Proceeds of Crime overlapping in IBC vis a vis Prevention of Money Laundering Act 2002

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‘Proceeds of Crime’ overlapping in Insolvency and Bankruptcy Code 2016 vis a vis Prevention of Money Laundering Act 2002

By Keshav Mantri 
Final year student at Faculty of Law, University of Delhi

What is ‘proceeds of crime’ under Prevention of Money Laundering Act, 2002?

The term “proceeds of crime” is an essential element of the Prevention of Money Laundering Act, 2002 (hereinafter “the Act”) and has been defined under Section 2(1)(u) of the Act as “any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property.” [S. 2(1)(u), the Prevention of Money Laundering Act, 2002.]

Further, Section 3 of the Act makes it an offence of money laundering for “whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected proceeds of crime.” [ S. 3, the Prevention of Money Laundering Act, 2002.] Furthermore, the Explanation added to Section 3 by way of the Finance Act, 2019 reads that: (ii) the process or activity connected with proceeds of crime is a continuing activity and continues till such time a person is directly or indirectly enjoying the proceeds of crime by its concealment or possession or acquisition or use or projecting it as untainted property or claiming it as untainted property in any manner whatsoever.

The Finance Act, 2019 has expanded the scope of proceeds of crime under the Act by adding “Explanation” to Section 2(1)(u) of the Act which reads as: Explanation.—For the removal of doubts, it is hereby clarified that “proceeds of crime” including property not only derived or obtained from the scheduled offence but also any property which may directly or indirectly be derived or obtained as a result of any criminal activity relatable to the scheduled offence. By virtue of this explanation, the “proceeds of crime” will also cover those properties which are derived/obtained out of any criminal activity related to the scheduled offence, and not just directly out of the scheduled offences.

The Supreme Court of India in P. Chidambaram v. Directorate of Enforcement had recognized, as had also been recognized under “objectives and reasons” of the Prevention of Money Laundering Act, 2002, that the money laundering possesses serious threat not only to the economy of the country but also to its integrity and sovereignty.

Problem of ‘proceeds of crime’ under Insolvency and Bankruptcy Code 2016

Insolvency and Bankruptcy Code 2016(hereinafter referred to as “The Code”) was brought into effect to provide for a framework to restructure and reorganize debt ridden companies and provide them different opportunities to reestablish the business entity through a court supervised process which is fair and transparent. The Code provides a comprehensive approach to maximize the assets and provide remedy to the operational, financial creditors and corporate debtors.

The problem arises when the management of the company or the resolution applicant had tainted money and siphoned off funds and misappropriated funds into the company. In an Insolvency case, The Directorate of Enforcement attaches the property of the company as “proceeds of crime” and so the Corporate Insolvency Resolution Process cannot run smoothly as the properties are attached and cannot be part of the resolution plan.

In the matter of Rotomac Global Private Limited, (Through Anil Goel, Liquidator) Vs. Deputy Director, Directorate of Enforcement before the Appellate Tribunal, where Bank of Baroda had initiated Corporate Insolvency Resolution Process against Rotomac Global Private Limited and after the conclusion of the ‘corporate insolvency resolution process’ in absence of any viable and feasible resolution plan, the Adjudicating Authority ordered for liquidation of the ‘Corporate Debtor’ but Directorate of Enforcement stated investigation under Section 3 of ‘Prevention of ‘Money Laundering Act’, 2002 and found in its investigation that the accused person had misappropriated funds and committed breach of trust and laundered the money so diverted.

The Directorate of Enforcement exercising the powers under Sub-Section (1) of Section 5 of PML Act 2002 attached the properties lying in the name of Corporate Debtor and its Directors wherein it was further ordered that the same shall not be transferred, disposed, parted with or otherwise dealt with in any manner, whatsoever, until or unless specifically allowed to do so by the Directorate and further stated that the property provisionally attached constitutes the value of such proceeds of crime.

Problems when Directorate of Enforcement attaches property of the company under resolution or Bankruptcy proceeding are:

  • Speedy disposal of proceeding: The objective of IBC Code of strict timelines gets disturbed as the properties are attached by ED and pendency in disposal of such cases leads to disturbance in the timeline disposal of cases.
  • Attaches properties which are prior to the commission of offense: The Enforcement of Directorate also provisionally attaches property of the company which are brought through a legitimate process and this arouses problem of maintaining balance with the ongoing Corporate Insolvency Resolution Process.
  • Disturbs the objective of the Code: The main objective of the IBC Code 2016 is to give confidence to the creditors and maintain a balance between the interest of all stakeholders but due to attachment by the ED, the investors would refrain themselves to invest in such debt-ridden company. Thus, the whole objective of IBC to restructure and reorganize the company comes to a standstill.

Thus, it was difficult to provide a mechanism to deal with this issue.While hearing the BPSL case, the NCLAT, asked “the two wings of the same government, i.e. the Finance Ministry and the Ministry of Corporate Affairs”. to sit together and settle the issue. The NCLAT had also put the Rs 19,700-crore payout by the JSW Steel to buy debt-ridden BPSL on hold until further orders.

“You are going to kill the economy of the country… (You are) playing with fire,” Justice Mukhopadhyaya said. “No outsider will come and purchase (distressed companies) … IBC cannot be annulled in this manner. Money laundering is by an individual.”

So, the Central Government amended Section 31 of the Code 2019 which stated:

 Approval of resolution plan:

“31. (1) If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, [including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed,] creditors, guarantors and other stakeholders involved in the resolution plan.

Provided that the Adjudicating Authority shall, before passing an order for approval of resolution plan under this sub-section, satisfy that the resolution plan has provisions for its effective implementation.

The amendment provides that approval of the Resolution Plan by the Adjudicating Authority under Section 30(4) of the Code shall be binding to the employees, members and the Central Government which provides a route to the resolution applicant to take over the companies without the attachment of properties by ED.

The Central Government also brought Section 32A in the amended Code of 2019 which states that:

32A: Liability for prior offences, etc.:

32A. (1) Notwithstanding anything to the contrary contained in this Code or any other law for the time being in force, the liability of a corporate debtor for an offence committed prior to the commencement of the corporate insolvency resolution process shall cease, and the corporate debtor shall not be prosecuted for such an offence from the date the resolution plan has been approved by the Adjudicating Authority under section 31, if the resolution plan results in the change in the management or control of the corporate debtor to a person who was not—

(a) a promoter or in the management or control of the corporate debtor or a related party of such a person; or

(b) a person with regard to whom the relevant investigating authority has, on the basis of material in its possession, reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court:

Provided that if a prosecution had been instituted during the corporate insolvency resolution process against such corporate debtor, it shall stand discharged from the date of approval of the resolution plan subject to requirements of this sub-section having been fulfilled:

Provided further that every person who was a “designated partner” as defined in clause (j) of section 2 of the Limited Liability Partnership Act, 2008, or an “officer who is in default”, as defined in clause (60) of section 2 of the Companies Act, 2013, or was in any manner incharge of, or responsible to the corporate debtor for the conduct of its business or associated with the corporate debtor in any manner and who was directly or indirectly involved in the commission of such offence as per the report submitted or complaint filed by the investigating authority, shall continue to be liable to be prosecuted and punished for such an offence committed by the corporate debtor notwithstanding that the corporate debtor’s liability has ceased under this sub-section.

(2) No action shall be taken against the property of the corporate debtor in relation to an offence committed prior to the commencement of the corporate insolvency resolution process of the corporate debtor, where such property is covered under a resolution plan approved by the Adjudicating Authority under section 31, which results in the change in control of the corporate debtor to a person, or sale of liquidation assets under the provisions of Chapter III of Part II of this Code to a person, who was not—

(i) a promoter or in the management or control of the corporate debtor or a related party of such a person; or

(ii) a person with regard to whom the relevant investigating authority has, on the basis of material in its possession reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court.

Explanation— For the purposes of this sub-section, it is hereby clarified that, —

(i) an action against the property of the corporate debtor in relation to an offence shall include the attachment, seizure, retention or confiscation of such property under such law as may be applicable to the corporate debtor;

(ii) nothing in this sub-section shall be construed to bar an action against the property of any person, other than the corporate debtor or a person who has acquired such property through corporate insolvency resolution process or liquidation process under this Code and fulfils the requirements specified in this section, against whom such an action may be taken under such law as may be applicable.

(3) Subject to the provisions contained in sub-sections (1) and (2), and notwithstanding the immunity given in this section, the corporate debtor and any person who may be required to provide assistance under such law as may be applicable to such corporate debtor or person, shall extend all assistance and co-operation to any authority investigating an offence committed prior to the commencement of the corporate insolvency resolution process.

Conditions after the amendment of 2019:

  • No liability on corporate debtor for offence prior to CIRP: Section 32A work as as a “Suraksha Kawach” for the companies. As per new Section 32A inserted in IBC, the liability of a corporate debtor for an offence committed under any law prior to the commencement of CIRP shall cease and the corporate debtor will not be prosecuted for such an offence from the date the resolution plan is approved by the adjudicating authority.
  • No action against property of corporate debtor: Further, as per provisions of Section 32A(2) of the IBC, no action including attachment, seizure, retention or confiscation of property of the corporate debtor can be taken in relation to an offence committed prior to the commencement of CIRP, in case such property is covered by the resolution plan approved by NCLT. Also, conditions relating to change in control or management, as present for the liabilities against the corporate debtor, are also relevant for the action against property of the corporate debtor.It may however be noted that action against the properties of any person other than the corporate debtor or the person who acquired such properties through CIRP or liquidation process, is not barred, and action may be taken under the relevant law.

Controversy whether IBC will override PML Act 2002

There is still ambiguity whether IBC 2016 would override PML Act 2002, so some instances where the courts have tried to interpret and pronounce certain orders and judgments:

  1. On April 22, 2019, NCLT passed an interim order upholding the overriding effect of IBC and while placing reliance on the observations of the Hon’ble Supreme Court in Principal Commissioner of Income Tax v. Monnet Ispat and Energy Ltd., 63(IBC)03/2018 held that ‘no attachment can be ordered by the Income Tax Department in respect of the assets of the Corporate Debtor. What is true in respect of the Income Tax Act is equally true in respect of other statutes as well.’(“NCLT order dated April 22, 2019”)
  2. In Directorate of Enforcement v. Axis Bank, 2019, Delhi High Court held that if a bonafide third party claimant had acquired interest in the property which is being subjected to attachment at a time anterior to the commission of the criminal activity, the product whereof is suspected as proceeds of crime, the acquisition of such interest in property by the third party cannot conceivably be on account of intent to defeat this law.
  3. The Hon’ble Supreme Court in Solidaire India Ltd v. Fairgrowth Financial Services Pvt. Ltd., (2001) 3 SCC 71 held that where there are two special statues which contain non-obstante clauses, the later statute must prevail. This is because at the time of enactment of the later statute, the Legislature was aware of the earlier legislation and its non-obstante clause.

Conclusion

The object of IBC is to expedite the insolvency process and to secure maximization of value of assets of Corporate Debtor for distribution to all stake holders. PMLA contemplates restoration of confiscated property to the claimants who have legitimate interest.The objective of both the law is to help the beneficiaries i.e the Creditors to maximize the assets. In result of the above, it is important to maintain a balance between the two laws and Section 32A of the Code provides better insights to the CIR process. If properties are attached by ED after a successful court supervised process it will hamper the economy as a smaller number of resolution applicant would come forward and build the debt-ridden company and would fail to achieve the ultimate objective of the whole Insolvency and Bankruptcy Code.It is a settled rule of interpretation that if one construction leads to a conflict, whereas on another construction, two Acts can he harmoniously constructed then the latter must be adopted.

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