The IBC vs. PMLA – A Critical Study

The IBC vs. PMLA – A Critical Study

Steps taken by India in combating Money Laundering

In wake of the stand taken by the United Nations, a comprehensive legislation for combating money laundering by introducing measures such as confiscation and seizure of assets and properties that are directly or indirectly an end product of Money Laundering was enacted by India in the year 2002.

The Prevention of Money Laundering Bill, 1998 was introduced in the parliament on 04^th August 1998. The Bill received its assent from the President of India and subsequently became the well-known Prevention of Money Laundering Act, 2002 (hereinafter referred as “PMLA”) on 17^th January 2003. The main objective of this Act is to prevent and control money laundering and to provide for confiscation and seizure of the properties and assets that were obtained by virtue of the laundered money and other matters related/ connected to money laundering incidental or thereto in the territories of India. It has been amended in 2005, 2009 and recently in 2012.

What is Money Laundering?

According to Black’s Law Dictionary, the term ‘money laundering’ is defined as: “the act of transferring illegally obtained money through legitimate people or accounts so that its original source cannot be traced”

Money Laundering is a scheme wherein money obtained illegally is transferred through several countries in order to conceal its origins. The money laundered goes through various stages including but not limited to structuring deposits, creation of shell companies, opening offshore bank accounts and bulk cash smuggling.

As many nations felt that money laundering created a huge impact on their economies, a resolution^[1] was adopted by the General Assembly of the United Nations (UN) in the year 1998 against money laundering and drug trafficking wherein Member States of the UN were requested to implement an action plan to combat and counter the growing problem of money laundering and drug trafficking.

Salient Features of the Act

An offence under the PMLA is said to be committed when a person deals with the ‘Proceeds of Crime’. Section 2(u) of PMLA defines “Proceeds of Crime” as “any property derived or obtained directly or indirectly by any person as a result of a criminal activity relating to a scheduled offence or the value of any such property or where such property is taken or held outside the country, then the property equivalent in value held within the country.” Section 4^[2] of the Act provides that any person convicted of money laundering shall be punishable with rigorous imprisonment of 3 to 7 years, however the term shall extend up to 10 years if the proceeds of crime relates to any offence specified under Paragraph 2 of Part A of the Scheduled of offences under the Act.

The Act also allows for confiscation and seizures of the assets that are purchased using the proceeds of crime. An authorized officer not below the rank of Deputy Director of Enforcement Directorate can attach the property of proceeds of crime after duly informing the District Magistrate. Thereafter a report containing all material facts and information with respect to such attachment shall be sent to the Adjudicating Authority constituted under Section 6 (1) of PMLA and after considering the response from the concerned person involved in that offence, the Adjudicating Authority gives finality to the order of attachment. The property/asset attached shall be retained for 180 days, the same shall be extended subject to the discretion of the Adjudicating Authority.

The Insolvency & Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code, 2016 (“Code”) was introduced with an intention to expedite and simplify the process of Insolvency and Bankruptcy proceedings in India and ensuring that there exists a time bound process and stressing on the importance of revival, through a Resolution Applicant who steps in with a commercial bid to take over the stressed assets and give them a new life.

A Resolution Applicant plays a vital role in revival of any Corporate that is undergoing the Corporate Insolvency Process and the term ‘Resolution Applicant’ is defined under Clause 5(25) of the Insolvency & Bankruptcy Code, 2016 and for the sake of convenience the said clause is reproduced below:

5(25) “Resolution Applicant” means a person, who individually or jointly with any other person, submits a resolution plan to the resolution professional pursuant to the invitation made under clause (h) of sub-section (2) of section 25;

A Resolution Applicant after the invitation by the Interim Resolution Professional (“IRP”) or the Resolution Professional (“RP”) as the case may be, submits a Resolution plan, subject to being qualified to do the same. The resolution plan becomes the soul of the Insolvency and Bankruptcy Code as one of the important objective of the Code is the restoration and revival of the Corporate Debtor and the resolution plan charts out the procedures and processes as to how the said Corporate Debtor will be revived by the Resolution Applicant.

One of the key attractions for any Resolution Applicant would be the immovable fixed assets of the Corporate Debtor that is undergoing Corporate Insolvency Resolution Process. The Resolution Applicant who steps in would absorb in toto all the assets as well as the liabilities of the Company and the Resolution Plan he brings in would categorically state how the liabilities of the Company would be paid off and in what proportion the same would be paid.

The assumption of by and large all the Resolution Applicants would be that the Corporate Debtor they are taking over is free of all debts and other liabilities as soon as the payments are made as per the Resolution Plan submitted by them which is approved by the Committee of Creditors and the Hon’ble Adjudicating Authority.

The Conundrum Between IBC and PMLA

            The National Company Law Tribunal Bench at Chennai ordered for Liquidation in the matter of M/s. Nathella Sampath Jewelry Private Limited[3]. While disposing of the Application filed by the Resolution Professional held that the proceedings pending before the Enforcement Directorate against the erring Promoters are in no way affected by this Order of Liquidation. However, the NCLT Bench at Chennai did not address the issue whether the assets attached by the Enforcement Directorate forms part of the Liquidation Estate of the Corporate Debtor or not.

Later in the case of Bhushan Power and Steel[4], the NCLAT dealt with a similar situation and held that IBC will override PMLA to a limited extent involving the assets of the Corporate Debtor which is discussed herein below.

Land Mark Decision that Lead to the Amendment

            During the Insolvency Proceedings of M/s. Bhushan Power and Steel (‘BPSL’), the Enforcement Directorate (‘ED’) attached a portion of the assets of BPSL stating that those were acquired as a result of proceeds of crime. JSW Steel, the successful Resolution Applicant of BSPL, filed an Application before the Hon’ble National Company Law Appellate Tribunal (“NCLAT”) seeking protection from the attachment of the assets by the ED. When the matter of heard before the NCLAT, the Appellate Tribunal opined that if the assets are seized by the ED as a result of proceeds of crime, then the ED would have a claim over it in the nature of Operational Debt.

The Ministry of Corporate Affairs, a Respondent in the instant proceedings way of the Affidavit submitted before the Hon’ble NCLAT that once a resolution plan is approved by the Tribunal, it is binding on all stakeholders including Government Agencies. The Ministry also argued that the differences between the Ministry of Corporate Affairs and the ED would be resolved soon.

Immediately, in order to settle the dispute between the two wings of the Departments of Central Government the Hon’ble President promulgated an Ordinance wherein Section 31 and 32A of the Code was amended. In view of the Amendment, the Hon’ble NCLAT ordered that the Resolution Plan submitted by M/s. JSW Steel stands approved and abated the criminal investigation against the ‘Corporate Debtor’ thereby providing immunity to M/s. JSW Steel from the ongoing proceedings under the PMLA against the erstwhile promoters of BSPL.

The parties have preferred an appeal against the said order of NCLAT and the matter is currently sub-judice before the Hon’ble Supreme Court of India.

The Amendment to the Code and The Introduction of Section 32A

            Due to the various interpretations taken by different parties and in a bid to clarify the position of law, The Insolvency and Bankruptcy Code was amended^[5] a new provision in the Code was introduced as Section 32 A.  The said new Provision is a major amendment as the said insertion of Section 32 A consists of three clauses with each having a sub-clauses / explanation / provisos to the same making it an exhaustive and vast provision of the Code. The important aspect that is to be noted is that the said provision may not be applicable in cases where the Corporate Debtor falls under the purview of a Micro, Small and Medium Enterprise (“MSME”) and the promoters of the Corporate Debtor may themselves submit a Resolution Plan, as there are certain exceptions under the Code in order to be supportive of the MSME’s under Section 240A of the Code which permit the promoters of the MSME’s to submit the resolution plan to be considered and voted upon by the Committee of Creditors.

The newly introduced provision can be boiled down under three major categories namely:

a) Cessation of any Liability:

On perusal of the said Section it is clear that Section 32A (1) is a non-obstante provision that appears to give blanket immunity to the new set of directors of the Resolution Applicant who replaces the old directors to take over the corporate debtor as against all the offences done by the promoters/directors of the corporate debtor prior to being put into Corporate Insolvency Resolution Process, from the date of approval of the Resolution Plan by the Adjudicating Authority.

b) Prohibition of action against the Property of the Corporate Debtor:

On perusal of Section 32A (2) it is clear that the said clause prohibits all actions that can be taken against any property of the corporate entity undergoing Corporate Insolvency Resolution Process that is covered under a Resolution Plan approved by the Adjudicating Authority. This clause categorically denies all the claims of attachment by the Government agencies on the properties of the Corporate Debtor, provided the same was considered and covered under the Resolution Plan approved by the Adjudicating Authority. However, it is to be noted that this sub clause does not bar any or all action against property of other third parties, namely the guarantors.

c) Offering Assistance and Cooperation for investigation:

          On perusal of Section 32A (3) it can be understood that notwithstanding anything contained in the clauses (1) and (2) of the Section 32(A), the Corporate Debtor and any person, shall extend all assistance and co-operation to any authority investigating an offence committed prior to the commencement of the Corporate Insolvency Resolution Process.

Conclusion

This Amendment further raises the questions as to which assets can be included in the Resolution Plan and can Banks invoke the personal guarantees of the erstwhile promoters, and if so, what happens to the assets covered under the personal guarantee which are acquired through proceeds of crime.

The Amendment as it seems today as per the Order of the Hon’ble National Company Law Appellate Tribunal in the matter of M/s. Bhushan Power and Steel, totally benefits the Resolution Applicants, and the Financial Creditors, as the assets acquired by the Resolution Applicant by way of a resolution plan stands to become legitimate even if the same was initially acquired on account of proceeds of crime as the same is given an immunity blanket under the Code by invoking the Section 238 of the Insolvency & Bankruptcy Code, 2016.

As of date of this Article, the issue of whether Insolvency and Bankruptcy Code, 2016 overrides the provisions of Prevention of Money Laundering Act, 2002 is a matter that is sub-judice before the Hon’ble Supreme Court. It is a well settled rule of interpretation that if there are two conflicting acts/laws, the rule of harmonious construction shall be applied to bring a quietus to the issue. Also, the far reaching implications of the nascent provision would have to be tested judicially.

Reference

^[1] Subs. by Act No. 8 of 2018, sec. 3(a), for clause (25) (w.r.e.f. 23-11-2017).

^[2] 4. Punishment for money-Laundering.-Whoever commits the offence of money-laundering shall be punishable with rigorous imprisonment for a term which shall not be less than three years but which may extend to seven years and shall also be liable to fine: Provided that where the proceeds of crime involved in money-laundering relates to any offence specified under paragraph 2 of Part A of the Schedule, the provisions of this section shall have effect as if for the words “which may extend to seven years”, the words “which may extend to ten years” had been substituted.

[3] Order dated 03.01.2020 in MA/1147/2019 & MA/547/2018 in CP/129/IB/CB/2018 by Hon’ble NCLT, Chennai. <https://ibbi.gov.in//uploads/order/0a18b6325b428e226e2391f800760cb8.pdf>

[4] Order dated 17.02.2020 in Company Appeal (AT) (Insolvency) No.957 of 2019. <https://nclat.nic.in/Useradmin/upload/9638210675e4a74fab5965.pdf>

^[5]  w.e.f. 28-12-2019.

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