Conflict between Prevention of Money Laundering Act, 2002 and Insolvency & Bankruptcy Code, 2016

The Prevention of Money Laundering Act, 2002 (“PMLA”), was enacted to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto, whereas the Insolvency and Bankruptcy Code, 2016 (“IBC”), was promulgated with a view to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons in a time bound manner, for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance of the interests of all stakeholders.

Both, PMLA and IBC are special statutes and contain a non-obstante clause [PMLA (Sec. 71) and IBC (Sec. 238)] that gives an overriding effect to the provisions of each statute over the other enactments prevalent, in cases of inconsistency. Where two statutes contain a non-obstante clause and there is a conflict of provisions contained therein, the year in which such statutes came to be enacted bears importance. The Apex Court, in the case of Solidaire India Ltd. Vs. FairGrowth Financial Services Ltd. & Ors., has observed that when two special statutes contain a non-obstante clause, the statute enacted later in point of time shall prevail. This is because, it is presumed that at the time of enacting the subsequent statute, the legislature would have taken the note of the prior statute. However, this principle cannot be applied in all cases and other aspects of the statute, including the objective becomes relevant factor in resolving a conflict in the provisions. Similarly, a conflict in the provisions of IBC and PMLA cannot be decided merely by looking at the year in which these statutes have been enacted. Certain cases that dealt with the conflict between IBC and PMLA are discussed below.

The National Company Law Appellate Tribunal (“NCLAT”), in matter of Varrsana Ispat Limited Vs. Deputy Director, Directorate of Enforcement dismissing the Appeal observed that the attachments were made prior to initiation of the Corporate Insolvency Resolution Process (“CIRP”), therefore no advantage of Section 14 can be derived. The NCLAT also observed that PMLA relates to “proceeds of crime” and the offence relates to “money laundering” resulting confiscation of property derived from, or involved in, money laundering. Thus, Section 14 of IBC is not applicable to such proceeding. Further, the NCLAT also observed that so far as penalty is concerned, offence of money-laundering is punishable with rigorous imprisonment, which is applicable to the individual which may include the former directors and shareholders of the Corporate Debtor (“CD”), who cannot take any advantage under Section 14 of the IBC.

Taking a view different from what was held in the above case, the NCLAT, in the matter of Directorate of Enforcement Vs. Sh. Manoj Kumar Agarwal, Resolution Professional & Ors. affirmed the order passed by National Company Law Tribunal (“NCLT”), Mumbai and observed that “there is no conflict between PMLA and IBC and even if a property has been attached in the PMLA which is belonging to the Corporate Debtor, if CIRP is initiated, the property should become available to fulfil objects of IBC till a resolution takes place or sale or liquidation of asset occurs in terms of Section 32A”. The NCLT had held that the attachment order passed by the Directorate of Enforcement (“ED”) was nullity and non-est in law, in terms of Section(s) 14(1)(a), 63 and 238 of the IBC. The NCLT had also permitted the Resolution Professional (“RP”) to take charge and deal with the properties of the CD as if there is no attachment order.

The Delhi High Court, in the matter of Nitin Jain, Liquidator PSL Limited Vs. Enforcement Directorate addressed the issue as to whether the authorities under the PMLA would retain the jurisdiction or authority to proceed against the properties of a CD once liquidation of its assets has been approved under IBC. Answering it in negative, the Court held that the Liquidator is entitled in law to proceed further with the liquidation process in accordance with the provisions of IBC. The Court restrained ED from taking any action against liquidating the estate of CD or the corpus gathered by the Liquidator. However, in the case of Rajiv Chakrabarty Resolution professional EIEL Vs. Directorate of Enforcement, the Delhi High Court did not interfere with the attachment orders and provided liberty to the RP to approach competent authorities under the PMLA for such reliefs with respect to tainted properties as may be permissible. Pertinently, in this matter, the attachment was prior in time.

Recently, a moot question that came up for the consideration before the Apex Court in the matter of Ashok Kumar Sarawagi Vs. Enforcement Directorate and Anr., was whether the order passed by ED for provisional attachment of the assets of a corporate debtor post initiation of the CIRP would be valid? The Apex Court has issued a notice to ED and in the interim allowed the CIRP to continue in accordance with IBC on “as is whereas is basis” and “whatever there is basis”. The Apex Court clarified that the approval of the resolution plan by the NCLT shall be subject to the orders that may be passed by the Apex Court.  

It is hoped that the order that will be passed by the Apex Court in the case of Ashok Kumar would clarify many questions in relation to the interplay between the two special statutes, including the questions as to, (i) whether assets attached under PMLA either prior to or during the CIRP would be considered in the pool of the CD’s assets? (ii) whether ED could be considered as a creditor under IBC? If yes, in what capacity? (iii) action under PMLA being a criminal in nature, whether the same could be allowed to continue against the assets standing in the name of CD under IBC? etc. Given the objectives of both statutes, the Apex Court may strike a balance of ensuring successful revival of stressed entities, without allowing offenders go scot-free with laundered money.

Deepak Deshmukh is an Associate Partner, Nisha Kaba is a Senior Associate and Hrishikesh Nadkarni is an Associate at Naik Naik & Co.