Powers of ED Under Prevention of Money Laundering Law and the Tussle with IBC
[Manik is a student at National Law University, Jodhpur.]
The basis for the formation of the Enforcement Directorate (ED) was to primarily enforce and ensure implementation of the two crucial laws, which are the Prevention of Money Laundering Act 2002 (PMLA) and the Foreign Exchange Management Act 1999 (FEMA).
The PMLA empowers the ED to attach the property and Section 5(1) thereof lays down the power to temporarily attach the property with the adjudicating authority confirming the attachment under Section 8(3) of the statute which then leads to the government finally confiscating it under Section 9. The attachment of the property can be established by showing the existence of the proceeds of the crime.
Also, the second proviso of Section 5(1) of the PMLA provides for the attachment of the property on the ground that if the attachment is not done under the statute, this would affect the proceedings under the statute.
ED’S POWERS UNDER PMLA UPHELD
This second proviso to Section 5 of the PMLA was challenged in the case of Vijay Madanlal Choudhary v. UOI, where it was argued that this provision was broader than the scope of the main provision, and given that it allows for the attachment of the independent property even before the commission of the offence at the mere satisfaction of the officers, it has no fetters. But the court held that the section provides for a balancing arrangement with procedural safeguards in place for protecting the interest of the person concerned while also ensuring that the attached property remains available to be dealt with under the statute for the proceeds of the crime.
IBC AND PMLA DEADLOCK
The issue in this scenario is that while the PMLA provides for the confiscation and the attachment of the property under Section 5, Section 32A of the Insolvency and Bankruptcy Code 2016 (IBC) provides immunity to the corporate debtor for the offence which is committed before the corporate insolvency resolution process (CIRP) once it starts. So the issue is whether ED can exercise its powers to attach assets once CIRP has started.
The recent amendment to the PMLA by the Finance Act 2019 also failed to deal with this issue and did not provide any clarity in this regard.
ANALYSIS OF THE TUSSLE
This complex tussle was taken up in the case of Nitin Jain Liquidator PSL Limited v. Enforcement Directorate, based on Section 32A of the IBC. The issue taken up, in this case, was whether the powers of the ED under Section 5 of PMLA to attach assets of a corporate debtor can be exercised once Section 32A of the IBC has become applicable. The Delhi High Court, resolving this complexity, held that as soon as the liquidation process has been approved by the authority and the property is covered under the resolution plan, a statutory bar comes into play and then the ED’s power to attach assets under Section 5 of the PMLA would cease to exist when the liquidation process order is given under the IBC.
Notwithstanding what has been stated above, it was clarified by the court that the property of a person who has been involved in money laundering can still be attached under PMLA and thus the statutory bar cannot be extended to them. Also, it has to be made sure that Section 32A does not act as an escape route for people engaging in money laundering activities and therefore the court, by adopting a balanced approach in this case, deterred individuals from engaging in such unlawful activities.
At one point, the case tried to present a solution to the possible conflict between the two laws. However, at the same time, the court left many things unanswered. Ambiguity remains as to whether the ED can attach the assets once the liquidation process is over. Further, clarity is needed as to whether the ED can attach the assets during this period when the liquidator has to give reports under Regulations 34 and 13 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016, which will provide the manner of the sale of assets of the corporate debtor and lay out a proposed plan for the process of liquidation to get the approval of the NCLT. Since Section 32A can trigger only after the CIRP process has started, there is no clarity concerning this period. In another case concerning this issue (Directorate of Enforcement v. Manoj Kumar Aggarwal), the court failed to tackle this ambiguity but at the same time ensured that the corporate debtor’s properties are available for achieving the objectives under the IBC. It gave primacy to the IBC but also clarified that this should not be taken as an escape route because there are instances where the corporate debtor colludes with the creditors and get in the process of CIRP to escape from the actions of the ED. The final word from the Supreme Court of India is needed to resolve this conundrum and strike the right balance.
Another deadlock was expressed recently by the Supreme Court of India in the case of Committee of Creditors v. Directorate of Enforcement, wherein the court asked the government to resolve the ambiguity between the statutes, especially in the case where the property is purchased by the tainted money and the ED has attached it under Section 5 for sale at a lawfully conducted auction.
The court’s decision to give primacy to the IBC over the PMLA is essentially in line with the Insolvency Law Committee Report (2020) which stated that due to the threat of the liability falling upon acquirers, there may be a lower chance of the business being successfully acquired. Further, the court in the case of Ghanshayam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited relied on the clean slate principle which extinguishes all past liabilities of the corporate debtor.
The power of the PMLA to attach assets under Section 5 is affected as and when Section 32A of the IBC comes up and the CIRP process begins. Thus, as a rule of interpretation, the courts should apply harmonious construction between these conflicting laws and should ensure that the objectives and purposes of both statutes are met. At the same time, the government should take steps to deal with ambiguities and clear the position concerning them.