Status on- 15/06/2023
This article examines the legal aspects and implications surrounding the attachment of assets by the Enforcement Directorate (ED) under the Prevention of Money Laundering Act (PMLA) after a company has entered into insolvency proceedings. The PMLA is a significant legislation in India aimed at preventing money laundering and confiscating assets obtained through unlawful means. On the other hand, insolvency proceedings are governed by the Insolvency and Bankruptcy Code (IBC), which provides a framework for resolving financial distress and protecting the interests of creditors and stakeholders.
Whether the ED can continue to attach assets of a company undergoing insolvency proceedings?
Assets attachment by ED under PMLA act:
In India, the PML Act is the legislation that seeks to curb instances of money laundering. Under section 5 of the Act, the investigating agency, the Enforcement Directorate, has the power to provisionally attach property.
If the order is passed for the attachment of the property by a concerned or appropriate authority, it ceases the transfer, conversion, disposition, or movement of such attached property.
A property involved in money laundering can be temporarily attached by the competent authorities under the PML Act. Such property can be attached for up to 180 days if the authority has reasonable grounds to believe that the person is in possession of the proceeds of crime and that the proceeds of crime may be concealed, transferred, or dealt with in a way that frustrates confiscation proceedings. Such grounds for belief, according to the law, must be documented in writing.
It should be remembered that the order for provisional attachment of property under PMLA is made after a report is forwarded to the magistrate for taking cognizance under Section 173 of the CrPc. However, imagine there is a sense of urgency or a fear that the property would vanish. In that circumstances, the temporary attachment order might be issued even before the report is submitted to the magistrate.
The conflict between PMLA and IBC
A conflict arises when the ED attempts to attach assets under the PMLA Act while insolvency proceedings are underway. The ED’s action may disrupt the smooth resolution process outlined in the IBC and compromise the interests of creditors and other stakeholders. Recognizing this conflict, the Indian judiciary has established that once insolvency proceedings have commenced, the attachment of assets by the ED under the PMLA Act is not permissible.
Once authorized by the Ld. Adjudicating Authority, a Resolution Plan is obligatory on all stakeholders under the Insolvency & Bankruptcy Code. Before approving the Resolution Plan, the Ld. Adjudicating Authority hears objections, and once the hearing on the Resolution Plan and objections are completed and the Resolution Plan is approved, such approved Resolution Plan is binding on all stakeholders, including all government agencies. The Insolvency and Bankruptcy Code (Amendment) Act, 2019, which revised Section 31(1), makes it abundantly clear that a resolution plan is binding on the Central Government and other statutory authorities.
Supremacy of Insolvency Proceedings
Once a company has entered insolvency proceedings, the IBC confers significant powers upon the insolvency resolution professional (IRP) or the resolution professional (RP) appointed by the NCLT. The IRP/RP assumes control over the company’s affairs and acts as the custodian of its assets. The primary objective is to resolve the company’s financial distress in a fair and equitable manner, protecting the interests of all stakeholders involved.
In so far as the corporate debtor or its assets are concerned, after the completion of the CIR Process, i.e. a statutory process under the IBC, there cannot be any attachment or confiscation of the assets of the Corporate Debtor by any enforcement agencies after approval of the Resolution Plan. The CIR Process is an open and transparent statutory process wherein under Resolution Plans are invited bona fide Prospective applicants who are not hit or disqualified under Section 29A of the IBC.
Section 32A of the IBC Section 32A of the IBC
- Sub-section (1) of Section 32A begins with a non-obstante clause and states that the liability of a corporate debtor, for offenses committed prior to the commencement of the Corporate Insolvency Resolution Process (“CIRP”), will stand extinguished from the date a resolution plan is approved by the adjudicating authority or sale of liquidation assets, subject to certain conditions being fulfilled. This immunity under Section 32A is applicable once the approved resolution plan mandates a change in the management of the corporate debtor if such persons (1) were not directly or indirectly related to the old management of the corporate debtor, or (2) have not abetted or conspired for the commission of such an offense committed by the corporate debtor.
JSW Steel Limited vs Mahendra Kumar Khandelwal and others
“The Hon’ble National Company Law Appellate Tribunal (NCLAT), after considering the submissions of the Ministry of Corporate Affairs (MCA) and the steps were taken by the ‘Directorate of Enforcement’, held that ‘Directorate of Enforcement’ is prohibited from the attachment of any property of the ‘Corporate Debtor’ without prior permission of the National Company Law Appellate Tribunal (NCLAT). Moreover, the property which has been already attached shall be released in favor of the ‘Resolution Professional’ immediately.”
Essar Steel India Limited v. Satish Kumar Gupta & Ors. [Civil Appeal No. 8766-67 OF 2019]
“The Supreme Court of India stated that once a company enters insolvency proceedings under the IBC, the attachment of assets by the ED under the PMLA act is not justifiable. The court emphasized that the insolvency resolution process should be free from external interference, ensuring and expeditious and fair resolution of the company’s financial distress. The resolution professional and the committee of creditors must be afforded the opportunity to maximize the value of assets and distribute them among stakeholders according to the provisions of the IBC.”
Asset attachment by the Enforcement Directorate (ED) under the Prevention of Money Laundering Act (PMLA) is critical in combating money laundering and criminal activities. When a company enters insolvency, the Insolvency and Bankruptcy Code (IBC) takes precedence over the PMLA Act. The attachment of assets by the ED under the PMLA Act is regarded illegal during insolvency proceedings since it would obstruct the IBC’s smooth and efficient resolution process. This ensures that the interests are protected.
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