Insolvency v/s Financial Crimes: NCLT’s Stand on ED’s Powers

[Samriddhi and Saakshi are students at National Law University Odisha and Ramaiah College of Law, respectively.]

The conflicting interrelationship between insolvency law and various anti-money laundering authorities has posed a uniquely demanding legal problem, especially concerning the jurisdiction of the National Company Law Tribunal (NCLT) versus that of the Enforcement Directorate (ED) under the Prevention of Money Laundering Act 2002 (PMLA). In a landmark judgment, the NCLT, New Delhi, in the case of Mr Shailendra Singh, Resolution Professional of Foxdom Technologies Private Limited v. Directorate of Enforcement and Another, reaffirmed the fundamental principle that it lacked adjudicatory authority to direct the ED to de-freeze assets of a corporate debtor attached under the PMLA. The decision underscores ED’s sovereign authority and prerogatives concerning investigations and prosecutions, bolstering the assertion that the Insolvency and Bankruptcy Code 2016 (IBC) may take precedents over other statutes formulated to curb financial malfeasance. By contextualizing the manifold approaches of corporate stakeholders, creditors, and insolvency constituents in navigating India’s overlapping framework. This judicial stance unveils the scope of its appellate authority. 

Factual Background

At the heart of this legal deadlock is a jurisdictional divide between two distant statutory regimes: IBC and PMLA. The ED exercised its powers under Section 5 of the PLMA to freeze and attach the corporate debtor’s bank account on suspicion of involvement in money laundering. Such intervention during the ongoing corporate insolvency resolution process (CIRP) effectively stalled efforts of the resolution, hindered creditor recoveries, and signaled the operational demise of the corporate entity. 

Seeking relief, the resolution professional (RP) approached the NCLT, New Delhi, arguing that the attachment contravened the fundamental objectives of the IBC. The RP contended that from the initiation of CIRP, all assets of the debtor’s assets are subject to the statutory moratorium stipulated under Section 14 of the IBC. Consequently, any unilateral intervention by the ED would, in effect, curtail the mechanism of insolvency, infringing upon the rights of creditors and resolution applicants. The RP, therefore, implored the NCLT to direct the ED to unfreeze the accounts and restore liquidity. However, the NCLT unequivocally held that it lacked jurisdiction to interfere with the ED’s actions, elucidating that the PMLA operates independently of the IBC, unaffected by insolvency proceedings.  

This verdict springs forth a fundamental legal question: when IBC and PMLA intersect, which statutory framework prevails? Does the objective of corporate resolution outweigh the ED’s mandate to combat financial misconduct?

Legal Analysis

The NCLT’s ruling deals with a major and pivotal controversy between IBC and PMLA. It stood fast to the belief that NCLT did not have any jurisdictional capacity to direct the ED to de-freeze the bank account of a corporate debtor that was frozen under PMLA. This judgment brings to the fore an important legal issue regarding the controversial relationship between corporate insolvency laws and anti-money laundering legislation in India.

One of the crucial vexed issues in this matter relates to the ED exercising its powers under Section 17(1A) of PMLA to attach and freeze accounts suspected of containing the proceeds of the crime. The RP contended that freezing the account of the corporate debtor has not only disrupted the corporate insolvency resolution process but also affected the interests of creditors, employees as well as the stakeholders involved alike. 

In delivering its decision, on the authority exercised by ED through inferences drawn earlier in cases like Embassy Property Developments Private Limited v. State of Karnataka and Others (Embassy Property) and subsequently, Varrsana Ispat Limited v. Deputy Director of Enforcement (Varrsana Ispat), NCLT reiterated that it does not have the jurisdiction to come in with regards to the Tribunal of ED under PMLA. The judgment illustrates the jurisdictional limits of NCLT.

The NCLT mainly handles insolvency and resolution affairs under the provisions of IBC that is fundamentally focused on siphoning back the corporate debtor and maximizing recovery to its creditors. But the NCLT cannot adjudicate upon matters pertaining to other specialized laws such as PMLA while hearing cases under the IBC. The Supreme Court in Embassy Property previously brought it on record that NCLT was merely a tribunal with limited jurisdiction and could not be tantamount to an authority of constitutional stature with the jurisdiction to entertain pleas arising out of the purview of other statutory authorities.

With this background, the NCLT thus concluded that any challenge to the freezing of accounts should be brought before the adjudicatory authority under the PMLA, and rather than the NCLT. The RP contended that a moratorium is in operation by virtue of the commencement of the insolvency proceedings, which prevents acts against the corporate debtor’s assets, covering, among others, the freezing of the bank accounts. Nonetheless, the NCLT rejected this proposition.

The NCLT held that PMLA proceedings are independent of the IBC and that such a moratorium does not cover them. The earlier judgement in Varasna Ispat reiterated that while IBC and PMLA each serve distinct purposes i.e., for corporate revival and for penal code, respectively - neither can override the other. The IBC aims to facilitate corporate restructuring and creditor recoveries, PLMA is designed to prevent money laundering and recovery of proceeds of crime.

With this, the judgment carries far-reaching consequences with respect to corporate insolvency proceedings dealing with financial crime investigations. The ED retains the authority to freeze and attach assets suspected of being linked to illicit financial activities even while the corporate debtor is in CIRP. This precedent is monumental, for it stresses that corporate insolvency mechanisms cannot be used to prevent any regulatory action that is triggered under specialized financial crime statutes.

Critical Analysis

The debate over the extent of overlapping jurisdiction of the IBC and PMLA has been a subject of legal scrutiny particularly concerning the scope of the NCLT’s jurisdiction relating to assets under enforcement by the Enforcement Directorate. While NCLT ruled out its jurisdiction to direct the ED to release the assets of the corporate debtor, conflicting judicial precedents have raised significant questions on the said matter. Notably, in Shiv Charan and Another v. Adjudicating Authority and Another, the Bombay High Court held that the ED cannot attach the properties after approval of the resolution plan, once it fulfills Section 32A. The dichotomy underscores that there is a fundamental tension between revival and financial crime enforcement. 

The IBC is a remedial statute to give way to corporate resolution and creditor protection, whereas the PMLA is a penal statute, introduced to tackle financial crimes. The NCLT’s judgment, which effectively prioritizes PMLA over the IBC, has been interpreted as undermining the legislative intent of Section 32A, which grants immunity post-resolution. The Judgment reaffirmed that special acts should be construed and put into operation in terms of the law that has been prescribed. Since NCLT derives its authority from IBC it has exclusive jurisdiction over cases relating to money laundering or financial crimes. 

However, this distinction also raises concerns. A corporate debtor might exploit insolvency proceedings to evade liability by invoking the IBC’s moratorium provisions to challenge freezing orders issued by the ED. This order serves to reaffirm the policy that the IBC will never be an asylum for entities that stand accused of money laundering. While combating financial crimes remains paramount, the overall application of PMLA attachments could stagnate the CIRP denying creditors access to crucial funds and delaying resolution efforts, ultimately affecting creditors and employees. Conversely, if IBC is unbridled in offering relief to a debtor, it could create a safe harbor for unscrupulous companies to escape accountability. A balanced interpretation of both statutes is necessary to ensure that insolvency resolution proceeds effectively while maintaining financial discipline. 

Conclusion

The NCLT’s decision reaffirms the principle that a clear distinction must be maintained between the provision of IBC and PMLA. The tribunal held that it would be inappropriate for NCLT to issue a directive ordering the ED to unfreeze a corporate debtor’s account, as insolvency statutes cannot override the powers invested with financial crime regulators.

This ruling provides much-awaited clarity to the ambit of the NCLT’s jurisdiction, restating that PMLA processes cannot interfere with proceedings by insolvency tribunals. It also establishes that actions by the ED under PMLA do not fall within the purview of the moratorium under Section 14 of the IBC, given that both legislations serve distinct objectives. While the IBC facilitates corporate resolution, the PMLA prescribes is designed to prevent and penalize money laundering. The judgment preserves the autonomy of investigating authorities through PMLA while ensuring that insolvency proceedings can be weaponized by a company against legitimate inquiries.

In conclusion, the judgment sets a strong precedent for the apparent demarcation of jurisdictions between insolvency laws and anti-money laundering laws in India reinforcing the broader public interest. Henceforth, the RPs and the corporate debtors must seek relief against account freezes from ED rather than the NCLT.