The Insolvency and Bankruptcy Code, 2016, (IBC) been hailed as a major game changer economic legislation: as it has secured more rights to the creditors. Since the jurisprudence of this nascent Code is still developing, the central enquiry of this article is — whether the imposition of moratorium under Section 14 of the IBC would prevent the initiation or continuation of attachment proceedings under the Prevention of Money Laundering Act (PMLA) ? The answer to this query is in the affirmative. Three major arguments are advanced to support this proposition. First, IBC is a later enactment, which stipulates a non-obstante clause; hence it would override the inconsistent provisions of the PMLA. Second, the economic rationale behind the IBC provides for the speedy resolution of corporate debtor's assets — than the longer proceedings under PMLA. Thus the legislative intention supports giving prevailing effect to the proceedings under IBC: insofar as debt recovery actions under PMLA are concerned. And third, in any case, Section 63 of the IBC debars the jurisdiction of other civil courts or authority—which includes adjudicating authority under the PMLA—to try any matter for which NCLT has been vested with the jurisdiction. In light of these reasons, I conclude that the moratorium under Section 14 of the IBC would apply to the attachment proceedings under the PMLA.
Before diving deep into the murky water: that is to analyse, applicability of moratorium under IBC to attachment proceedings under PMLA, it is pertinent to first understand the statutory objective behind it. Moratorium creates a calm period for negotiations.1 It affords the creditors and corporate debtors the opportunity to apply their minds sans additional stress during the closure of IRP. And thereupon discuss the viability of reviving or restructuring the corporate entity.
In addition the declaration of moratorium during the continuation of IRP, preserves the assets of the company—from downfall. It enables the corporate entity the opportunity to continue its operations without fear of judicial nemesis during the continuation of IRP.2 Thus moratorium seeks to reinforce its legislative wisdom—that is, providing 'value maximisation' to the corporate debtor's assets.3
Accordingly, Section 14 (1)(a) of the IBC grants NCLT the power4 to declare moratorium on inter alia: "the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority".5
Scrutinising the broad scope of Section 14 (1)(a), closely: what is judicially well-settled is that the declaration of moratorium does not puts an embargo on institution or continuance of proceedings under Articles 32 and 226 of the Constitution of India;6 arbitration proceedings under Section 34 of the Arbitration and Conciliation Act, 1996;7 suits against the personal guarantor of a corporate debtor;8 proceedings under Section 138 of the Negotiable Instruments Act;9 and other regular criminal proceedings—such as contempt and regular IPC proceedings.10
However, a judicial grey area remains insofar as to determine whether the moratorium declared under IBC would prevail over proceedings under PMLA—especially, in realm of attachment of properties and assets of the corporate debtor by the prescribed authority. For instance in the case of SREI Infrastructure Finance Limited v. Sterling SEZ and Infrastructure Limited,11 NCLT Mumbai had held that adjudicating authority under PMLA does not have jurisdiction to attach the properties and assets of corporate debtor: which is undergoing corporate insolvency resolution process. It concluded that if such an attachment order is passed, it would be a nullity and non-est in law, and thereby would have no binding effect.
On the other hand, the Delhi High Court in its recent judgment, ruled that debt recovery legislations like RDBA, SARFAESI, and IBC does not prevail over the provisions of PMLA: Instead they must be harmonically construed.12 In this context, the court reiterated the law: holding that the attachment proceedings under PMLA are civil sanctions, which runs concurrent to criminal investigation vis-à-vis the offence of money laundering. Notably the interesting aspect of court's decision was where it distinguished that moratorium imposed under Section 14 of IBC would not come in way of proceedings under PMLA; especially in cases, where the corporate debtor is deprived of those assets and properties, which are obtained from proceeds of crime.13 The court justified that such assets and properties, which have an element of criminality connoted to it, cannot be used by corporate debtor to discharge his civil liability towards the creditors.14
In light of this existing legal conundrum pertaining to the issue of applicability of moratorium under IBC to attachment proceedings under PMLA, this Article argues that the decision of NCLT Mumbai rendered in matter of SREI Infrastructure is correct: That is to posit: the moratorium under Section 14 of IBC would override the attachment proceedings under PMLA.
A. Non-obstante clause in the later enacted law overrides the earlier non-obstante clause
IBC is a later enacted legislation than PMLA. Hence in purview of non-obstante clause contained in Section 238 of the Act, the moratorium imposed under Section 14 would prevail — despite the non-obstante clause contained in Section 71 of PMLA. This is because of the controlling decision of Supreme Court in Solidaire India Ltd. v. Fairgrowth Financial Services Pvt. Ltd.15 In Solidaire the Supreme Court with the aid of canons of statutory interpretation, concluded that, if there arises an inconsistency between two special statutes—each containing an non-obstante clause — the later enacted statute must prevail. The reason is that the legislature was well aware of the non-obstante clause contained in any other law at the time of its enactment. Thus if the later enacted statute is still conferred by it with the non-obstante clause, the intention of the legislature becomes crystal clear: that is to give overriding effect to the later statute: despite, notwithstanding, anything contrary contained in the earlier enacted statutes.
Pertinently even the Delhi High Court in the Axis Bank case,16 overlooked its controlling precedent of two judge bench. For instance, in Kohinoor Creations v. Syndicate Bank,17 the Delhi High Court have held that the non-obstante clause contained in the Recovery of Debts due to Banks and Financial Instruments Act, 1993 (RDB Act) would override the non-obstante clause contained in Section 8 of the Arbitration and Conciliation Act, 1996. This was due to the fact that RDB Act was later amended after 1996. And since the legislature intentionally sought to retain the non-obstante clause in RDB Act — the court correctly concluded that, the non-obstante clause in RDB Act would prevail over Arbitration and Conciliation Act, 1996.
Additionally the court reasoned that Arbitration & Conciliation Act, 1996 is a general law: insofar as debt recovery actions are concerned.18 Hence giving it a overriding effect would not disturb the statutory scheme and arrangement of both these laws. In this backdrop, it is posited that the judgment of single judge bench of the Delhi High Court in Axis Bank is per incuriam —to an extent, it ruled that IBC does not prevail over PMLA — insofar as debt recovery proceedings are concerned.
B. Economic rationale behind IBC is paramount
The objective of both the legislations — IBC and PMLA — is to provide for due and fair consideration of economic interests of the beneficiaries. But it is to be distinguished that IBC provides for a speedy mechanism and strict time frames within which resolution has to be arrived. In addition, the quantum of money that is locked in the assets can be released earlier to the creditors under IBC.19 On the other hand, the criminal proceedings by the Special Court under PMLA takes much longer time: which would inevitably lead to the erosion in valuation of corporate debtor's assets. Hence even after the imposition of moratorium, if creditors are still required to apply to the adjudicating authority under PMLA to recover their dues, which is both time consuming and financially deleterious, it would defeat the objective of the IBC Code.20
Interestingly, even supposing, that the debts and dues are payable to the Government under PMLA proceedings: they are still ranked lower in precedence order under IBC. For instance, Section 53 of the IBC lays down priority of payment on liquidation. Notably only when all of operational creditors, and financial creditors — both secured and unsecured — are paid, can the debts and dues be paid to the Government. Considering that the Section 238 of IBC is a non-obstante clause contained in IBC — it overrides the PMLA. Concordantly it is argued that the Government cannot take escape route to PMLA to seek its debts and dues when moratorium is imposed.
This view was also adopted by the Supreme Court in the case of PR Commissioner of Income Tax v. Monnet Ispat & Energy Limited.21 The court ruled that the IBC Code would overrule inconsistent provisions in any other statute for the time being in force. The court referred to its controlling decision in Dena Bank v. Bhikabhai Parekh,22 and thereby ordered that crown debts such as income-tax dues does not take precedence over debts payable to the secured creditors under the IBC Code. Likewise in Assistant Commissioner (CT) v. Indian Overseas Bank,23 pertinently, the Madras High Court while upholding the amended provisions of Section 31B of RDDB Act — concluded that, debts owed to the secured financial creditors shall have priority over all other dues payable to the Government—such as revenue, taxes, cesses, and rates due to other governmental authorities. In view of the aforesaid, once the moratorium period has commenced, the debts due to the statutory authorities and other crown debts can only be recovered under the IBC Code and not through alternative escape route under PMLA: which would frustrate the objective of IBC.
C. Section 63 of IBC ousts the jurisdiction of adjudicating authority under PMLA
Pertinently, Section 63 of the IBC also debars the jurisdiction of 'any other civil court or authority' in respect of matters on which NCLT has jurisdiction. That essentially implies, the jurisdiction of NCLT under IBC for debt recovery actions — including taking control of corporate debtor's properties — would supersede the jurisdiction of prescribed adjudicating authority under PMLA. This observation was also affirmed in case of Bank of Baroda v. Deputy Directorate Enforcement,24 whereby the appellate tribunal under PMLA ruled that, "the Adjudicating Authority under PMLA does not have jurisdiction to attach the properties of the Corporate Debtor undergoing Corporate Insolvency Resolution Process."
Similarly this view was adopted by Justice Manmohan Singh in case of PNB v. Deputy Director of Directorate of Enforcement, Raipur.25 The issue involved therein was if the moratorium period comes into effect — could the Enforcement Directorate attach the assets and properties of corporate debtor under PMLA? The appellate tribunal while setting aside the order of adjudicating authority, that granted the Enforcement Directorate authority to attach the corporate debtor's property mortgaged with the bank, held that, upon admission of moratorium application by NCLT — the Enforcement Directorate does not have any authority vested — to attach the corporate debtor's properties.
In this context, the tribunal observed that proceedings under PMLA are civil in nature: thus, they cannot escape from the moratorium imposed under Section 14 of IBC. This is also ratified by the legislative intent: whereby IBC is a later enactment, which contains a non-obstante clause in Section 238. Resultantly if since attachment proceedings are civil in nature: thus PMLA cannot be applied to the detriment of the third party; who has no involvement in the scheduled offence of money laundering—but rather is just an innocent secured creditor.26 Thus in view of the aforesaid, it is posited that once the moratorium period comes into effect, the proceedings under PMLA would automatically stay: And there could be no subsequent attachment of assets and properties of the corporate debtor.
After analysing the scope of moratorium and highlighting legislative wisdom behind it, I argued in this paper that the scope of Section 14(1) of IBC is wide enough to cover the attachment proceedings under PMLA. In this regard, I examined the controlling precedents and with the canons of statutory interpretation, concluded that, when a moratorium period commences under IBC: all debt recovery actions, including actions commenced under PMLA, would standstill. This is because there could not be any additional stress on the business during IRP by instituting or continuing civil actions against the corporate entity. Which amongst includes money related suits. Since the confiscation and attachment of properties under PMLA is for the purpose of settling the beneficiaries dues; thus it falls within the broad contours of money suits under IBC — ergo moratorium would apply!