The National Company Law Appellate Tribunal (NCLAT) has clarified that asset attachments made by the Enforcement Directorate (ED) under the Prevention of Money Laundering Act (PMLA) are not stayed by the moratorium imposed by the Insolvency and Bankruptcy Code (IBC). This ruling asserts that PMLA attachments, aimed at proceeds of crime, supersede the protections offered by the IBC's Section 14 moratorium. The ED's role as a public enforcement agency, rather than a creditor, is central to this distinction.
The NCLAT’s stance, articulated across several recent judgments, emphasizes that the PMLA operates to serve penal objectives and meet international obligations, such as those set by the Financial Action Task Force (FATF) and United Nations conventions. These aims are deemed distinct from the PMLA's purpose of satisfying creditors within insolvency proceedings. Despite Section 238 of the IBC granting it overriding effect over other laws, the NCLAT maintains this provision does not nullify the PMLA's reach concerning proceeds of crime.
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Conflicting Legal Frameworks
The clash arises when a company undergoing insolvency resolution, triggering an IBC moratorium, is also under investigation by the ED for financial offenses. The ED contends that proceeds of crime, by definition, never lawfully vest in the corporate debtor and thus do not form part of the insolvency estate. This perspective positions PMLA attachments as dealing with assets outside the typical scope of corporate insolvency.
"PMLA and IBC operate in distinct spheres with no ‘irreconcilable inconsistency’ between them." - NCLAT
The ED functions as a public enforcement agency, distinct from a creditor seeking to recover dues. The assets attached under PMLA are viewed as instruments for penal consequences and for fulfilling broader international commitments, rather than for compensating creditors.
Key Case Law and Interpretations
Recent rulings, including those concerning Siddhi Vinayak Logistics Ltd. and Dunar Foods, highlight this legal tension. In the Dunar Foods case, the ED attached assets worth ₹177.33 crore. The resolution professional of Dunar Foods approached the National Company Law Tribunal (NCLT) seeking de-attachment, citing the IBC moratorium. However, the NCLAT upheld the ED's attachment.
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The appellate tribunal has pointed to Supreme Court findings, such as those in the Embassy Property case, indicating that the confirmation of asset attachments falls beyond the jurisdiction of insolvency forums.
Background: PMLA vs. IBC
The Insolvency and Bankruptcy Code (IBC), enacted to consolidate and amend laws relating to insolvency, aims for time-bound resolution of corporate debt. Its Section 14 imposes a moratorium on legal proceedings against a corporate debtor once the Corporate Insolvency Resolution Process (CIRP) begins.
The Prevention of Money Laundering Act (PMLA), on the other hand, targets the proceeds of crime and aims to prevent money laundering. It grants the ED powers to investigate and attach such assets.
The fundamental point of contention is whether the IBC's protective umbrella extends to assets that are simultaneously alleged to be the proceeds of criminal activity. Legal analyses suggest that insolvency law focuses on legal and economic realities of ownership, while criminal law addresses culpability and the illicit nature of acquired assets. Earlier interpretations, like those referencing Section 32A of the IBC which grants immunity to corporate debtors and their assets from offenses prior to CIRP, had suggested a potential for release of attached properties under specific conditions. However, recent NCLAT judgments appear to reinforce the primacy of PMLA attachments when proceeds of crime are involved.
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