank v. Deputy Director, Directorate of Enforcement, Raipur reiterated the same and stated that the trial of the criminal case brought against the borrowers often takes several years putting creditors at disadvantage. The aim and scheme of the CIRP is to pass the business of the corporate debtor to a bona fide new resolution claimant, the Resolution Plan of which is authorized by the Committee of Creditors. It was decided in the case of M/s. PMT Machines Ltd. vs. Directorate of Enforcement, New Delhi that “The Committee of Creditors/consortium of banks are taking every possible effort to get viable Resolution Plan for the company, however, due to the attachment of the assets the objective of the CIRP is getting delayed.”
Application under moratorium can be used as an escape route by the offenders
Allowing the overlapping of the I&B Code over the provisions of PMLA would lead to misuse of an application under moratorium as an escape root by the offenders. The Hon’ble High Court of Delhi, Observed similarly, and claimed that the implementation of the moratorium would result in a situation in which criminals could use the Code as an escape path. In this case, the Hon’ble Court held that a person who committed the crime of money laundering could not use the proceeds of the crime to repay his debts to his creditors. If the same thing is allowed to happen, the properties that do not legitimately belong to him can be used to discharge his civil legal liability, which cannot be allowed. This has further been highlighted in the case of Varrasana Ispat Limited v Deputy Director, Directorate of Enforcement  ibclaw.in 67 NCLAT, where the tribunal analyzing the scope of Section 14 of I&B Code stated in Paragraph 13 that “It will be applicable to the individual which may include the Ex-Directors and shareholders of the ‘corporate debtor’ and they cannot be given protection from the ‘Prevention of Money Laundering Act, 2002’ and such individual cannot take any advantage of section 14.”
The way out: adopting a balanced approach
It is a well-settled principle of law that a restricted meaning should be given to notwithstanding or non-obstante clause in order to ensure that both statues are interpreted harmoniously.[ii] Such an interpretation is consistent with the presumption that there is no “repeal by implication”.[iii] Two important assertions support this presumption are: First, it is believed that since the legislature is fully aware of the existing rules, it would not purposefully pass a conflicting statute without first repealing the existing one. As a consequence, if the legislature does not explicitly provide for the abolition of a clause, it is clear that the purpose is not to repeal the existing law.[iv] Secondly, where a repealing Section is specifically provided by the new legislation, the principle of est exclusio alterius applies, meaning that the express intention of one person or thing is the exclusion of another. This can be noted by referring to Section 243 of the I&B Code which expressly provides for a repeal provision for Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920. In light of the above, it should be clear that all other legislation should be treated harmoniously as long as it is expressly repealed by the code.
According to the doctrine of harmonious construction, even though it is difficult to resolve discrepancies between two provisions or statutes, the Court may view them in such a way that all provisions or statutes are given as much effect as possible. In the words of Justice Krishna Iyer, “legislative futility is to be ruled out as long as interpretative possibility permits”. Further, the Apex Court in the case of Raj Krishna Bose v, Binod Kanungo has stated that the legislature’s purpose cannot be to render one clause or bit of legislation ineffective. Hence, It would be possible, by harmoniously interpreting two statutes, to give effect to the objectives of both laws. Given the difficulties caused by money laundering and the international fight against it, an interpretation should be undertaken that promotes the objectives of both the I&B Code, 2016 and the PMLA. This view would also be consistent with the jurisprudence of the non-obstante clause and the rules for interpreting statutes.
The same can be noted from Hon’ble Delhi High Court’s Judgement where the court while deciding upon the issue of the overlapping effect of the I&B Code on PMLA took a harmonious interpretation of the two statutes. The Delhi High Court emphasized the need for holding to the provisions of the PMLA as providing other statutes with overriding power over its provisions would negate the object of PMLA and defeat the entire purpose of its enactment. Therefore, Since the authorities concerned are distinct, there would be no overlap, and therefore all claims can be filed concurrently, until the RA invests his money in the restructuring. This will give all provisions a reasonable chance to achieve their goals. In light of the same, it is suggested that a balance must be reached between the two provisions, and this can only be achieved if all legislations are considered when making a decision on the same.
[i] Sumant Batra, Corporate Insolvency: Law and Practice, Pg. 244 (2017).
[ii] Sandeep Bhalla, Principles Of Interpretation In India With Legal Maxims 121 (2006).
[iv] Sara Jain, Analysing the overriding effect of the Insolvency and Bankruptcy Code, 2016, 13 NUJS L. Rev. 1 40, 41 (2020).
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