India - Insolvency And Bankruptcy Code: Re-Affirming Its Primacy Over The Prevention Of Money Laundering Act, 2002.
Legal News & Analysis - Asia Pacific - India - Insolvency & Restructuring
22 April 2021
It has been an active month for the Insolvency and Bankruptcy Code, 2016 (“Code”/ “IBC”). On one hand, the legislature has inserted a new chapter into the Code providing for pre-packed insolvency resolution process for micro, small or medium enterprises (“MSMEs”) to ease and fast track the resolution for the stressed MSMEs, while on the other hand, Courts through various landmark decisions have upheld the primacy of the Code which will play a significant role in boosting the confidence of the stakeholders, particularly the creditors and the resolution applicants, in the sanctity of the corporate insolvency resolution process (“CIR Process”).
To state a few, Hon’ble Supreme Court in the case of Ghanashyam Mishra And Sons Private Limited vs. Edelweiss Asset Reconstruction Company Limited, has re-affirmed the ‘clean slate’ theory and stated that once a resolution plan for an ailing Corporate Debtor is approved under the provisions of the Code, all claims (including the Statutory Claims) outside the Resolution Plan will ceased to survive, nor will they be permitted to be re-initiated/ continued against the new corporate body. This will warrant that the new corporate body, under the aegis of the Resolution Applicant, is not strained with the past claims again and is given time and opportunity to rehabilite itself.
In another case namely Directorate of Enforcement vs. Manoj Kumar Agarwal & Ors., which will be analysed in this post, while observing that there is no conflict between the provisions of the Code and the Prevention of Money Laundering Act, 2002 (“PMLA”), the Hon’ble National Company Law Appellate Tribunal (“NCLAT”) went on to hold that the provisions of the Code will over-ride the attachment of the properties (of a corporate debtor) under the PMLA, even when such attachment took place prior to the initiation of the CIR Process. In order to arrive at this finding, the NCLAT referred to the object and intention of the Code which is providing a free-hand to the creditors and the Resolution Professional to effectively revive and resolve the stress faced by the corporate debtor. In doing so, if the properties of a corporate debtor are attached, it will jeopardize the efforts of the Resolution Professional and will hamper a successful resolution.
The aforesaid aspect has been a focal point of discussion before the Tribunals in several instances, both under the PMLA and the Code. For instance, in Bhushan Power and Steel Limited, NCLAT by way of the judgment dated February 17, 2020, while examining the overriding effect of both the special legislations (IBC and PMLA) on account of both having non-obstante clauses, laid down a precedent by giving Section 32A of the Code a retrospective effect and setting aside the attachment of properties by the Directorate of Enforcement. The NCLAT held that the newly-introduced Section 32A, by way of an Ordinance promulgated on December 28, 2019, would apply in this case. Section 32A was inserted during the pendency of the BPSL proceedings before the NCLAT with the intention of providing protection to the assets of the corporate debtor and the successful Resolution Applicant (provided the criteria’s specified therein are met), once Resolution Plan has been approved, from being prosecuted for offences committed by the erstwhile management prior to commencement of the insolvency process. However, the instant judgment in the Manoj Kumar Agarwal case differs from the aforesaid and assumes significance in light of the specific stage of proceedings in this case and the resultant wider teeth given to the IBC, as elaborated below.
In Manoj Kumar Agarwal case, the CIR Process was initiated against the corporate debtor on July 16, 2018 pursuant to the order of the Adjudicating Authority in an Application filed under Section 7 of the Code. However, prior to initiation of CIR Process, the Provisional Attachment Order (“PAO”) dated May 29, 2018 (read with Corrigendum dated June 14, 2018) was issued under Section 5 of the PMLA attaching certain properties of the corporate debtor. The said PAO was subsequently confirmed by the PMLA Adjudicating Authority on November 20, 2018 (post initiation of the CIR Process).
Subsequently, upon initiation of the CIR Process, the Resolution Professional filed an Application with the Adjudicating Authority seeking release of the attached properties under the PAO. On February 22, 2019, the Hon’ble Adjudicating Authority allowed the Application and directed the properties to be released to the Resolution Professional for necessary process as per the Code.
Appeal before the NCLAT
The Directorate of Enforcement (“ED”) challenged the aforesaid order before the NCLAT and primarily argued the following:
The PMLA proceedings are essentially criminal in nature, and thus, the moratorium under Section 14 of the Code will not be applicable.
The proceedings before the PMLA Adjudicating Authority are in relation to the offence of money laundering, for which PMLA is a special legislation and will take precedence over the provisions of the Code.
The appropriate forum for the Resolution Professional to seek any relief in relation to the PAO would be before the Appellate Tribunal under the PMLA and not the Code in as much as the Adjudicating Authority under the Code has no authority to set aside the PAO.
Section 32A of the Code (introduced vide Ordinance of 2019 and later superseded by Insolvency & Bankruptcy (Amendment) Act of 2020) is not applicable in the given facts as the provision is not applicable to actions taken prior to the approval of the resolution plan/ liquidation.
Although the aforesaid averments have earlier been raised and deliberated upon before various Courts, the NCLAT considered the judicial pronouncements and analysed the position of law afresh in this regard and came to the following conclusion.
A. PMLA proceedings are civil in nature
The ED relied upon the NCLAT’s decision in the case of Varrsana Ispat to argue that the PMLA proceedings are criminal in nature, and therefore, any application of Section 14 moratorium would wrongly benefit and afford protection to erring parties from offences under PMLA. It is pertinent to note that the factual position under Varrsana Ispat was similar to the instant Manoj Kumar Agarwal case as the attachment in that case was also prior to the initiation of the CIR Process. Further, the Hon’ble Supreme Court had chosen to not interfere with the NCLAT decision in the Varrsana Ispat case.
However, despite Varrsana Ispat being the authority on the instant question of law, the NCLAT in Manoj Kumar Agarwal case diverged from its earlier position. NCLAT, while placing reliance upon the decision of the three-judge bench of the Hon’ble Supreme Court in the case of Pareena Swarup vs. Union of India, observed that the act of attachment, and confirmation of the same, by the PMLA Adjudicating Authority is civil in nature. The NCLAT further observed that provisions under the PMLA are clearly demarcated. While, on one hand, the offences under the PMLA are defined in Chapter 2 and tried under Chapter 7 by Special Courts as per Code of Criminal Procedure (S. 46), the attachment is carried out under Section 5 and is adjudicated and confirmed under Section 8 by the Adjudicating Authority. Thus, the functions as regards the Adjudicating Authority are civil in nature to the extent that it does not decide on the criminality of the offence nor does it have the power to impose penalty or impose punishment.
Consequently, NCLAT held that the confirmation of the PAO by the Adjudicating Authority, subsequent to the initiation of the CIR Process against the corporate debtor, is bad and to be ignored, more so considering that Section 14 will hit institution/ continuation of proceedings before the Adjudicating Authority, barring prosecution proceedings before the Special Courts.
B. Code takes primacy over PMLA and Adjudicating Authority has power to decide all issues arising out of insolvency proceedings
Primacy of Code over other legislations has been time and again upheld in light of Section 238 of the Code. To draw an analogy, Section 238 is to the Code, what is spinach to Popeye.
The NCLAT in the instant Manoj Kumar Agarwal case too upheld that the provisions and the proceedings under the Code will take primacy over the proceedings under the PMLA. NCLAT observed that even if it is to be assumed that Section 14 moratorium is not applicable to the proceedings under the PMLA, Section 238 of the Code would still apply and the Code being a subsequent special statue, will prevail over another special statute PMLA.
The NCLAT observed that under the Code, the Resolution Professional has certain duties, namely, to take control and custody of the assets over which corporate debtor has ownership rights (S. 18); to protect and preserve the value of the property of the Corporate Debtor and manage the operations of the Corporate Debtor as a going concern (S. 20); to appoint valuers and determine the fair value and the liquidation value of the Corporate Debtor (with its assets and liabilities) (Reg 35 of CIRP Regulations); to issue Information Memorandum with such details of the assets and liabilities, as are necessary for ascertaining their values to the creditors and the prospective resolution applicants (Reg 36 of CIRP Regulations), amongst others.
For the aims and objects of the Code to be achieved and value to be maximised for effective resolution, the Resolution Professional is required to undertake the above acts in a time bound manner, without any threat of/ actual obstructions of attachments and seizures, which would otherwise make the duty of keeping the corporate debtor as a going concern difficult. Further, since the above acts/ duties of the Resolution Professional to take over properties of corporate debtor, manage the same, and keep corporate debtor a going concern are arising from the provisions of the Code, if any hindrance is being created by the attachment under PMLA, it would be a question of priority of the Code over the PMLA, which in light of Section 238 will necessarily require the Code to prevail in the interest of the corporate debtor. Additionally, since these proceedings arise out of or are in relation to the insolvency resolution of the corporate debtor, such question can be decided by the Adjudicating Authority under Section 60 (5) (c) of the Code:
“60 (5) (c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code.”
Thus, the NCLAT essentially affirmed and assured that the Resolution Professional will have a free hand in order to effectively discharge his duties under the Code.
Although the aforesaid observation is in the facts of the instant case wherein the attachment was confirmed subsequent to the initiation of the CIR Process and therefore set aside, it would not be wrong to assume in light of the observation w.r.t. Section 238 and the duties of the Resolution Professional, that the aforesaid position of law will not undergo any change if the attachment is confirmed even prior to the initiation of the CIR Process.
Additionally, while arriving at its conclusion, the NCLAT made a detailed reference to Section 32A along with its objective. While Section 32A has been inserted in the Code with the aim to facilitate effective revival of a corporate debtor, its primary aim is to statutorily ensure that the interest of the successful resolution applicant is duly protected and that a fair chance is given to the corporate debtor to revive itself under a new management, after the approval of a Resolution Plan. Reference to Section 32A in the instant Manoj Kumar Agarwal case may perhaps not be directly relevant to the issue at hand, considering the material difference qua stage of the CIR Process (since Plan is yet to be approved) and the fact that Section 32A kicks in only when a Resolution Plan is approved by the Adjudicating Authority. This is nevertheless a welcome decision, particularly from all the stakeholders’ perspective, as it brings in more certainty in the corporate insolvency process.
For further information, please contact:
Bishwajit Dubey, Partner, Cyril Amarchand Mangaldas
 Civil Appeal No. 8129 of 2019.
 CA-AT (Ins) No. 575 of 2019.
 See Bank of India vs. Deputy Director, Enforcement Directorate, FPA-PMLA-2173 & 2155/MUM/2018, judgment dated October 10, 2018; Punjab National Bank vs. Deputy Director, Directorate of Enforcement, Raipur, FPA-PMLA-2633/RP/2018, judgment dated January 2, 2019.
 JSW Steel Ltd. vs. MK Khandelwal and Ors., Company Appeal (AT)(Ins.) No. 957 of 2019.
 See Varrsana Ispat Ltd. vs. Deputy Director, Directorate of Enforcement, Company Appeal (AT) (Ins.) No. 493 of 2018 (affirmed by two judge bench of the Hon’ble Supreme Court vide order dated July 22, 2019 in Civil Appeal No. 5546 of 2019).
 2008 14 SCC 107 (three judge bench decision).
 See Manish Kumar vs. Union of India, Writ Petition (Civil) No. 26 of 2020, wherein constitutional validity of Section 32A was upheld.