PMLA vs IBC : Supreme Court Expresses Concerns Over ED Attaching Properties Purchased By Resolution Applicants

The Central Government on Tuesday informed the Supreme Court that it will come up with a mechanism with regard to the properties which are proceeds of crime as defined under the Prevention of Money Laundering Act but are purchased by a new owner in insolvency process under the Insolvency and Bankruptcy Code (IBC).

The question involved is whether in cases where the property is acquired by the original owner through money laundering, can the Enforcement Directorate attach such a property after it is purchased by a new owner under IBC process.

A Bench comprising the Chief Justice of India NV Ramana, Justice Krishna Murari and Justice Hima Kohli was informed by Solicitor General of India Tushar Mehta that there is divergence of views between two Ministries (Finance And Corporate Affairs) which they are trying to bridge and the Government will create a mechanism after the ongoing Parliament session.

The submissions were made in response to the Chief Justice of India's query as to whether a new purchaser who has only bought the property put on auction can be prosecuted for misdemeanours of the previous owner.

"Third party has purchased in auction. Now you want to prosecute the third party also? Problem is...as per common sense, if you hunt them, nobody will come to buy!" CJI remarked

"That's our concern, it is the Government's worry that it defeats the object of the very code", the SG said.

The SG added that there is no dispute that the purchaser can never be prosecuted. However the question is what is to be done to the property purchased with proceeds of crime. He added that there has to be some mechanism to deal with such properties.

While further explaining the question at hand, the SG said "Lets say there is a plot of land, owned by me. I've acquired the plot of land by money laundering business, that plot of land is proceeds of crime as defined under PMLA. My company due to my mismanagement goes to IBC. And now a person purchases that, he can never be prosecuted, I must be, but what should be done to the property being under proceeds of crime, two ministries will have to sit together", the SG explained

During the hearing, Senior Advocate Abhishek Manu Singhvi appearing for the Committee of Creditors submitted that Section 32A was inserted into the Insolvency and Bankruptcy Code to say that people who are successful applicants who step into shoes of the Corporate Debtor not be prosecuted for misdemeanour of earlier promoters.

Responding to Mr Singhvi's submissions, the SG submitted that " Apart from commercial issues involved in the case the issue is so far as outgoing management is concerned they will be prosecuted. The new entrants cannot be prosecuted to which I also can't object, otherwise very object of the act would be frustrated. The only limited question on which the Government will have to take a call is that suppose there is money laundering by earlier outgoing management, out of which from proceeds of crime property is purchased what will happen when there's attachment of properties"

"There's some divergence of views, they are honest bona fide views, both will have to sit together. I had discussion with the government . If Lordships will have it after 2 weeks we'll have a concrete stand." SG added 

After SG Mehta sought time for the Ministries to sit and decide and assured the Court that that the issue will be resolved, the bench posted the matter for further hearing on April 19th.

The case relates to the insolvency process of Bhushan Power and Steel, whose assets were provisionally attached by the ED in October 2019.  In December 2019, Section 32A was introduced in the IBC through amendment granting immunity from prosecution to resolution applicants with respect to the criminal acts of the previous promotors of the corporate debtor. The Supreme Court stayed the ED's attachment in 2019 after the creditors approached it relying on Section 32A. ED argues that the provision cannot be given retrospective effect.

Case Title : Committee of Creditors through Punjab National Bank and another versus Ravi Prakash Goyal and others| SLP(c) No.13755/2019

Click here to read/download the order