Conflict between PMLA and IBC
Nihal Keshav
5th Year, BBA. LL.B, Bharati Vidyapeeth’s New Law College
“The Prevention of Money Laundering Act, 2002” (hereinafter “PMLA”) was passed in order to penalise those who engage in the illicit practice of obtaining funds and subsequently moving them to foreign accounts in order to hide their source. The Act also allows for the forfeiture and seizure of assets acquired through money laundering. After fulfilling all requirements outlined in the Act, an official designated by the “Enforcement Directorate” (hereinafter “ED”) may seize the assets of criminal profits. A consolidating statute known as “The Insolvency and Bankruptcy Code, 2016” (hereinafter “IBC”) allows for the prompt rehabilitation and birth again of struggling corporations, partnership businesses, and individuals. Maximizing the corporate debtor’s asset value is the primary goal of IBC to balance the interests of all parties involved.
This article looks at the goals of PMLA and IBC, as well as their non-obstante provisions, landmark decisions, and their overall impact on one another, to understand which act would have the overriding effect.
Brief overview of both the Acts
PMLA
The PMLA aggressively combats money laundering. The PMLA provides a thorough procedure for seizing and attaching tainted assets, as well as covering a broad spectrum of financial operations. As indicated by the title of the organisation, the main goal of the PMLA is to stop money laundering and seize any assets obtained from it. PMLA seeks to protect the integrity of financial system by taking the strict measure against the illegal monetary activities and disrupting the vicious cycle used for money laundering. The PMLA fights against the complex web of money laundering by sweeping broadly over a number of offences. As the PMLA’s authorised authority, ED has a wide range of authority.
The PMLA grants authorities extensive jurisdiction to investigate and seize belongings related to money-laundering practices. Section 5 of the Act allows authorities to seize property related to money laundering operations. Importantly, until shown otherwise, assets are presumed to be used in money laundering in any activity involving proceeds of crime, according to Section 24 of the Act. This carries serious repercussions for the accused and anybody found in possession of the profits of crime. Furthermore, when there is evidence of the owners misconduct, Section 8 of the PMLA grants enforcement agencies, such as the Directorate of Enforcement, the power to make an arrest, attach, search, and confiscate property.
IBC
In contrast to the PMLA, IBC operates in the area of the backruptcy, insolvency and the revial of the financially sick companies. One of the primary goal of the insolvency related proceedings is the reorganisations and resolution of the insolvency proceedings. The act aims to maximize the value of the assets, guarantees the availability of the credit, encourage entrepreneurship and most importantly balance the interest of the stakeholders.
One of the most significant improvements brought about by the IBC is the shift in the power dynamics from debtor to creditor. The Code prioritises debtor settlement in an effort to create financial and credit discipline.
Inconsistency between the Statutes
The conflict between IBC and PMLA arises when both claims over the sane assets. However, this conflict is a regular occurance as enforcement officials of PMLA take control over the assets on the pretext of money laundering and at times on the same property the secured creditors have the rightful claims.
Further, section 14 of IBC protects the corporate debtor during CIRP proceedings making hard for PMLA to link the assets to money laundering. Furthermore, Section 32A protects the corporate debtor from the proceedings and prosecution for insolvency related issues once the resolution plan has been approved by the NCLT.[1] This protection offered by the IBC is in contravention with the objective of the PMLA that is to the seize the assets of suspected money laundering as section 5 of the act provides for the attachment of the property and whereas IBC protects that property.[2]
Furthermore, the “non-obstante clauses in Section 238 of IBC and Section 71 of the PMLA” give both Acts a certain superseding impact, bringing up further primacy-related issues. In the “Maruti Udyog v. Ram Lal & Ors.”[3] decision, the Supreme Court ruled that if two special statutes include a non-obstante provision, the latter legislation would take precedence over the previous one. This view is supported by the fact that the Legislature knew there was already a prior Act with a non-obstante clause in place when it enacted the later Act. The legislation would have made it clear if it had had a different intention.
This rule, however, cannot be used in every situation, and other parts of the statute such as the objective become important considerations when attempting to resolve a discrepancy between the sections. In a similar vein, more is needed to determine whether the provisions of the PMLA and IBC contradict by examining the year that these legislation were passed. The following discusses a few cases that dealt with the dispute between PMLA and IBC.
Judicial Jurisprudence
Two processes operate concurrently under PMLA: the first is the ED’s attachment and seizure of property, and the second is the session court’s criminal prosecution of the accused. However, several of the articles of the IBC, a relatively new law, conflict with this attachment. That leaves us with one very important legal question: may properties attached under PMLA be accorded the protection of a moratorium under IBC by ED? Will Act would prevail over the other. Courts have attempted to resolve this disagreement in a number of rulings.
The NCLT initially addressed this conflict of priority in a liquidation decision against “M/s Nathella Sampath Jewellery.”[4] The Tribunal noted that this liquidation order will not have any bearing on the money-laundering charges being brought against the company’s founders. The Delhi High Court’s ruling in “Deputy Directorate of Enforcement, Delhi v. Axis Bank”[5] followed suit. It concluded that as the goals of the two enactments are diametrically opposed, the court need to allow for a reasonable interpretation of the relevant clauses. The IBC will not prevail over the PMLA. If a third party has any outstanding claims regarding the property that is attached, they must prove they were unaware of the crime, and the special court will decide how to proceed.
Furthermore, the NCLT concluded in “Rotomac Global Private Limited v. Deputy Director, Directorate of Enforcement”[6] that because PMLA proceedings are criminal in character, Section 14 of the IBC does not apply to them. Procedures can be activated concurrently and none of them will supersede the other as the goals of the two enactments are distinct.
The NCLAT heard this contradicting situation in the “M/s Bhushan Power and Steel v. Deputy Director, Directorate of Enforcement”[7] case. It was decided that actions taken under the PMLA constitute criminal actions. As a result, the ED would be able to mandate attachment. The discrepancy between the two laws was eventually resolved by intervention from the Ministry of Corporate Affairs. Section 32A was immediately inserted by an Ordinance issued by the President of India to IBC. This change clarified that all attachments and seizures would stop working as soon as a Resolution Plan was accepted by the adjudicating body. As soon as M/s JSW Steel’s Resolution Plan was adopted, the NCLAT in the matter of “JSW Steel Ltd. v. Mahender Kumar Khandelwal”[8] stopped all criminal proceedings against the corporate debtor in a sense giving priority to IBC.
The NCLAT noted that as the attachments were made before the CIRP began, no benefit under Section 14 could be obtained in the case of “Varrsana Ispat Limited v. Deputy Director, Directorate of Enforcement,”[9] where the appeal was dismissed. Additionally, the NCLAT noted that PMLA is related to the “proceeds of crime” and that the offence is related to “money laundering,” leading to the seizure of assets produced from or utilised in money laundering. As a result, this process is not covered by Section 14 of the IBC.
The NCLAT, in the case of “Directorate of Enforcement v. Sh. Manoj Kumar Agarwal,”[10] held a different view from that of the previous ruling. It upheld the decision made by the NCLT, Mumbai, and stated that “there is no conflict between PMLA and IBC and even if a property has been attached in the PMLA which is belonging to the Corporate Debtor, if CIRP is initiated, the property should become available to fulfil objects of IBC until a resolution takes place or sale or liquidation of asset occurs in terms of Section 32A.” According to “Sections 14(1)(a), 63, and 238 of the IBC,” the NCLT had ruled that the attachment order issued by the ED was void and unenforceable.
The question of “whether the authorities under the PMLA would retain the jurisdiction or authority to proceed against the properties of a CD once liquidation of its assets has been approved under IBC” was addressed by the Delhi High Court in the case of “Nitin Jain, Liquidator PSL Limited v. Enforcement Directorate.”[11] In response, the Court determined that the Liquidator has a legal right to carry out the remaining steps of the liquidation procedure in compliance with the IBC’s rules. The Court ordered ED to refrain from pursuing any legal action against the Liquidator’s corpus or the liquidation of CD’s estate.
The Delhi High Court, however, did not interfere with the attachment orders in the “Rajiv Chakrabarty Resolution professional EIEL v.. Directorate of Enforcement”[12] case. Instead, it gave the RP the freedom to apply to the appropriate authorities under the PMLA for any appropriate relief regarding tainted properties. In the case of “Ashok Kumar Sarawagi v. Enforcement Directorate and Anr.,”[13] the Apex Court was recently asked to evaluate a moot question: would the order issued by the Enforcement Directorate (ED) for the temporary attachment of a business debtor’s assets following the start of the CIRP be deemed valid? The CIRP may proceed in compliance with the IBC on a “as is whereas is basis” and “whatever there is basis” basis while the Apex Court issues a notice to ED.
Finally in most recent judgment “Shiv Charan v. Adjudicating Authority”[14] under the PMLA, The Bombay High Court has made it clear that after the resolution plan under the IBC is approved, the corporate debtor’s possessions cannot be attached under the PMLA. The court has also decided that, upon approval of a resolution plan, the NCLT may order the ED to release a corporate debtor’s connected properties.
Hence, it is can said that for now the debate has been settled that PMLA would be subservient to IBC once the resolution plan under the IBC has been approved.
Conclusion
From the above discussion, it is pretty evident that both the acts come into conflict when both assert the claim over the same asset. Further, the presence of a non-obstante clause in both statutes further complicated the situation. Indian judiciary for a long time has been grappled with the question that which act would prevail over the other. Recent trends suggest the inclination of the judiciary is to prioritize the IBC over the PMLA once a plan of resolution is approved. However, the judgments pertaining to the conflict are mostly dealt with by the High Courts of the state, leading the ambiguity and non-uniformity. The absence of the ruling and interpretation leaves the Pandora’s box open. The decision of the Supreme Court at this juncture is essential to provide clarity and ensure equitable treatment of shareholders all over the country. Till then it can be said as indicated by the judicial trend that IBC would prevail over PMLA once the resolution plan has been approved by NCLT.
References:
[1] Avinash Amarnath, Harmonizing Legal Landscapes: Interplay between PMLA and IBC (Chandhiok & Mahajan, Mar. 28, 2024), https://www.chandhiok.com/post/harmonizing-legal-landscapes-interplay-between-pmla-and-ibc.
[2] Nayani Agarwal, PMLA v. IBC Conundrum: Is it Really Settled (Indian Law Journal), https://www.indialawjournal.org/pmla-vs-ibc-conundrum.php.
[3] AIR 2005 SC 851.
[4] CP/129/IB/CB/2018
[7] 2020 SCC OnLine P&H 738.
[8] [2020] ibclaw.in 217 NCLAT.
[10] (2021) ibclaw.in 182 NCLAT
[13] SLP (Civil) Diary No (S). 30092/2022
