Clash Of Jurisdiction: Analysing The IBC-PMLA Conundrum

The Conflicting Dispute

Before delving into the dispute of IBC and PMLA, it is worth looking at the relationship between Section 71 of the PMLA and Section 238 of the IBC. These provisions are "overriding provisions" that have priority effect over the provisions of both laws according to their application. This signifies that if any legislation with similar clauses disputes the present act, then the latter shall prevail because they were created with due research and analysis. But even though there still tends to be a clear demarcation between both the legislations wherein there have been many instances where the court has been stuck while deciding on the supremacy of both. We shall start by analysing judgements and try ro develop an idea about what the court tends to believe while dealing with this issue.

In the case of Rajiv Chakraborty Resolution Professional of EEIL vs Directorate Of Enforcement, the main issue that arose was when the PMLA freeze 74 accounts of the corporate debtor when it was charged under the offense of money laundering and the same was also undergoing the process of CIRP. It was held by the Delhi High Court that just because a particular property may have come to be provisionally attached under the PMLA, it does not confer over the enforcing authority under the PMLA act a superior or justified authority to supersede the provisions of the IBC and utilize the proceeds that it may receive upon the selling of those properties. The court also took a backseat while analyzing Section 32A of the IBC stating that the section provides for immunity to corporate debtors and their assets, upon approval of a resolution plan, subject to certain conditions stipulated in that provision.^[1]

Similarly, Delhi High Court in the case of Nitin Jain Liquidator PSL Limited v. Directorate of Enforcement, upheld Section 32A of IBC. The paper would tend to keep more reliance over this judgment as the court has favoured the Insolvency regulation over the Money laundering act and has also given a proper reasoning for the same. The court stated that Section 32A in unambiguous terms specifies the approval of the resolution plan in accordance with the procedure laid down in Chapter II. Based on these facts, this Court observed that the approval of the procedure to be followed by the judicial authority during the process of removal would correspond to the legal criteria established in Article 32A. It must consequently be held that the power to attach as conferred by Section 5 of the PMLA would cease to be exercisable once any one of the measures specified in Regulation 32 of the Insolvency Regulation 2016 comes to be adopted and approved by the Adjudicating Authority. The expression sale of liquidation assets must be construed accordingly. The power otherwise vested in the respondent under the PMLA to provisionally attach or move against the properties of the corporate debtor would stand foreclosed once the Adjudicating Authority comes to approve the mode selected during liquidation. To this extent and upon the Adjudicating Authority approving the measure to be implemented, the PMLA must yield. The Court also bears in mind that the bar that stands created under Section 32A operates and extends only insofar as the properties of the corporate debtor are concerned.^[2]

NCLAT in case of JSW Steel Limited Vs Mahender Kumar Khandelwal & Anr, after considering the submissions of the Ministry of Corporate Affairs (MCA) and the steps taken by the 'Directorate of Enforcement', held that 'Directorate of Enforcement' is prohibited from the attachment of any property of the 'Corporate Debtor' without prior permission of the National Company Law Appellate Tribunal (NCLAT). Moreover, the property which has already been attached by the Enforcement Directorate, shall be released in favor of the 'Resolution Professional' immediately.^[3]

The NCLAT in Varrsana Ispat Ltd v. Deputy Director of Enforcement (2019) discussed the potential working of Moratorium under the IBC. It stated that once the CIRP process has been initiated and that the Moratorium has been released under Section 14, the same shall not act as the barrier for the PMLA to conduct its functions. That it held that the moratorium would not act as a hindrance to the attachment orders passed under the PMLA. Dismissing the appeal, it was held that the attachments were made before the commencement of corporate insolvency resolution process ("CIRP") and therefore inapplicable under Section 14. NCLAT also stated that the PMLA deals with "proceeds of crime " and the crime of "Money laundering" includes the confiscation of assets derived from or related to money laundering. Therefore, Section 14 of the IBC does not apply to such activities. The NCLAT also said that for punishment, money laundering offenses are punishable with rigorous imprisonment, which may be imposed on persons who may include former directors. There is no benefit under section 14 of the IBC for these people.^[4]

In case of the Directorate of Enforcement v. Manoj Kumar Agarwal, NCLAT Delhi abandoned this position holding that keeping in mind the objectives of the IBC, the authorities under the PMLA that is the Enforcement Directorate are barred from exercising the power to arrest goods after the moratorium.^[5] Even the NCLT Mumbai in the case of STCI v. DSK Southern Projects upholding the decision of NCLAT Delhi stated that the attachment of assets by the Enforcement Directorate could not continue after the inclusion of corporate debtors in the CIRP.^[6]

The NCLT Jaipur Bench in the case of Mr. Satyendra P. Khorania Liquidator^[7] recently ruled that the authorities are not empowered to attach assets of debtors under the PMLA if a winding-up order has been passed under the IBC.It also cited the decision of Manoj Kumar in the Delhi High Court and Rajiv Chakraborty stating that the power of the authorities under the PMLA to seize or confiscate property ceases when a liquidation plan has been approved or worked upon. Similarly, NCLT Delhi in the case of Jagat Pal Paliwal and Anr. v. Jassum Propcon Projects Private Limited^[8] also said that the CBI cannot seize the assets of a credit corporation or initiate legal proceedings after the commencement of the CIRP, as the seizure of bank accounts during the moratorium period is prohibited under the IBC. NCLT Delhi also ordered the bank to de-freeze the accounts of the corporate debtors linked by the CBI so that the RP can use the funds to initiate the process of corporate insolvency. By analyzing the judgements, it has become difficult to conclude the supremacy between both the acts. Even the courts have been under deviation in the approach towards attachment of assets of a corporate debtor during CIRP. Both NCLT and NCLAT have not been able to give a proper reasoning for the same and the only precedence that can now be followed is from the opinion of the supreme court.

The Supreme Court in the case of JSW Steel Ltd v. Mahender Kumar Khandelwal & Ors, asked the Central Government to address this challenge, saying that the seizure of goods 'sold by new buyers in auctions under the IBC' will not interfere with the objectives of the IBC.^[9] The apex court dealt with the same issue recently in the case of Ashok Kumar Sarawagi Vs. Enforcement Directorate and Anr. that the issue is whether the order passed by ED regarding attachment of assets of the debtor company was valid after the initiation of CIRP. The Apex court issued a notice to the ED, this time allowing the CIRP to continue with the IBC "as is" and "with all things on purpose". The Apex Court has made it clear that the approval of the decision plan by the NCLT is subject to such orders as may be passed by the Apex Court. As a result, the decision of the Apex Court was not sufficient to decide upon the issue of supremacy between both the legislations.

Ambiguity in the application of legal provisions leads to lack of clarity for investors. The Court and the Tribunal recognized that the purpose of Section 32A and CIRP is to ensure favorable recovery of debtors and reduce the liabilities of new investors. Actions pending against a creditor corporation by making payments may adversely affect the value of the assets being liquidated. The RP/liquidator has the right to seize and dispose of the assets of the debtor company in such a way that the construction costs are ineffective because, after the commencement of the liquidation, the assets of the creditor company cannot be met. , whether by retention or forfeiture, even if subject to judgment, for the obligations imposed. by law through PMLA.^[10] Therefore, legislative reforms must strike a balance to ensure that (a) enforcement does not prevent the source of post-CIRP distressed asset sale investments and (b) ensure full provisions to firms' illness.

The complexion of the IBC and the PMLA creates a precarious balance between economic stimulus and policing requirements. On the other hand, the IBC embodies the vision of reviving insolvent entities, promoting entrepreneurship and recovering creditors through the Corporate Insolvency Resolution Process (CIRP). On the other hand, PMLA embodies the commitment to combat economic crime, prevent money laundering and maintain the integrity of the financial system through strict confiscation of assets and criminal prosecution measures. At the heart of the controversy between the IBC and the PMLA is the treatment of assets covered by both laws. While the IBC aims to facilitate speedy resolution of insolvent entities and realization of assets for the benefit of creditors, PMLA lays down strict measures to confiscate assets tainted by money laundering activities. The conflicting priorities of these legal frameworks highlight broader tensions between economic obligations and legal mandates that require a delicate balance between restoration goals and deterrence. Court decisions provide insight into the resolution of certain disputes, but have also highlighted the need for legislative clarity and harmonization. The judiciary, which has struggled with the primacy of conflicting provisions, has attempted to interpret, and reconcile the divergent mandates of the IBC and the PMLA, often leaning towards protecting the interests of resolution applicants and promoting the efficiency of the insolvency resolution process. However, the lack of clear legislative guidance increased the ambiguity and inconsistency of legal decisions, which emphasized the need for legislative reforms to provide clear guidance and address the shortcomings of the current legal framework.

Views are personal.

References

Case Laws

1. Rajiv Chakraborty Resolution Professional of EEIL v. Directorate of Enforcement, 2022 SCC OnLine Del 3703
2. Nitin Jain Liquidator PSL Limited v. Directorate of Enforcement, 2021 SCC OnLine Del 5281
3. JSW Steel Ltd. v. Mahender Kumar Khandelwal, 2020 SCC OnLine NCLAT 431
4. Varrsana Ispat Limited v. Deputy Director, Directorate of Enforcement, 2019 SCC OnLine NCLAT 236
5. Directorate of Enforcement v. Manoj Kumar Agarwal, 2021 SCC OnLine NCLAT 121
6. STCI Finance Ltd. v. DSK Southern Projects (P) Ltd., 2023 SCC OnLine NCLT 9819
7. Packwell (India) (P) Ltd. v. Emgee Cables & Communication Ltd., 2019 SCC OnLine NCLT 30061
8. Jagat Pal Paliwal v. Jassum Propcon Projects (P) Ltd., 2023 SCC OnLine NCLT 329

Articles

V, Pandichelvi, and Saranya S. “Implication of Continued Fraction and Metallic Ratios to Resolve Binary Quadratic Diophantine Equations.” International Journal of Mathematics Trends and Technology 68, no. 12 (December 31, 2022): 13–15. https://doi.org/10.14445/22315373/IJMTT-V68I12P503

News Report

Nishith Desai Associates Dissecting the Insolvency Code: Will threat of attachment of assets by ED resurface during Liquidation Process under IBC? https://nishithdesai.com/NewsDetails/5318