Is Bankruptcy Code an escape route for PMLA?

The present article addresses the controversy that was recently addressed by the Delhi High Court in the case of Nitin Jain Liquidator PSL Limited vs Enforcement Directorate.

Published: 20th December 2021 11:38 PM  |   Last Updated: 20th December 2021 11:38 PM   |  A+A-

Bank

For representational purposes (File Photo | PTI)

This decision of the court is a balanced view of the application of conflicting provisions in terms of commercial law. The order to cooperate with the investigative authorities is not only recognised but also necessary for deterring people from using corporations to conduct unlawful activities.

There has been a lot of debate about the intersection of the Insolvency and Bankruptcy Code (IBC) with other commercial laws such as the Competition Act, 2002, Real Estate (Regulation and Development) Act, 2016, and procedural laws such as the Limitation Act, 1963. Whenever there has been conflict in the operation of the laws, the courts have continuously held that they should be read harmoniously wherever possible in light of the facts of the case under consideration. 
The present article addresses the controversy that was recently addressed by the Delhi High Court in the case of Nitin Jain Liquidator PSL Limited vs Enforcement Directorate. The court has once again taken a balanced approach in interpreting the intersection between the operation of a liquidation order and the proceedings under the Prevention of Money Laundering Act (PMLA). This balanced approach was necessary due to the facts in the present case. The main question that has arisen is about the bounds of jurisdiction of authorities under the PMLA after liquidation has been approved.
It is now pertinent to examine the role of the insolvency professionals as prescribed under the IBC. The code, among other things, vests the right of managing the operations of the corporate debtor as a growing concern that includes a collection of information on assets and liabilities, collation of claims and managing and monitoring the assets of the corporate debtor. For performing the said function, the Interim Resolution Professionals (IRPs) and Resolution Professionals (RPs) have to take immediate control of the assets. There is no doubt that once the resolution plan is approved, it is even binding on the government authorities. The court placed heavy reliance on the Supreme Court’s judgment in Ghanashyam Mishra and Sons Private Limited vs Edelweiss Asset Reconstruction Company.
Moreover, the validity of Section 32A has been upheld by the SC in Manish Kumar vs Union of India. The intent behind the insertion of 32A, which deals with the liability of the corporate debtor for offences committed prior to initiation of Corporate Insolvency Resolution Process (CIRP), is that, among other things, “when the corporate debtor is successfully resolved, it should not be held liable for any offence committed prior to the commencement of the CIRP, unless the successful resolution applicant was also involved in the commission of the offence, or was a related party, promoter or other person in management and control of the corporate debtor at the time of or anytime following the commission of the offence, ... [The section shall also] include protection of property from enforcement action when taken by a successful resolution applicant.”
The rationale behind this provision is to protect the value of the assets of the corporate debtor, create a distinction between the offences that the entity committed under the previous and current management after the resolution process is successful. The corporate debtor does not retain the same identity as it would otherwise. This is not an absolute law, and the exception has been carved out in favour of continued cooperation and assistance by the corporate debtor or any other person who knows anything in relation to the offence that had been committed before the CIRP was successful as would be required under the law. Now both the PMLA and IBC incorporate non obstante, which means that in the cases of conflict, an issue of primacy will arise. For this, the court first looked at if the provisions were in fact irreconcilable with respect to the purpose of the two legislations and the provisions therein. In Directorate of Enforcement vs Axis Bank, the court held that the purposes of the two acts were not necessarily the same; that the aim of IBC was to protect the assets while that of PMLA was to attach and confiscate the properties and take them away from the corporate debtor; also that the secured creditor taking charge of the properties does not preclude the authorities under PMLA from taking control of the assets.
However, the court in the present case was only required to test the standard in relation to the working of Section 32A that operates only on successful approval of the resolution plan for the corporate debtor. In the present case, the court held that there is a foreclosure of authority to attach the properties under PMLA and to the extent that the property relates to the corporate debtor, the Act will have to yield. It also held that the resolution applicant has to cooperate with the investigating authorities as it steps into the shoes of the earlier management and would thus be under an obligation to provide information and other materials as may be required.
This decision of the court is a balanced view of the application of conflicting provisions in terms of commercial law. The exception to cooperate with the investigative authorities is not only recognised but is necessary for deterring people from using corporations to conduct unlawful activities.  PMLA is a serious legislation aimed at curbing offences such as money laundering and if given an easy way out of this, it would frustrate the purpose of the legislation. So it is essential to judge the facts of the case carefully before the courts move away from the harmonious construction of the legislation.

Kavya Lalchandani 
A legal scholar based out of UK
(lalchandani.kavya@gmail.com)



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