INTRODUCTION
The interplay between the “Prevention of Money Laundering Act, 2002” (hereinafter referred to as “PMLA”) and the “Insolvency and Bankruptcy Code, 2016” ((hereinafter referred to as “I&B Code”). has been a point of discussion in recent days. Both of them are special laws with separate purposes and objectives. ‘I&B CODE’ has been put into place with the goal of protecting the interests of creditors, financial and operational, as well as other stake holders, and also reviving the companies in a timely manner through an insolvency resolution process that must be completed in maximum 330 days. Whereas the primary goal of the PMLA is to combat money laundering and to establish provisions for the confiscation of property obtained from, involved in, or related to money laundering, as well as for challenges associated with or incidental to such activity. The clauses of each legislation make the disagreement between them apparent. Whether the introduction of a moratorium under Section 14 of the “I&B CODE” will preclude the initiating or sustaining attachment proceedings under the “Prevention of Money Laundering Act” (PMLA) is the main question discussed in this article. The answer to this question is yet to be established. A great deal of unrest has been caused by numerous judgements involving the ‘I&B CODE’ and PMLA. Nothing is abidingly established for the overriding effect of ‘I&B CODE’ over PMLA or vice-versa until now as the same is considered on case to case basis. Furthermore, an appeal filed in the matter of Ashok Kumar Sarawagi vs. ED[1] has stimulated the Hon’ble Supreme Court to take a decision on overriding effect of PMLA or ‘I&B CODE’. The Apex Court will also provide its views on whether moratorium also applies to action initiated by the Enforcement Directorate (ED).
INCONSISTENCY BETWEEN THE STATUES
There is ambiguity and a lack of transparency on how the provisions of both these Acts should be applied because there are some circumstances in which both PMLA and ‘I&B CODE’ may be applicable. While delivering the verdict in the case of “Innoventive Industries Ltd. v. ICICI Bank”[2] emphasised that the principle established in several cases was reaffirmed and inconsistencies must be apparent, clear, and irrefutable. In addition, the inconsistency should be so great that the laws are often in “direct collusion,” making it challenging to adhere to both simultaneously.
The “I&B Code” clearly prescribes that the corporate debtor’s business activities be managed as a going concern. Additionally, in accordance with Section 18 of the “I&B Code”, the Resolution Professional must take control over the Corporate Debtor’s assets. Managing and running the corporate debtor’s company includes taking back control of the assets the Enforcement Directorate has attached. On the contrary, PMLA specifies in Section 5 to provisionally attach the property covered by the act, placing restrictions on its transfer, conversion, disposal, and movement. Contradictory provisions in both statutes appear to be keeping the CIRP process on hold.
ECONOMIC RATIONALE
The I&B Code stipulates deadlines for reaching a resolution while by seizing and selling the wrongdoer’s assets, the PMLA seeks to recover property from wrongdoers and compensate harmed parties. The I&B Code will therefore evaluate the economic interests of beneficiaries and propose a solution as soon as possible to the Corporate Debtor and Creditors. In this aspect NCLT in “SREI Infrastructure Finance Limited v. Sterling SEZ and Infrastructure Limited”[3] held that “compared to the time-bound process of the I&B Code, 2016, criminal proceedings under the PMLA would take a long time, resulting in the erosion of the value of the assets. The I&B Code, 2016 should therefore be given priority, taking into account the economic aspect of the case as well.” Moreover, in the case of the “Punjab National Bank v. Deputy Director, Directorate of Enforcement”,[4] Appellant Tribunal for PMLA reaffirmed the same and observed that, “the trial of the criminal case brought against the borrowers often takes several years putting creditors at disadvantage. The aim and scheme of the CIRP is to pass the business of the corporate debtor to a bona fide new resolution claimant, the Resolution Plan of which is authorized by the Committee of Creditors.” In the matter of “M/s. PMT Machines Ltd. vs. Directorate of Enforcement, New Delhi”,[5] it was ruled that “The Committee of Creditors/consortium of banks are taking every possible effort to get viable Resolution Plan for the company, however, due to the attachment of the assets the objective of the CIRP is getting delayed.”
Let’s examine the conflict between ‘I&B CODE’ and PMLA under the following heads:-
I. ‘I&B CODE’ Overrides the PMLA. – In light of Section 238 of the Code, it has consistently been ruled that the Code takes precedence over other laws. To draw an analogy, Section 238 is to the Code what spinach is to Popeye.
a) The previous non-obstante clause is superseded by the non-obstante clause in the later-enacted statute.
Unlike “PMLA”, “I&B CODE” was enacted much later. The moratorium imposed under Section 14 would therefore take precedence under the non-obstante clause in Section 238 of the Act, despite the non-obstante clause in Section 71 of the PMLA. Owing to the Supreme Court’ controlling judgment, in “Solidaire India Ltd. v. Fairgrowth Financial Services Pvt. Ltd.”[6] In Solidaire case, the Canons of statutory interpretation were used by the Supreme Court to reach the following conclusion: “if there arises an inconsistency between two special statutes—each containing an non-obstante clause — the later enacted statute must prevail. The reason is that the legislature was well aware of the non-obstante clause contained in any other law at the time of its enactment. Thus if the later enacted statute is still conferred by it with the non-obstante clause, the intention of the legislature becomes abundantly clear: that is to give overriding effect to the later statute: despite, notwithstanding, anything contrary contained in the earlier enacted statutes.”
Moreover, even the Delhi High Court in the “Axis Bank case,”[7] overlooked its controlling precedent of two judge bench. For instance, in the case of “Kohinoor Creations v. Syndicate Bank”,’[8] the Delhi High Court have held that “the non-obstante clause contained in the Recovery of Debts due to Banks and Financial Instruments Act, 1993 (RDB Act) would override the non-obstante clause contained in Section 8 of the Arbitration and Conciliation Act, 1996. This was due to the fact that RDB Act was later amended after 1996. And since the legislature intentionally sought to retain the non-obstante clause in RDB Act — the court correctly concluded that, the non-obstante clause in RDB Act would prevail over Arbitration and Conciliation Act, 1996.”
b) Section 63 of “I&B CODE” nullified the scope of the PMLA’s adjudicating authority’s jurisdiction.
Importantly, Section 63 of the “I&B CODE” forbids “any other civil court or authority” from having jurisdiction over subjects under NCLT’s purview. That essentially implies, taking control of corporate debtor’s properties — would supersede the jurisdiction of prescribed adjudicating authority under PMLA. Additionally, the Appellate Tribunal under the PMLA affirmed this conclusion in the matter of “Bank of Baroda v. Deputy Directorate Enforcement”,[9] stating that, “the Adjudicating Authority under PMLA does not have jurisdiction to attach the properties of the Corporate Debtor undergoing Corporate Insolvency Resolution Process.”
The same conclusion was shared by Justice Manmohan Singh in the matter of “PNB v. Deputy Director of Directorate of Enforcement, Raipur”[10]. The question at hand was whether the Enforcement Directorate would be able to seize the corporate debtor’s assets and properties under the PMLA if the moratorium period became effective. While overturning the adjudicating authority’s order permitting the Enforcement Directorate to seize the corporate debtor’s property secured by a bank mortgage, the appellate tribunal held that, “upon admission of moratorium application by NCLT — the Enforcement Directorate does not have any authority vested — to attach the corporate debtor’s properties.”
The tribunal noted that since PMLA actions are civil in nature, they are subject to the ‘I&B CODE’’s. Legislative purpose also supports this since Section 238 of the “I&B CODE”, a later statute, contains a non-obstante clause. Therefore, as attachment procedures are civil in nature, PMLA cannot be used against the third party, who is merely an innocent secured creditor and has no connection to the scheduled offence of money laundering. In light of the foregoing, it is believed that once the moratorium period is in place, the PMLA procedures would automatically be put on hold: Additionally, the corporate debtor’s assets and properties could not afterwards be attached.
II. PMLA Takes precedence Over ‘I&B CODE’ – In “Deputy Director Directorate of Enforcement Delhi v. Axis Bank”, the Delhi Court held that, “the government cannot be considered a creditor when it exercises its right to seize proceeds of crime under the PMLA. Therefore, it cannot be stated that a person accused of money laundering has acquired the status of a debtor under the PMLA. Additionally, any PMLA-related proceeding is exempt from being challenged in IBC-related proceedings.” This means that the IBC does not supersede the PMLA and that there is no “overriding effect” of one statute over another.
a) Steps taken to combat Money Laundering in India by implementing “Prevention of Money Laundering Act (PMLA), 2002”.
The PMLA was passed in order to address the problem of money laundering in India and to confiscate and seize any assets acquired through money laundering. The Hon’ble Apex Court in the case of Vijay Madanlal Choudhary[11] held that “Money laundering is an independent offence under PMLA. Being involved in any one or more of the Section 3 specified processes or activities involving the proceeds of crime is sufficient. They are all considered members of the same class of criminals that engage in money laundering. It is not important whether the offender is involved in the predicated offence or not.” This has increased the scope of attachment assets acquired by successful bidders too under approved CIRP.
b) Non Acceptance of Exploitation of ‘I&B CODE’ provisions by the PMLA offenders.
On the one hand, it is possible to make the case that if PMLA is not implemented, criminals would manipulate the immunity and moratorium provisions to escape prosecution for the crime of money laundering. However, because it has not yet established itself in any discernible way, this notion is more academic. The other argument is that it hampers genuine business acquisitions under ‘I&B CODE’ and effects the time value of money and it can possibly make projects unviable as cases can linger on in court for years. However, the Hon’ble High Court of Delhi in ED vs Axis Bank Ltd.[12], rejected the fact of prevalence of the other laws over PMLA. It was held that “accepting moratorium and other immunity provisions of ‘I&B CODE’ would defeat the objective of PMLA by opening an escape route for the offenders. A person indulging in money-laundering cannot be permitted to avail of the “proceeds of crime” to get a discharge for his civil liability as such assets are part of “Proceeds of Crime” and subject to confiscation”.
At this juncture, it is pertinent to note that Hon’ble NCLAT has held in the case of Varrasana Ispat Limited v Deputy Director, Directorate of Enforcement [13] that PMLA deals with ‘Proceeds of Crime’ and was held that “Section 14 of ‘I&B CODE’ is not applicable to such proceeding. Further while analysing the scope of Section 14 of ‘I&B CODE’, it was held that “It will be applicable to the individual which may include the Ex-Directors and shareholders of the ‘corporate debtor’ and they cannot be given protection from the ‘Prevention of Money Laundering Act, 2002’ and such individual cannot take any advantage of section 14.”
CONCLUSION
Although clearly different, the objectives of both laws are of utmost importance to the Indian economy. In contrast to PMLA, which aims to stop money laundering and prevent criminals from profiting from their crimes, ‘I&B CODE’ promotes the resurrection of stressed enterprises by protecting the interests of all stakeholders. Therefore, the first goal is to implement a balanced strategy under the ‘I&B CODE’ while also apprehending money laundering offenders. Everyone is watching for the Supreme Court order to clear up any confusion over the overriding effects of either the PMLA or the ‘I&B CODE’. This will outline the essence and scope of both legislations to reduce the litigation burden and smooth functioning of proceedings under both legislations. However, it would be prudent for the courts to take into consideration while making their decision how the judgement might affect sensible business transactions and how it might affect the entire ecosystem.
[1] Ashok Kumar Sarawagi vs. ED 2022 SC 11560.
[2] M/S. Innoventive Industries Ltd vs Icici Bank on 31 August, 2017.
[3] SREI Infrastructure Finance Limited v. Sterling SEZ and Infrastructure Limited, Manu/ND/0924/2019.
[4] Punjab National Bank v. Deputy Director, Directorate of Enforcement, Raipur, Manu/ML/ 0003/2019.
[5] PMT Machines Ltd. vs. Directorate of Enforcement, New Delhi , 16.09.2019.
[6] Solidaire India Ltd. v. Fairgrowth Financial Services Pvt. Ltd (2001) 3 SCC 71.
[7] The Deputy Director Directorate of Enforcement Delhi v. Axis Bank & Ors., 2019 SCC Online Del 7854.
[8] Kohinoor Creations v. Syndicate Bank, 121 (2005) DLT 241.
[9] “Bank of Baroda v. Deputy Directorate Enforcement”, FPA-PMLA-2115/2017.
[10] Supra Note 4.
[11] “Vijay Madanlal Choudhary and Others v. Union of India and Others” dated 27 July 2022, Special Leave Petition (Criminal) No. 4634 OF 2014 and connected matters.
[12] Supra Note 7.
[13] “Varrasana Ispat Limited v Deputy Director, Directorate of Enforcement, 2019” NCLAT Del 05510.
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