Recently, the Hon'ble High Court of Delhi (“High Court”) caused yet another bend in the meandering interplay between the Insolvency and Bankruptcy Code, 2016 (“IBC”) and the Prevention of Money Laundering Act, 2002 (“PMLA”). The High Court held that a moratorium imposed under Section 14 of the IBC (“Section 14”) will not preclude the Enforcement Directorate (“ED”) from attaching properties under Sections 5 and 8 of the PMLA.

FACTS

In this case, 49 bank accounts of the Corporate Debtor (“CD”) were provisionally attached by the ED after commencement of the Corporate Insolvency Resolution Process (“CIRP”). While a challenge to the Provisional Attachment Order (“PAO”) was pending before the NCLT, the PAO was confirmed by the Adjudicating Authority under PMLA. Subsequently, more properties came to be provisionally attached and eventually confirmed by the Adjudicating Authority.  

The Writ Petition[1] came to be filed by the Resolution Professional of the CD to challenge the confirmation orders passed by the Adjudicating Authority under Section 8(3) of the PMLA.

CONTENTIONS OF THE PARTIES

The Petitioner contended that ED would have no jurisdiction to interfere in proceedings under the IBC once a moratorium under Section 14 came into effect.[2] It was submitted that Section 14 is designed to protect the assets of the CD and prevent coercive steps during the pendency of the CIRP.[3] It was further argued that since proceedings for attachment of properties under PMLA are civil proceedings, they fall within the ambit of “proceedings” in Section 14.

The ED, relying on judgments of the Hon'ble Supreme Court (“Supreme Court”), the NCLAT and the Hon'ble High Courts, inter alia, contended that “proceeds of crime”[4] is not an “operational debt”[5] and ED is not an “operational creditor”[6]. Thus, ED does not attach properties in the capacity of a creditor of the CD. It was submitted that the object of PMLA being distinct from that of IBC, the latter cannot prevail over the former, especially as there is no inconsistency.[1]  

The ED further submitted that the NCLAT, in Varrsana Ispat Limited v. Deputy Director, Directorate of Enforcement,[2] held that powers conferred on the ED to attach properties under PMLA are not impacted by Section 14. It was also pointed out that since a Civil Appeal was dismissed by the Supreme Court, the decision in Varrsana Ispat (supra)[3] stood merged and thus is now law under Article 141 of the Indian Constitution. It was further pointed out that in the case of Kiran Shah v. Directorate of Enforcement, Kolkata[4], the NCLAT had held that PMLA takes precedence over IBC where there is neither an approved Resolution Plan nor sale of liquidation assets of the CD.

DELIBERATION LEADING UP TO THE DECISION

On a perusal of the statement of objects and reasons of the PMLA, the judgment of Nitin Jain Liquidator PSL Limited v. Directorate of Enforcement [5] and on referring to judgments of the US Supreme Court[6], the High Court observed that PMLA is a distinct regime aimed to arm enforcement agencies in the fight against crime. The High Court found that PMLA and IBC subserve completely different, divergent and distinct purposes.

The High Court also observed that the Government, while proceeding to act under PMLA, cannot be recognized as a creditor who seeks to enforce a debt. Its action to attach a property is not one which is taken by a person to whom a debt may be said to be owed. The ED only seeks to strip the perpetrator of the right to enjoy the property. The High Court agreed and reiterated its views in Directorate of Enforcement v. Axis Bank [7] and that of the Supreme Court in P. Mohanraj v. Shah Bros. Ispat (P) Ltd.,[8] in respect of the above.  

Discussing the effect of attachment, the High Court noted that attachment does not expunge the property rights but is merely a symbolic taking over of the property till the conclusion of the PMLA proceedings. It is not an attachment for debt but a measure to deprive an entity of assets which comprise proceeds of crime.

With respect to the non-obstante clauses in both the special statutes, the High Court opined that even though IBC is the later enactment between the two, the introduction of Section 32A in 2020 represents the last expression of intent of the Legislature. The High Court observed that the bar under Section 32A of the IBC would come into play only upon approval of a resolution plan or liquidation of assets of the CD and those alone constitute the defining moment for the aforesaid purpose.[1]

Section 32A of the IBC states that a CD shall not be prosecuted for any offence committed prior to the commencement of CIRP from the date that the resolution plan has been approved by the NCLT. However, it is pertinent to note that persons who were responsible for conducting the business of the CD at the time of commission of the offence(s) will continue to be liable.[2]

Further, dealing with conflicting judgments of the NCLAT, the High Court observed that in the case of Rotomac Global Private Limited vs. Deputy Director, Directorate of Enforcement[3], the question of a moratorium applying to proceedings under the PMLA fell for consideration and the NCLAT reiterated the position elucidated in Varrsana Ispat (supra)[4] and proceeded to dismiss the appeal. The High Court noted that the sole discordant note was struck by the NCLAT in Directorate of Enforcement v. Manoj Kumar Agarwal [5] wherein the NCLAT, for the first time, held that in light of the objects of the IBC, it would be impermissible for the authorities under the PMLA to exercise the powers of attachment after a moratorium had come into effect.

The legal position was ultimately laid to rest by a larger Bench of the NCLAT in Kiran Shah (supra)[6] which reiterated Varrsana Ispat (supra)[7] and disapproved the decision of Manoj Kumar Agarwal (supra)[8] for being contrary to the principles of stare decisis. In view of this, the High Court agreed with the decision of the NCLAT which approved of ED’s powers under PMLA despite imposition of moratorium under IBC.

Lastly, assessing the impact of a moratorium, the High Court opined that Section 14 is aimed at maximisation of value and preservation of assets of the CD while possibilities of its resurrection are explored, and to ensure that its creditors do not initiate actions which may impede the resolution process. In this regard, the High Court noted that the primordial purpose of a moratorium is distinct from that of attachment under the PMLA.

The High Court, therefore, rejected the submission that the provisions of PMLA must be read as being subservient to the moratorium provision in Section 14. It was found that PMLA represents a larger public interest viz. the fight against crime. The High Court also noted that the moratorium provision is not liable to be interpreted as barring all possible actions “especially where countervailing public policy concerns are involved”[1].

Thus, on an overall conspectus, the High Court held as under:

“113. ….an order of attachment when made under the PMLA does not result in the corporate debtor or the Resolution Professional facing a fait accompli. The statutes provide adequate means and avenues for redressal of claims and grievances. It could be open to a Resolution Professional to approach the competent authorities under the PMLA for such reliefs in respect of tainted properties as may be legally permissible. Similarly, and as was explained by Axis Bank, a PAO made by the ED under the PMLA does not invest in that authority a superior or overriding right in property. Ultimately the claims of parties over the property that may be attached and the question of distribution and priorities would have to be settled independently and in accordance with law.”[2]

                                    (Emphasis supplied)

The High Court, in the present judgment, has heavily relied on Axis Bank (supra)[3]. Pertinently, it has been challenged[4] before the Supreme Court wherein an interim order of status quo has been passed.