The Insolvency and Bankruptcy Code (IBC), 2016 has been highly successful in speedy resolution of matters or liquidation of corporate entities. The legislature has further been successful in maximizing value of assets of the debtor by adopting a fair and transparent procedure for disposition of assets while balancing the interests of all stakeholders. The law has brought about a paradigm shift in laws relating to insolvency resolution to promote entrepreneurship at large.
In the recent case of Nitin Jain Liquidator PSL Limited v. Enforcement Directorate, the Delhi High Court aims to clarify on the complexity with regard to the reconciliation between the IBC and the Prevention of Money Laundering Act, 2002 (PMLA) on the context of Section 32A of IBC.
The facts of the case are that a petitioner, i.e. Liquidator was appointed by the National Company Law Tribunal (NCLT) to take over the control and management of M/s. PSL Limited, i.e. Corporate Debtor. The Liquidator had approached the Court upon receiving summons from the respondent who was investigating the affairs of the Corporate Debtor under the provisions of the PMLA.
On studying the matter, the Court observed that no provisional order of attachment has been issued against Corporate Debtor, despite investigations being undertaken by the Enforcement Directorate (ED) in accordance with the provisions of PMLA. Thus, the Court permitted the Liquidator to continue with the liquidation process and further ordered to place the amount received from the sale of assets in a separate account and also file an affidavit before the Court in this regard. Later on, an order of provisional attachment was issued after the sale of assets of the Corporate Debtor.
The issue arose whether PMLA would retain the jurisdiction or authority to proceed against the properties of a corporate debtor once liquidation measure had been approved under the provisions of IBC. To study about this matter, it is highly important to understand the provisions of Section 32A of the IBC and understand their significance.
- Sub-section (1) of Section 32A states that the liability of a corporate debtor for an offence committed prior to the commencement of the corporate insolvency resolution process shall cease, and the corporate debtor shall not be prosecuted for such an offence from the date the resolution plan has been approved by the Adjudicating Authority under section 31.
- Sub-section (2) of Section 32A talks about extending the warranty in respect of the properties of the corporate debtor upon approval of resolution plan or sale of liquidation assets while providing assurance against liability.
- Sub-section (3) talks about extending assistance and co-operation to any authority investigating an offence committed prior to the commencement of the corporate insolvency resolution process.
Section 32A was implemented subsequent to the matters recognized in JSW Steel Ltd v. Mahender Kumar Khandelwal & Ors. Furthermore, in the case of Manish Kumar v. Union of India, the Court emphasized on maximization of assets’ value of the corporate debtor under the IBC. The introduction of Section 32A aims to mitigate apprehensions and subserves to assure the resolution applicant that once the offer is accepted, corporate debtor can take over a fresh stand.
The question remained on the ED’s power to attach the properties of the corporate debtors as conferred by Section 5 of PMLA, once Section 32A is applicable.
Under the PMLA Act, the ED has the power to provisionally attach property for a specified period, if it has reason to believe that the person in possession of such proceeds of crime may conceal, transfer or deal with the same to frustrate the proceedings. Once the offence of money laundering is established, the property is confiscated by the Union Government and thereafter vests absolutely with the Union Government, free of all encumbrances.
Now the Court was required to deal with the issue of primacy with IBC as both statutes, i.e PMLA and IBC employ non-obstante clauses on their overriding effect over any other law in force.
With the introduction of section 32A to the IBC, a trigger event was introduced which imposed a statutory bar on taking any action against the corporate debtor’s property in relation to an offence committed prior to the commencement of CIRP. Such property must be covered through a resolution plan approved by the adjudicating authority. Once the event has occurred, the power to attach assets of the corporate debtor under Section 5 of the PMLA would cease to be exercisable as soon as a liquidity measure is adopted and approved by the adjudicating authority.
In this manner, the corporate debtors and its bonafide purchasers along with their property stand protected even though assistance must be provided to enforcement authorities to investigate offences committed prior to commencement of CIRP.
However, authorities under the IBC and PMLA ought to continue to discharge their obligations and duties within the demarcated spheres. Also, the enforcement authorities such as the Enforcement Directorate under the PMLA will now have to limit its actions beyond the trigger event and the IBC will protect the corporate debtors, its bonafide purchasers along with its property.
It must be understood that IBC may have imposed this restriction but it cannot be said to have curtailed the powers of enforcement authorities to take actions against the persons in charge of the corporate debtor or involved in money-laundering.