[Shivani Shenoy and Yashwardhan Rajawat are students at Symbiosis Law School, Pune.]
The provisions of the Insolvency and Bankruptcy Code 2016 (IBC) became, in the course of operation, repugnant to provisions contained in a number of other laws. However, due to its quasi-criminal nature which provides for two simultaneous proceedings viz. a proceeding for attachment of property and a criminal prosecution for determination of guilt, reconciling provisions of the IBC with the Prevention of Money Laundering Act 2002 (PMLA) has not been a straightforward exercise. Courts and tribunals at multiple levels have adjudicated upon the issue, but with a number of judicial authorities exercising their concurrent jurisdiction on the subject, there was more confusion than clarity. This article, in reverse engineering the newly inserted Section 32A via the Insolvency and Bankruptcy (Amendment) Ordinance 2019, illustrates the centerpiece of the apparent repugnance between IBC and PMLA - the applicability of moratorium to attachment proceedings - and, in doing so, answers the central question - does IBC override PMLA?
The focal point
If the Enforcement Directorate (ED) has reasons to believe that a property is a proceed of crime and likely to be concealed, transferred or dealt with in a manner that would frustrate the proceedings relating to its confiscation, it may provisionally attach such property under PMLA.[1] Parallelly, IBC requires that the property of the corporate debtor be kept together during the corporate insolvency resolution process (CIRP), and hence, a moratorium prevents initiation or continuation of suits or pending proceedings against the corporate debtor including under Section 14 of IBC.
This raises a pertinent question - whether moratorium under IBC would apply to attachment proceedings under PMLA?
IBC v/s PMLA
In the view of the authors, the moratorium would apply to attachment proceedings since broadly, the provisions of IBC override those of PMLA due to the reasons set out below.
Non-obstante clause of the later law prevails over the former:
Both, PMLA (under Section 71) and IBC (under 238) contain non-obstante clauses. However, the Supreme Court of India, in Solidaire India Ltd. v. Fairgrowth Financial Services Private Limited, held that where two special statutes contain non-obstante clauses, the later statute would prevail over the former since the legislature, at the time of drafting the later law, is aware of the non-obstante clause in the earlier law - the inclusion of a non-obstante clause in the later law implies that it intends to override the earlier law. Since IBC was enacted in 2016 and PMLA in 2002, the issue comes to a logical end with the former overriding the latter.
The argument that neither overrides the other is myopic:
The Delhi High Court, in Deputy Director, ED v. Axis Bank (Axis Bank) held that neither PMLA nor IBC overrides the other because there is no inconsistency between them. It reasoned that since the objectives of PMLA were distinct from that of IBC, the latter could not prevail over the former and proceedings under both statutes could run simultaneously. This view taken by the High Court is myopic on two counts.
In order for any legislation to override the other, inconsistency among them is a condition precedent.[2] IBC requires that operations of the corporate-debtor be managed as a going concern. However, once a property is provisionally attached, it cannot be transferred, converted, disposed or moved. In the Sanjay Gupta case, it was held that a successful resolution applicant could not manage the affairs of the corporate debtor as a going concern without possession of its assets. Further, in JSW Steel Limited v. Mahendra Kumar Khandelwal, (JSW Steel) the CIRP of the corporate debtor i.e. Bhushan Power and Steel Limited came to a standstill due to the property of the corporate debtor having been attached by the ED. Therefore, IBC and PMLA can be said to have fundamental inconsistencies, thereby fulfilling the test.
Failure of the doctrine of harmonious construction
The Axis Bank case failed to effectively employ the doctrine of harmonious construction. The criterion for the applicability of this doctrine is apparent inconsistency between two statutes, not actual inconsistency.[3] However, an interpretation that renders one provision useless is not harmonious construction. The judgment, despite setting aside the order for release of provisionally attached property of the corporate debtor does not harmonize Section 14 of IBC with Sections 5 and 8 of PMLA; rather, it defeats the former at the alter of the latter.
Hence, there is a real repugnancy between the two statutes and, therefore, IBC would override PMLA and moratorium would apply to attachment proceedings.
Choice of forum
Much confusion prevails regarding the forum to approach to adjudicate upon issues where IBC and PMLA overlap. However, mechanisms under IBC will be considered in preference to those under PMLA because:
ED is a deemed operational creditor
In Axis Bank, it was held that when the government attaches and confiscates proceeds of a crime under PMLA, it does not stand as a creditor of the offender nor does it wish to be perceived to be sharing the loot with the offender. However, PMLA is categorised as “non-tax revenue” in the list of heads of accounts of the Union and the states as per the Government of India Allocation of Business Rules 1961. Further, while directing release of attached assets in JSW Steel, the NCLAT interpreted ED to be an operational creditor of the corporate debtor who could recover its debts in the order of priority of asset distribution under Section 52 of IBC. Therefore, for the ED, the NCLT and other such authorities under IBC ought to adjudicate upon disputes to the exclusion of respective authorities under PMLA.
NCLAT has exclusive jurisdiction over matters governed by IBC
Under the PMLA, third parties having legitimate interest over the property attached as proceeds of a crime may approach the adjudicating authority under Section 8(2) or the appellate tribunal under Section 26, which may release the attached property to the claimant. However, when the property of a corporate debtor is attached, the NCLT, by virtue of Section 60(5)(c), has exclusive jurisdiction to entertain or dispose off any questions of law or fact arising out of or in connection with the resolution or liquidation process.
Therefore, NCLT as opposed to the authorities under PMLA ought to be approached for issues where their subject matters overlap.
A microscopic view
The moratorium will apply to attachment proceedings since:
Attachment proceedings are not penal in nature
The moratorium is not applicable to criminal proceedings or penal action taken pursuant to criminal proceeding or any act having essence of crime or crime proceeds.[4] However, to assume that an order of attachment is penal in nature would be incorrect, because attachment is a civil proceeding, which is done as a measure of security than with punitive intent. The legislative intent behind section 14 of IBC is to keep the assets of a corporate debtor together during CIRP to ensure its continuation as a going concern.[5]
IBC accounts for disputed properties of the corporate debtor in CIRP and liquidation
In Axis Bank, it was held that a person indulging in money laundering should not be able to avail himself of the proceeds of crime to discharge his civil liability towards his creditors since he does not have a good title over them. However, the duties of an IRP entail him to take control and custody of all such assets of the corporate debtor including those subject to adjudication of ownership by a court or an authority.[6] The legislative intention is that all those properties to which the corporate debtor may have a claim, although disputed, may be realized during CIRP or liquidation as its own. Therefore, the ratio of the judgement stands on shaky grounds.
Non-imposition of moratorium would cause undue delay in CIRP
In Swiss Ribbons Private Limited and Another v. Union of India, the apex court held that the primary focus of IBC is to ensure revival and continuation of the corporate debtor by protecting it from a corporate death by liquidation and advised that liquidation ought to be the last resort only if all attempts at resolution fail. Proceedings for release of attached property of the corporate debtor under the PMLA are not required to be time bound or speedy. This would make it difficult to conclude CIRP within the 330-day timeline. The longer the delay, the more likely it is that liquidation would be the only answer. Further, since most assets are subject to a high rate of depreciation, the liquidation value tends to decrease with time, leading to a loss of value of the corporate-debtor.
Conclusion
Thus, despite the reigning judgment of the High Court, IBC overrides the mandate of PMLA in substance, a notion conceded to a number of times by the Appellate Tribunal for Money Laundering itself.[7] Moratorium under IBC is, in our view, applicable to attachment proceedings. With the insertion of Section 32A in the IBC via the IBC (Amendment) Ordinance 2019 which ceases liability of and prosecution against the corporate debtor for offences committed prior to the commencement of CIRP from the date of approval of the resolution plan by the Adjudicating Authority, judicial interpretation will now be more straightforward but the mechanics of the newly inducted rather unconventional provision, which is yet to receive a legislative mandate, remains to be seen with respect to those CIRPs which end neither in a resolution plan nor in liquidation but rather in a settlement. Nevertheless, adequate caution must be exercised against abuse of the immunity, lest the erstwhile promoters of the corporate debtor use the corporate debtor as a conduit to collude with resolution applicants to evade criminal liability and dilute the robust mechanisms of PMLA.
[1] Prevention of Money-Laundering Act 2002, Section 5.
[2] Kamayu Motors Association v. State of Uttar Pradesh, A.I.R. 1966 S.C. 785.
[3] CIT v. Hindustan Bulk Carriers, (2003) 3 S.C.C. 57.
[4] Rotomac Global Pvt. Ltd. v. Deputy Director, Directorate of Enforcement, Company Appeal (AT) (Insolvency) No. 140 of 2019; Varssana Ispat Ltd. v. Deputy Director, Directorate of Enforcement, Company Appeal (AT) (Insolvency) No. 493 of 2018.
[5] Report of the Insolvency Law Committee, Ministry of Corporate Affairs, Govt. of India, March 2018.
[6] IBC, Section 18(f)(vi).
[7] Bank of India v. Deputy Director, ED, Appeal (AT) (PMLA) No. 2173 of 2018; Punjab National Bank v. Deputy Director, ED, Appeal (AT) (PMLA) No. 2633 of 2018.