Oshi Shrivastava & Rishi Saraf
INTRODUCTION
Recently, the Delhi High Court in the case of Rajiv Chakraborty vs Enforcement Directorate revisited the issue pertaining to the tussle between the Prevention on Money Laundering Act 2002, Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002, and Insolvency and Bankruptcy Code 2016 and emphasized on the need of a coherent and balanced approach while interpreting these statutes.
PMLA was formulated with the objective of penalizing money laundering offenders and provides the procedure for confiscating property acquired via the use of such money. At the same time, SARFAESI allows Indian banks and financial institutions to sell or auction the assets/properties of credit defaulters without any intervention from the courts and IBC provides a framework for the rehabilitation and revival of corporations and entities. All these have different legislative intents and serve distinct and independent purposes.
There are conflicting judgments over the overriding effect of PMLA. In a plethora of cases, PMLA was held subservient to IBC and SARFAESI Act whereas there are cases where IBC and SARFAESI ACT prevailed over PMLA. The debate over the ED’s powers to attach corporate debtor assets appears to have no closure yet. It remains to be seen how the apex court brings the matter to rest and crystallizes the legal position. The authors in the present paper try to examine the long-standing debate by analyzing the related judgments on this issue and the judicial approach till now.
ABOUT PMLA
The Prevention of Money Laundering Act (PMLA) was enacted in 2002 to combat money laundering and confiscate assets derived from or implicated in money laundering. This Act provides for the prevention, detection, investigation, and prosecution of money laundering crimes, as well as the confiscation of assets derived from or implicated in money laundering.
Section 71 of the PMLA provides for an overriding clause that states that the provisions of the Act shall apply regardless of anything inconsistent therewith contained in any other law currently in effect or any instrument having effect by virtue of any law other than this Act. This clause gives the PMLA a special status in India’s legal system and authorizes law enforcement agencies to take action against money laundering and related offenses without being hindered by provisions of other laws. However, this creates a situation where the authorities under PMLA may seize assets that have already been pledged as collateral or are subject to insolvency proceedings under the IBC, SARFAESI Act, or any such laws. Such situations can lead to delays in the resolution of insolvency cases or the recovery of dues by banks and financial institutions.
To address this issue, the courts have, from time to time, interpreted the various provisions for coordination between the authorities under PMLA and those under the IBC and SARFAESI Acts. Furthermore, the legislature has made amendments in the respective statutes, such as 32A of the IBC, 26E, and 31B of the SARFAESI Act, for harmonious relations between the three statutes where each of them can coexist without interfering with the other’s scope and objective.[1]
RELATIONSHIP BETWEEN IBC AND PMLA
It is a well-settled fact that the Insolvency and Bankruptcy Code, 2016 (IBC), and the Prevention of Money Laundering Act, 2002 (PMLA), in substance, deal with different issues and are formed with entirely different legislative intent. The introduction of IBC in the territory of India was done to consolidate and provide a time-bound process and is primarily focused on the revival of the company by the resolution applicant. PMLA, on the other hand, was enacted to provide a mechanism to prevent money laundering and also confiscate the property acquired as a result of it.
One point of interaction between both of these acts is when a company known to have been associated with money laundering goes into liquidation. Here, the point of discussion is, ultimately, which act would supersede the other. Section 25(2)(a)[2] of the IBC authorizes the resolution profession to take possession of all the assets of the corporate debtor. This has often led to contention over which act should prevail. This is when proceeding under both acts is initiated in similar time frames to cause overlap.[3]
The Judiciary has not entirely sided with any of the two acts.[4] In the Deputy Director of Enforcement vs. Axis Bank case[5], the High Court of Delhi delved into the conflict of the laws and opined that it cannot be settled that one of these two legislations would prevail over the other since they are in two entirely different spheres dealing with two entirely different issues and none of these can be said to have an upper hand in law. The court stated that Section 14[6] of Insolvency and Bankruptcy Code which enforces moratorium cannot in any manner, restrain the enforcement officers from conferred with the authority flowing from the statue of PMLA to confiscate property attained from the earnings of the crime of Money Laundering. The company in question might also be a corporate debtor, but that cannot restrict the authority of PMLA. This is because this can be a situation of concern since it defeats the objective of PMLA. It can act as a loophole in the law and provide an unsolicited saviour. Property attained through illegal means cannot act as a saviour at the time of liquidation.
In Nitin Jain Liquidator PSL Limited v. Enforcement Directorate[7], this intersection showed effect. In the instant case, M/s PSL Limited was discovered to be guilty under PMLA for laundering funds of approximately 275 crores. Here, the Court said that IBC would be given a superior stance over PMLA due to the blanket restriction under section 32A[8]. It also was of the opinion that the Corporate Debtor has successfully avoided the consequences of criminal liability by the way of an approved resolution plan. Hence, the proceeds other property would be taken into account to repay the debt of the Corporate Debtor.
In Punjab National Bank v. Union of India,[9] the Court observed that PMLA would supersede in such situation. The court opined that in such cases, IBC would not prevail over PMLA. Enforcement officers will not be restrained from utilizing their authority of attaching tainted property or in that case even deemed tainted property. This is when proceeds of the crime cannot be traced. The Act would prevail over any other act due to section 71[10] of PMLA. The onus of proof that the property is not the result of criminal activity would lie on the accused. Any creditor who wished to obtain repayment on the deemed tainted property would be required to prove Bonafede interest, and an additional liability of due diligence would lie on the third party in case it acquired any such interest following the commission of the said offence.
These are mere insights on the divide in the opinion of the courts, which do not provide any real assistance in determining the superiority between the acts. However, it is pertinent to note that this is due to the difficulty in determining which act was made with the intention of providing an upper hand. The answer to this question is going to be no since these acts were not considered to intersect at any point and cause the situation to occur in the first place.
RELATIONSHIP BETWEEN SARFAESI AND PMLA
The SARFAESI Act provides a mechanism for banks and financial institutions to recover their dues from borrowers who have defaulted on their loans by attaching/selling their assests. [11] On the other hand, the PMLA aims to prevent money laundering and to confiscate and seize property obtained from proceeds of crime.[12] There have been few instances where both of these statutes have conflicting provisions and the question over what prevails over whom had arisen.
Firstly, in the case of Solidaire India Ltd. v. Fairgrowth Financial Services Ltd. & Ors., the Supreme Court found that the provisions of the amended SARFAESI Act take precedence over those of the PMLA because the former is a more recent statute. So, if there is no direct or indirect connection between a person or their property and the proceeds of a crime, it cannot be presumed that the person is involved in any action involving the funds. The Court held that this similar principle should be applied while determining whether a person’s assets are associated with money laundering. Moreover, in the present case, the Hon’be Court ruled that if two special statutes have a non-obstante clause, the later-enacted statute has precedence. This is based on the presumption that the legislature was aware of the preceding law when it enacted the following law.[13]
However, this concept cannot always be used, and other variables, such as the purpose of the statutes, may be taken into account when resolving disputes among its sections which was subsequently clarified in the later cases.
In 2016, in a landmark case of Standard Chartered Bank vs. Dy. Director, Directorate of Enforcement, Mumbai, the appellate Tribunal evaluated the provisions of Section 26E of the SARFAESI Act, 2002 and Section 31B of the Recovery of Debts Owing to Banks and Financial Institutions Act, 1993. The Tribunal held that once a security interest is registered, the obligations owed to secured creditors take precedence over all other debts and any revenues, taxes, cesses, or other rates payable to the Central Government, State Government, or local government.
In addition, the Appellate Tribunal ruled that a secured creditor has priority over any unpaid taxes payable to the federal or state government or other local authority. The Tribunal further highlighted that the amendments to these statutes in the form of sections 26E and 31B were intended to preserve the rights of secured creditors/banks, who were previously hampered by the seizure of their properties. The Court added that in circumstances where mortgaged properties were acquired and mortgaged prior to the acts of fund diversion and fraud undertaken by the borrowers, they cannot be attached as security for loans. After a secured creditor/bank takes ownership of a property under the SARFAESI Act, it cannot be regarded to have been obtained with the proceeds of crime. The Tribunal further highlighted that the procedures under the PMLA before the Adjudicating Body are civil and not criminal, and that the rules of the SARFAESI will have precedence over the PMLA.[14]
The position got changed in the later cases where the Court approach was to strike a balance between the two acts. The Court advanced the need for balanced approach where both the statutes can coexist without having overriding effect over each other. [15]
Another case is the State Bank of India vs V. Ramakrishnan (2018), where the issue was whether a person could be prosecuted under the PMLA for the same offence for which proceedings had already been initiated under the SARFAESI Act. In this case, the bank had initiated proceedings under the SARFAESI Act to recover its dues, while the ED had also initiated proceedings under the PMLA against the borrower for the same transactions. The Supreme Court held that there was no bar under the PMLA to initiate criminal proceedings against a person who was already facing proceedings under the SARFAESI Act, as the two laws dealt with different aspects of the same transaction.[16]
In the recent case of Aditya Birla Finance Limited vs Directorate of Enforcement, whose decision came in January, 2023 where the substantial question of law was regarding the rights of a secured creditor under the SARFAESI Act, would prevail over an order of attachment under the PMLA Act, in the light of the provisions of the SARFAESI Act?
The Hon’ble Court placing reliance on Axis Bank case held that the PMLA, RDBA, SARFAESI Act and Insolvency Code (or any other laws) must coexist and be interpreted and enforced in harmony, with none of them derogating from the other with respect to assets that are derived or obtained from criminal activity relating to a scheduled offence and thus constitute proceeds of crime within the purview of PMLA. Further, the Court held that just because a secured creditor has a prior secured interest in a property under RDBA or SARFAESI Act, it does not render an attachment order under PMLA illegal, nor does the mere issuance of a PMLA attachment order automatically invalidate a secured creditor’s prior charge or encumbrance claim, which depends on its bona fides.[17]
RECENT RULING – RAJIV CHAKRABORTY VS ENFORCEMENT DIRECTORATE
In the present case, the petitioner via a petition, challenges to orders of attachment made by Enforcement Directorate in exercise of powers conferred by Prevention of Money Laundering, 2002.
An important issue roused is whether a moratorium under Section 14 of the Insolvency and Bankruptcy Code would have an impact on the powers of ED to enforce the attachment under provisions of PMLA. The Hon’ble Court on the issue pertaining to the conflict between the two statutes and their scope revisited the Axis Bank Judgment. It held that while an attachment order of the property labeled as proceeds of crime under the PMLA would remain valid and operative, however, in case of a secured creditor or any third-party claimant to that property, PMLA will have to take a back seat allowing the said property to be disposed off.
In addition, on the subject of Section 14 of the IBC, which prohibits the filing of lawsuits and requires the debtor’s assets to be kept together for a successful bankruptcy resolution process, a moratorium is imposed for the same. The Court added that it does not preclude all activities, especially if public policy considerations, including criminal proceedings, are involved. The PMLA aims to serve a greater public policy objective. The law reflects a greater public interest, notably the battle against crime and the damaging effect such actions have on the society and economy of nations as a whole.
In light of the foregoing, the Court is of the judgment that, on a fundamental level, it would be erroneous to interpret Section 14 of the PMLA as fully excluding actions under Sections 5 and 8 of the Act. Further, the Court revisited various NCLT, NCLAT, and High Court judgments where similar issues arose on the interplay between IBC and PMLA. Firstly in the VarrsanaIspat then in Rotomac Global where it was held that the moratorium under section 14 will not impact the PMLA proceedings. Other cases such as Axis Bank and Nitin Jain were also discussed where the objective and purpose of respective statutes were discussed.
“109. The Court has independently come to the conclusion that the power to attach under the PMLA would not fall within the ken of Section 14(1) (a) of the IBC. Through Section 32A, the Legislature has authoritatively spoken of the terminal point where after the powers under the PMLA would not be exercisable. The events which trigger its application when reached would lead to the erection of an impregnable wall which cannot be breached by invocation of the provisions of the PMLA. The non obstante clause finding place in the IBC thus can neither be interpreted nor countenanced to have an impact far greater than that envisaged in Section 32A. The aforesaid issue stands answered according”
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 redressed 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”[18]
WAY FORWARD – A BALANCED APPROACH
Recently, the question once again arose in the Ashok Sarawagi case[19] on the interplay and the role of PMLA, IBC and SARFAESI which is pending before the Supreme Court. Till then, the precedent set in Axis bank is to be followed where the hon’ble court focused on a need for a balanced approach and focused on striking out a balance between the three statutes. In the aforementioned case, certain attachment orders under PMLA were challenged. The Hon’ble Court held that the order of attachment issued under the PMLA is lawful if it meets the necessary statutory requirements, similar to actions taken by banks, financial institutions, or secured creditors for debt recovery or secured interest enforcement under the RDBA or SARFAESI Act.[20]
The Court further held that a prior secured interest by a creditor on the property does not render an attachment order under PMLA illegal, and conversely, the mere issuance of an attachment order under PMLA does not necessarily make a prior charge or encumbrance of a secured creditor illegal, subject to the claim of the third party being genuine. In such conflicting claims, a balance must be maintained. The lawful interests of a third party acting bona fide cannot be jeopardized due to the prerogative of the State under the PMLA. The claim of a bona fide third-party claimant cannot be defeated, as it would be unfair and unjust, which is not the legislative intent. The legislative scheme allows for such a view, such as Section 8(8) of the PMLA, which authorizes the special court to order the Central Government to restore the property to a claimant with a legitimate interest even after a confiscation order has been issued.[21]
CONCLUSION
In recent years, the conflict between the Prevention of Money Laundering Act (PMLA), the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), and the Insolvency and Bankruptcy Code (IBC) has been a source of debate and contention. The issue arises when the provisions of these Acts conflict, and the question of which Act should take precedence arises.
The primary objective of the PMLA is to prevent money laundering and financing of terrorism, whereas the SARFAESI Act is to expedite the recovery of non-performing assets by banks and financial institutions. The IBC provides a mechanism for the resolution of insolvent corporations and the collection of their debts. In instances where the provisions of these acts conflict, the courts have been required to determine which act should take precedence.
Several courts have determined that the PMLA would have precedence over the SARFAESI Act and the IBC to the extent that they are inconsistent. The justification for this is that the PMLA is a special law designed to prevent money laundering and terrorist financing, which are severe crimes with far-reaching consequences for society. The SARFAESI Act and IBC, on the other hand, are essentially economic laws designed to protect the interests of banks and financial institutions.
It is essential to note, however, that the courts have held that the paramount effect of the PMLA would only apply to the extent of any inconsistency between the Acts, and amendments have already been made in cases of inconsistency, such as Sections 32A, 26E, and 32B of the SARFAESI Act. This means that the provisions of the Acts would be interpreted harmoniously whenever possible, and if no inconsistency exists, all the Acts would operate concurrently. The Courts also emphasised the significance of a balanced approach in which all three acts are applicable. Thus, a balanced approach should be applied while interpreting the three statutes.
[1] Bhavisha Sharma & Siddharth Kothari, ‘Deconstructing the Conundrum between IBC, SARFAESI & PMLA‘ (2019) 9 NLIU L Rev 139
[2] Insolvency and Bankruptcy Code 2016, s (25)(2)
[3] Bhavisha Sharma & Siddharth Kothari, ‘Deconstructing the Conundrum between IBC,SARFAESI & PMLA’ (2019) 9 NLIU L Rev 139
[4]K. Varunkarthick, ‘Attachment of Assets by Enforcement Directorate during the Liquidation Phase of Insolvency Proceedings in India: An Analysis’ (2022) 5 Int’l JLMgmt& Human 389
[5]Deputy Director, ED Vs. Axis Bank(Manu/DE/1120/2019)
[6] Insolvency and Bankruptcy Code 2016, s 14
[7]Nitin Jain Liquidator PSL Limited v. Enforcement Directorate, [2021] SCC OnLine Del 1255
[8]Insolvency and Bankruptcy Code 2016, s 32A
[9]Punjab National Bank v. Union of India, [2022] SCC OnLine SC 227
[10]Prevention of Money Laundering Act 2002, s 71
[11]Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act,2002
[12]Prevention of Money Laundering Act, 2002
[13] Solidaire India Ltd. Vs Fairgrowth Financial Services Ltd. &Ors., [2001] 3 SCC 71
[14] Standard Chartered Bank vs. Dy. Director, Directorate of Enforcement(2001) 3 SCC 71
[15] Rishabh Sharma, “Interplay of SARFAESI Act, IBC, and PMLA: Which One Prevails?” (2021) Mondaq https://www.mondaq.com/india/financial-services/1071298/interplay-of-sarfaesi-act-ibc-and-pmla-which-one-prevails. accessed 13 Mar 2023)
[16] Bank of India vs V. Ramakrishnan[2018] 17 SCC 394
[17]Aditya Birla Finance Limited vs Directorate of Enforcement [2023] 4 SCC 034
[18] Rajiv Chakraborty Resolution Professional of EEIL v. Directorate of Enforcement, 2022 SCC OnLine Del 3703
[19] Ashok Kumar Sarawagi v. Enforcement Directorate [2022] ibclaw.in 261 NCLT
[20] Aanchal Kaur Gandhi, “Supreme Court Resolves the Conflicting Claims of Secured Creditors and the PMLA” (2023) IndiaCorpLawhttps://indiacorplaw.in/2023/01/supreme-court-resolves-the-conflicting-claims-of-secured-creditors-and-the-pmla.html. accessed 13 Mar 2023)
[21]Deputy Director, ED Vs. Axis Bank (Manu/DE/1120/2019)
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