The National Company Law Appellate Tribunal, New Delhi (‘NCLAT’) in Value Wise Consultancy Private Limited v The Deputy Director, Directorate of Enforcement had to decide that when two legislations were in action- the Insolvency and Bankruptcy Code, 2016 (‘IBC’) and the Prevention of Money Laundering Act, 2002 (‘PMLA’) – which attains primacy. The NCLAT invoked holy water of Ganges and national interest to conclude that IBC cannot displace PMLA since they operate in different domains. Apart from the questionable reliance on national interest, the NCLAT failed to satisfactorily examine the scope of moratorium under Section 14 of IBC or scope of National Company Law Tribunal’s (‘NCLT’) jurisdiction under Section 60(5) of IBC. Also, a reference to non obstante clause in Section 238 of IBC was missing.
Brief Facts
- Pursuant to FIRs registered against the corporate debtor, Directorate of Enforcement (‘ED’) was investigating allegations of bank fraud and diversion of loan funds by the corporate debtor and its promoters. ED passed an order for provisional attachment which was later confirmed by the adjudicating authority under PMLA.
- However, before the order for provisional attachment was confirmed, National Company Law Tribunal (‘NCLT’) approved commencement of CIRP against the corporate debtor. Thus, the order confirming ED’s provisional attachment of corporate debtor’s assets under PMLA was passed once the moratorium under Section 14 of IBC was in operation.
- Subsequently, the appellate tribunal set aside ED’s order of provisional attachment which was challenged before the Bombay High Court and its decision was pending. Even though the Bombay High Court did not stay the appellate tribunal’s decision to set aside the attachment.
- CIRP for the corporate debtor failed and liquidation proceedings commenced.
- The liquidator filed applications in the NCLT pleading withdrawal of ED’s provisional order of attachment. ED had also withdrawn Rs 2.29 crores from the corporate debtor’s account and the liquidator prayed for its remittance.
- Additionally, the liquidator prayed for quashing of ED’s order wherein it had issued directions to debtors/customers of the corporate debtor to not transact with or release any funds to the corporate debtor.
Liquidator v/s ED
The broader question was whether the proceedings under PMLA could sustain in view of impending liquidation of the corporate debtor under the IBC. Especially because the attachment order, withdrawal of money, and ED’s order prohibiting release of funds to the corporate debtor were passed when moratorium under Section 14 of the IBC was in force.
The liquidators’ stance was that ED’s actions were in direct violation of the moratorium under Section 14 of IBC. And frustrated the IBC’s objectives by depriving the corporate debtor of its assets and receivables.
ED opposed the liquidator’s application by stating that proceedings under PMLA are independent criminal proceedings relating to ‘proceeds of crime’. And that PMLA is a special statute with overriding effect over IBC. And tribunals under IBC – NLCT/NCLAT – lacked jurisdiction to interfere with attachment proceedings or actions undertaken under PMLA.
The NCLT dismissed the liquidator’s applications on the ground that it lacked jurisdiction to decide matters relating to PMLA. And the liquidator filed an appeal before the NCLAT.
Before the NCLAT, the liquidator argued that present proceedings did not require it to adjudicate on legality or validity of proceedings under PMLA but were related to IBC, i.e., whether the ED could withdraw money from the bank account of corporate debtor during subsistence of moratorium under Section 14 of IBC. And that such a withdrawal amounted to depletion of the insolvency estate of corporate debtor frustrating IBC’s objectives.
ED, on the other hand, reiterated the arguments it advanced before the NCLT. As per ED, the order for attachment was passed before commencement of CIRP, and it was only confirmed during the moratorium. Equally, proceedings under PMLA are independent criminal proceedings and operate in a completely distinct field from insolvency proceedings under IBC. And neither the NCLT nor the NCLAT had jurisdiction to interfere with attachment proceedings under IBC as they were not empowered to examine decisions taken by statutory authorities under public law.
The NCLAT’s Reasoning
Firstly, the NCLAT noted that if objectives of PMLA were compared with those of IBC, it was clear that the latter was only for resolving the insolvency situation of a debt-ridden company. IBC aims to protect the interests of only a few creditors via CIRP while PMLA is protecting national interest since it is aimed to combat organized economic crime and protect integrity of our financial system. And thus, the NCLAT observed that on comparing the IBC with PMLA, it was obvious that:
While the former is compromisable, which, at any rate happens through the haircuts imposed during the distribution of proceeds of a successful CIRP, or liquidation, which every creditor of a CD knows, accepts, and is prepared for, national interest at all times remains uncompromisable. (para 11)
By ‘compromisable’, the NCLAT clearly meant that IBC’s objectives can be sacrificed while pursuring PMLA’s aims could not be subordinated to IBC. By framing the objectives of PMLA in broad national terms and confining those of the IBC to narrow contractual relationships that fueled a company, the NCLAT placed PMLA on a higher pedestal than IBC. But it was an unjustifiably narrow reading of the IBC’s objectives. And is at odds with the Supreme Court’s categorization of the IBC as a welfare legislation that aims to rescue corporate debtor and interests of stakeholders. A CIRP is not solely aimed at helping the corporate debtor and its creditors to re-negotiate their contractual terms but achieve larger objectives of deepening credit markets, supporting entrepreneurship, and other related objectives.
Secondly, the NCLAT noted that IBC only intends to protect the ‘legitimate assets’ of the corporate debtor. And if ill-gotten wealth of the corporate debtor was also allowed to be protected in CIRP, then IBC would become a shield to save the ill-gotten wealth of the corporate debtor. It was in this context that the NCLAT observed that:
It must be emphasized that Parliament did not legislate IBC with an intent to create a holy Ganges out of the IBC to wash the corporate debtor of its sin of criminality under the PMLA, or as a mechanism for legitimizing any ill-gotten wealth of the CD. (para 12)
While the broad observations are accurate, they involve the NCLAT deciding on illegality of assets. ED’s order for attachment was set aside and its fate was pending before the Bombay High Court. Presumably, a final determination of whether corporate debtor’s assets were ‘proceeds of crime’ was pending. The NCLAT’s observations assume that the corporate debtor’s assets under ED’s control are proceeds of crime and illegal assets. It is difficult to argue against the claim that illegal assets or proceeds of crime should not be included in insolvency estate of corporate debtor. But the NCLAT seemed to have jumped the gun by accepting that the corporate debtor’s assets in control of ED were illegal assets.
Thirdly, while the NCLAT addressed rationale of Section 14 of the IBC, i.e., preventing institution or continuation of suits or proceedings against the corporate debtor to prevent adding to existing debt-liability of the corporate debtor. But concluded that proceedings of the IBC and PMLA operate in different domains with differing objectives and do not overlap in their respective operations. Thus, completely removing any constraint on ED to act against the corporate debtor during CIRP. The friction between IBC and other legislations is not new. But courts have evolved doctrines to address the overlaps. For example, if dues to the Government are crystallized but payment remains pending then they shall be only paid in a resolution plan. The NCLAT, previously, has prevented enforcement actions by statutory authorities. The Supreme Court has also endorsedthis doctrine that the NCLAT did not fully engage with in the impugned case.
Finally, the NCLAT reasoned that NCLT/NCLAT did not have jurisdiction over PMLA. The NCLAT held that in M/S Embassy Property Developments Private Limited v State of Karnataka and Others (‘Embassy Property case’) the Supreme Court has interpreted that the NCLT’s jurisdiction under Section 60(5) of IBC is limited to the extent it is required to be exercised for purposes of IBC. In the impugned case, the NCLAT relied on Embassy Property Developments case to state that the NCLT/NCLAT are not the forums which can entertain any plea against ED since their jurisdiction under Section 60(5) is limited to IBC. Section 60(5) states that the NCLT’s jurisdiction extends to question law or facts ‘arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor’. The phrase is malleable and the NCLT/NCLAT can interpret it mean if a particular issue falls within the scope of this phrase or outside it. In the impugned case, the NCLAT by taking the view that PMLA and IBC belonged to different domains took the view questions relating to former were not within the NCLT/NCLAT’s jurisdiction.
NCLAT’s Oversights
The NCLAT’s judgment suffers from two major shortcomings:
Summary Analysis of the Moratorium’s Scope
The liquidator’s argument was that ED cannot withdraw money from corporate debtor’s account while a moratorium was in force. And that recovery or enforcement actions against the corporate debtor should not be permitted during the moratorium. But by categorizing ED’s actions and PMLA proceedings outside IBC’s scope, the NCLAT eschewed any relevant analysis of the scope of Section 14 of IBC. The result is that ED is not bound by or constrained by IBC. ED justified its actions by arguing that money withdrawn by it cannot be classified as a debt regardless. The above views are defensible and on more solid ground if the ED had obtained a judgment proving misuse of funds or corporate fraud under PMLA. It seems, unproven allegations of money laundering and an insistence that a certain property is ‘proceeds of crime’ is enough to limit IBC’s aims by ED.
Lack of any reference to Section 238
Section 238 of the IBC contains a non-obstante clause that the IBC shall have an overriding effect ‘notwithstanding anything inconsistent therewith contained in any other law for the time being in force.’ This non-obstante clause though has been interpreted to have a limited scope. For example, as per the Supreme Court IBC cannot override sectoral laws such as telecommunication laws. At times, it has been held that the IBC overrides securities law. Interaction of the IBC with PMLA has resulted in similar but inconsistent results. While courts have not vacated attachments under PMLA due to a moratorium under Section 14 of IBC. They have pointed that an end point for ED’s action is when the resolution plan is finalized or liquidation commences. For example, the Delhi High Court in Rajesh Chakraborty v Directorate of Enforcement held that:
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 whereafter the powers under the PMLA would not be exercisable. (para 109)
Thus, when CIRP concludes or liquidation commences, ED’s powers of attachment under PMLA reach a ‘terminal point’ under IBC. Section 238 does not bar attachment under PMLA during moratorium but limits the time for which it can continue. The liquidation was being prejudiced in the impugned case, but the NCLAT did not investigate the relevant judicial precedents or interpret the relevant provisions of IBC or PMLA in a nuanced manner.
Conclusion
The NCLAT placed PMLA on a higher pedestal and accorded it more importance than the IBC. This was evident in its observations that the former was enacted in pursuit of national interest while the latter was only to renegotiate debtor-creditor contracts. A more accurate observation was that PMLA and IBC operate in different spheres. However, their paths do intersect as they did in this case. The NCLAT instead of relying on colorful metaphors could have instead examined relevant jurisprudence on the interaction of IBC and PMLA to arrive at a better reasoned conclusion.
