The Prevention of Money Laundering Act, 2002 (“PMLA”) was enacted to punish the offenders who indulge in process of procuring money illegally and then transferring it to overseas accounts to conceal its origin.1 The Act also provides for seizure and confiscation of properties that are obtained by virtue of the laundered money. An officer authorized by Enforcement Directorate (“ED”) can attach the property of proceeds of crime after completing all the necessary formalities provided in the Act. The Insolvency and Bankruptcy Code, 2016 (“IBC”) is a consolidating act which provides for rehabilitation and revival of sick corporates, partnership firms & individuals in a timely fashion. The basic aim of IBC is to maximize the value of assets of the corporate debtor to balance the interest of all the stakeholders.2
PMLA & IBC both consist of a non-obstante clause therefore both are exclusive of each other in a literal sense. However, when it comes to enforcement of the said laws, different courts & tribunals have different opinions regarding the overriding effect they have on each other. This anomaly led to a conflict of interest amongst ED and the Insolvency & Bankruptcy Board of India (“IBBI”). In some cases, even the Securities Exchange Board of India (“SEBI”) was confronted with the question that whether attachment of property is possible when Corporate Insolvency Resolution Process (“CIRP”) is also pending.
This issue is detrimental to the interest of the resolution applicants in their process of bidding. The resolution applicants who bid for the financially distressed assets have no means to know whether the asset has been attached by ED for money laundering. It is essential that a safety net is provided to them.
This article examines the objectives of IBC & PMLA, their non-obstante clauses, and landmark cases to the overriding effect they have on each other. The second part of the article analyzes Section 32A, inserted in IBC through a recent amendment & the implications that it has over the various stakeholders in the market.
The NDA Government enacted this legislation in the year 2002 when a resolution was passed by the General Assembly of the United Nation for tackling money laundering. The resolution called upon the member states to adopt consolidated money-laundering legislation which provides for confiscation of property derived from laundered money.3 The Black’s Law Dictionary defines the term ‘money laundering’ as: “the act of transferring illegally obtained money through legitimate people or accounts so that its original source cannot be traced”.4
The PMLA describes the offense of money laundering as the one in which a person attempts to indulge or knowingly assists or is a party to a transaction that involves the proceeds of a crime.5 ’Proceeds of the crime’ means a property acquired by any person as a result of criminal activity in relation to a scheduled offense.6 Money laundering also includes concealment, possession, acquisition, use, or projecting/claiming the property as an untainted one. The term ‘criminal activity’ has not been defined in the Act and hence shall include all the activities that are incidental to the scheduled offense. The punishment for this offense is a minimum sentence of 3 years of rigorous imprisonment which may be extended up to 7 years in addition to a fine.7
The Act authorizes the Director/Deputy Director of the ED to attach the property which is the proceeds of a crime and is likely to be dealt with in a manner that may act as a hindrance in achieving the objectives of the Act.8 This can be done for a period of not more than 180 days and the reasons for such attachment have to be recorded in writing. The Director is obliged to forward the order and the material so attached to the Adjudicating Authority immediately. The burden of proof lied on the person who is accused of committing the offense of money laundering to prove his innocence.9
The Adjudicating Authority consists of three members; the Chairperson and two other members, who are appointed by the Central Government. This authority has the sole discretion to decide the fate of the attached property.10 It is governed by the principles of natural justice and is not bound by the Civil Procedure Code, 1908. The period of 180 days can be extended upon the discretion of the Adjudicating Authority.
The IBC was enacted in the year 2016 to consolidate all the laws relating to the revival and insolvency of corporates, partnership firms, and individuals within a particular time frame. The objectives of the Act are to maximize the value of assets, enhance the availability of credit for improving the ease of doing business in India, and reviving the corporate as a going concern. This code repealed Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920, and amended 11 laws including The Companies Act, 2013.
The term ‘corporate debtor’ means a corporate person who owes a financial/operational debt to someone.11 There are two categories of creditors under the code: financial & operational creditors. A ‘financial creditor’ is a creditor to whom some financial debt is owed.12 ‘Financial debt’ is any debt in addition to interest accrued against the consideration of the time value of money.13 On the contrary, an ‘operational creditor’ is a person to whom an operational debt is owed14 and operational debt includes money owed a claim in respect of goods & services, employment dues & a debt owed to Central & State Government.15
The CIRP can be initiated by a financial creditor or an operational creditor or a corporate itself in the event there is a minimum default of INR 1,00,000 (Rupees One Lakh Only).16 An application has to be made to the National Company Law Tribunal (“NCLT”) who will admit the application based on the existence of default & existence of a debt. The NCLT has to either accept or reject the application within 14 days from the date of filing of the application. The CIRP has to be completed within 180 days from its initiation.17
Once the application is accepted by NCLT all the powers of the management of the corporate are taken away from it and are handed over to a professional agent called the ‘Interim Insolvency Resolution Professional (“IRP”)’.18 From this day, IRP is responsible to take all the management decisions and handle the day-to-day affairs of the corporate. All the assets of the company are frozen as the moratorium also begins from the same day. No legal proceedings can be initiated, no asset can be transferred not any claim is entertained during the moratorium.19 The IRP is also responsible to make a public announcement of the execution of the moratorium and examine all the creditor’s claims.20 He constitutes the Committee of Creditors (“CoC”) which consists of the financial creditors only.21
The CoC has to meet within 7 days of its constitution & decide whether they want to appoint another RP or continue with the existing one.22 The RP prepares an information memorandum based on which the Resolution Applicants submit their resolution plans.23 The Resolution plan has to be approved by the CoC with a 75% majority.24 Once this is done, the financial creditors are to decide whether they want to rehabilitate the corporate as a going concern or liquidate the company.
Under PMLA, two proceedings run simultaneously; one is attachment & seizure of property by ED & the second is criminal prosecution of the accused by the session court. On the other hand, IBC being a relatively new law has certain provisions that clash with this attachment. It leaves us behind with one very significant question of law: whether the protection of moratorium under IBC can be granted to properties attached under PMLA by ED?
Section 71 of PMLA reads as follows:
“The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.”25
Section 238 of IBC states that:
“The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”26
It is clear from the above two clauses that both the enactments have a non-obstante clause, both of which give a clear overriding effect to both of the Acts. However, the Supreme Court in the case of Maruti Udyog v. Ram Lal & Ors.27 has held that if two special statutes have a non-obstante clause, the one which is enacted will prevail over the earlier one. The reasoning for such a conclusion is that the Legislature while promulgating the latter Act had the knowledge that a previous Act containing a non-obstante clause already exists. If the legislature intends something different, it would have specified that.
NCLT first addressed this battle of primacy in a liquidation order passed against M/s Nathella Sampath Jewellery Pvt Ltd28 wherein the Tribunal observed that this liquidation order will in no way affect the money-laundering proceedings going against the promoters of the company. The next in line was Deputy Director Directorate of Enforcement, Delhi v. Axis Bank29 wherein the Delhi HC held that the objectives of two enactments are completely different and hence the court should provide for a harmonious construction of the said provisions. The IBC will not prevail over PMLA. In case if any third party has any prior claims on the attached property, the party will have to establish that they had no knowledge of the crime & the special court will adjudicate upon their charge.30
In Rotomac Global Private Limited v. Deputy Director, Directorate of Enforcement31, the NCLT held that the proceedings under PMLA are penal in nature, and thus Section 14 of IBC is not applicable on them. Since the objectives of both the enactments are different, proceedings can be invoked simultaneously and none of them will have an overriding effect on each other.
However, the ruling of the Delhi HC was overruled by NCLAT in the case of JSW Steel Ltd. v. Mahender Kumar Khandelwal & Ors.32 The ED claimed that some of the assets owned by M/s Bhushan Power & Steel (“BPSL”) were in the nature of ‘proceeds of crime’ and hence they had the power to attach the said properties. JSW Steel (resolution applicant) moved to the tribunal to seek redressal on the issue that whether ED has the power to attach the property when the resolution plan has already been approved. The NCLAT ruled that ED will have a claim on the property in the nature of the operational debt. After the insertion of Section 32A vide Insolvency & Bankruptcy (Amendment) Act, 2020 (“Amendment’), the NCLAT held that the resolution plan submitted by JSW Steel stands approved and the amendment provides blanket immunity to them, thereby flagging all the criminal prosecution against the corporate debtor. However, this decision of NCLAT has been challenged by the ED in the Supreme Court.33
A similar issue was faced by SEBI when it passed an order for attachment of assets of a company. Subsequently, CIRP was initiated against the said company and there was a conflict of interest. The NCLAT held that due to S. 238 of IBC the code will override the powers of SEBI & no attachment can be done by it.34
In light of the BPSL, JSW & ED conflict, the fourth amendment was made to the Code. The amendment inserted Section 32A35 in the Code. The Amendments brought about by the section are as follows:
The change brought about by Section 32A is by far the most powerful non-obstante amendment ever made by the legislature in India.40 The section grants blanket immunity to the promoters & the erstwhile management of the corporate debtor since no proceedings can be initiated against them. The insertion of this section has different implications for different stakeholders, which have been enumerated below:
The insertion of Section 32A in IBC may have come as a blessing to the investors and the management of the corporate debtor, however, the said amendment also opens a pandora’s box for other parties. The first loophole with this non-obstante clause is that the Delhi HC in Axis Bank44 has held that the objectives of PMLA & IBC are different and hence both of them shall co-exist and a harmonious construction shall be provided to them. This problem is still unresolved as both the enactments can still not exist together. The ED has been left remediless as no attachment of the property is possible if the company is undergoing CIRP. This provides an escape to the management & person in default as they cannot be imposed with any criminal liability.
The Amendment only provides for circumstances where the scheduled offense is committed by the corporate debtor. The provision does not talk about group entities and recourse to be taken when an offense is committed by the group and the ‘proceeds of the crime’ rest with the corporate debtor.45 There is a possibility that the promoters may collude with the resolution applicant and hatch a conspiracy to evade the criminal liability as this amendment legalizes all the ‘proceeds of crime’ once approved in the resolution plan.46
The provision also does not provide what all regulatory bodies fall under the category of “investigating authority”. The issue that arises due to this vague definition is that whether an approved resolution plan can exonerate the corporate debtor from all the other criminal liability claims like cheques dishonor or securities law breach or FEMA violations etc.47
One of the significant implications of this amendment is that it is not a permanent solution for any of the parties. The amendment protects the corporate debtor from attachment till CIRP is completed. Once it is done, the ED can proceed with the attachment and thus leaving the company high & dry again. The insolvency proceedings would be of no use.
The introduction of Section 32A has settled the position of law and has cleared that IBC proceedings will override the PMLA prosecution. There can be no attachment of assets of a company when it is undergoing a moratorium. This amendment is beneficial for the investors of the company as the illegal properties can be utilized to settle their claims. It also exonerates the corporate debtor of all the criminal liabilities & all claims of seizure, attachment, confiscation & retention of tainted properties.
However, the said provision also provides an escape route to the offenders. The management obviously has a sense of the financials of the company and they have prior knowledge if there is a possibility of the company going insolvent. Taking advantage of this knowledge, they may commit the criminal offense like money laundering under the impression that they will get an advantage of Section 32A. If they are successful and the resolution plan is approved by the Tribunal, all the illegal proceeds would be legalized. The provision is also unclear as to the fact that what will be the solution if the ED proceedings are already going on when the CIRP begins.
A lot of clarity is yet to be obtained on this provision by the Court. The appeal in the BPSL case is still pending in the Supreme Court and hopefully, it will resolve the issues. To balance out the objectives of both the Acts, the investigating authorities like ED & SEBI shall be considered as operation creditors under the ambit on ‘dues against government authorities’. This will provide a common ground wherein the conflicting interests of both the government agencies i.e. IBBI & ED will be settled.