IBC is not Holy Ganges to wash off criminality: NCLAT says ED action under PMLA not hit by moratorium

The National Company Law Appellate Tribunal (NCLAT) recently held that the Insolvency and Bankruptcy Code (IBC) cannot be used as a “holy Ganges” to wash away criminality or protect tainted assets from action under the Prevention of Money Laundering Act (PMLA). [Value Wise Consultancy v. Deputy Director ED]

A coram of judicial member Justice N Seshasayee and technical members Arun Baroka and Indevar Pandey said that assets alleged to be proceeds of crime cannot be brought into the insolvency or liquidation estate merely because a corporate debtor is under moratorium or liquidation.

“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,” the Tribunal said.

The NCLAT was hearing appeals filed by the liquidator of a company (corporate debtor) against a July 19, 2022 order of the NCLT Ahmedabad. The NCLT had dismissed the liquidator’s applications seeking relief against actions taken by the Enforcement Directorate (ED).

The case arose from ED proceedings against the corporate debtor over allegations of bank fraud and diversion of loan funds. The ED had issued notices under Section 50 of the PMLA to various debtors and customers of the corporate debtor, directing them not to transact with or release money to the company. It also attached movable and immovable assets of the corporate debtor and related persons.

The company was admitted into the corporate insolvency resolution process on September 12, 2017, following which moratorium under Section 14 of the IBC came into force. However, during the moratorium, the ED withdrew ₹2.29 crore from the corporate debtor’s ICICI Bank account.

The liquidator argued that this withdrawal violated the moratorium and unlawfully depleted the insolvency estate. He also sought directions to entities including Ashok Leyland, Haldia Petrochemicals, Sonalika International Tractors and Hindustan Coca Cola Beverage to release dues payable to the corporate debtor.

The ED opposed the plea, arguing that PMLA proceedings are independent criminal proceedings concerning proceeds of crime and that the NCLT and the NCLAT have no jurisdiction to interfere with PMLA attachment proceedings.

The NCLAT agreed with the ED and said that the dispute was essentially “IBC vs PMLA” when both statutes are in operation. It held that while IBC protects legitimate assets of a corporate debtor for resolution or liquidation, it does not protect wealth alleged to be sourced from crime.

“IBC would unwittingly become a camouflage, a shield, to save the ill-gotten wealth of the corporate debtor,” the Tribunal observed.

It further held that any challenge to ED attachment must be made before the adjudicatory mechanism under PMLA or the appropriate High Court, and not before IBC tribunals.

“The writing is on the wall for the appellant: whether to attach or not to attach the properties of a corporate debtor is for the Enforcement Directorate to decide,” it said.

Advocates Sandeep Bajaj, Vipul Jai, Mayank Biyani and Saumya appeared for the appellant.

Special Counsel Zoheb Hossain, with Advocates Vivek Gurnani, Kanisk Maurya, Pranjal and Vivek Gaurav appeared for the ED.

Advocate Abhijeet Pandey appeared for Haldia Petrochemicals.

[Read Judgment]