INTRODUCTION
The Prevention of Money Laundering Act, 2002 (or “PMLA“)[1], was passed to penalize those who engage in the practice of illegally obtaining money and afterwards moving it to foreign accounts to hide its source. The statute also allows for the seizure & confiscation of assets acquired via the use of money that has been laundered. After adhering to all the requirements outlined in the statute, an officer designated by the Enforcement Directorate (“ED“) may seize the revenues of illicit property. The Insolvency and Bankruptcy Code, 2016 (“IBC“)[2] is an act that calls for the prompt rehabilitation and rebirth of struggling partnerships, corporations, and individuals. The primary goal of IBC is to harmonize the interests of all stakeholders by maximizing the value of the corporate debtor’s property.[3] Both PMLA and IBC, are each unique laws in their respective sectors that control various things. However, in case the corporate debtor and its former management have committed scheduled offences as defined by the PMLA & proceedings have been started under the PMLA at the same time as the corporate insolvency resolution process has been started under the IBC, then conflict will arise between the two proceedings. The issue of which statute supersedes another arises at this point.[4]
INCONSISTENCY BETWEEN STATUTES
Under the PMLA, two processes are ongoing at once: the first is the ED’s action of attaching & seizing property, and the next is the session court’s criminal prosecution of the accused. On the contrary, because the IBC is new legislation, several of its provisions conflict with this attachment. One very important legal question remains whether ED can provide properties attached to the PMLA with the protection of a moratorium under the IBC. Section 71 of PMLA[5] states that the provisions contained in PMLA will have an overriding effect over the provisions of some other statute. Section 238 of IBC[6] also states that the provisions contained in IBC will have an overriding effect over the provisions of some other statute. The aforementioned two provisions make it quite evident that both provisions of the statute have a non-obstante clause, which overrides both Acts. It was established in many cases that if two special legislations have a non-obstante clause, the statute which is passed later will triumph over the previous statute. The justification for such decisions is that the Legislature knew that an earlier Act with a non-obstante clause already existed when it promulgated the latter Act. If the legislature had different intentions, it would have been clear in its language.
Furthermore, without possession of the corporate debtor’s assets, a successful resolution claimant is unable to manage its business concerns. The IBC Code requires that the business operations of the corporate debtor be managed as a continuing concern. In contrast, the PMLA stipulates in Section 5[7] that the act’s property may only be temporarily attached and subject to restrictions on its transfer, conversion, disposal, and movement. Both statutes appear to have clauses that clash, putting the CIRP process on hold. Further, according to Section 18 of the IBC,[8] the corporate debtor’s assets must be under the Resolution Professional’s management. Regaining control of the properties the Enforcement Directorate attached is part of the responsibility of running the corporate debtor’s business. Also, according to Section 14 of the IBC,[9] a moratorium is imposed after the admission of the application under Section 7.[10] While the Moratorium period is going on, suits or procedures against the Corporate Debtor are forbidden, as is the execution of any judgment, decree, or order issued by a court, tribunal, or other authority.[11]
JUDICIARY ON THE ISSUE OF IBC V. PMLA
NCLT in M/s Nathella Sampath Jewelry Pvt Ltd.[12]noted that the money-laundering investigations against the company’s promoters will not be impacted by the liquidation decision in any manner. In Rotomac Global Private Limited v. Deputy Director, Directorate of Enforcement[13], the NCLT determined that because the PMLA procedures are criminal, Section 14 of the IBC[14] does not apply. As the goals of the two laws are distinct, it is possible to call both processes at once without any of them taking precedence over the others. In Deputy Director Directorate of Enforcement, Delhi v. Axis Bank[15]the high court of Delhi decided that because the goals of the legislations are so distinct, the court must interpret provisions of each statute harmoniously. The IBC has no prevalence over PMLA.
However, NCLAT overruled the decision of the Delhi High Court in JSW Steel Ltd. v. Mahender Kumar Khandelwal & Ors.[16] The ED asserted that it had the authority to seize certain assets owned by BPSL since they were in the character of “proceeds of crime”. When the resolution plan was already authorized, JSW Steel (the resolution applicant) filed a motion with the tribunal to address the question of whether ED had the authority to seize the property. According to the NCLAT’s decision, ED will have an operational debt-based claim on the property. The NCLAT ruled that the resolution plan presented by JSW Steel is valid following the introduction of Section 32A[17] by the amendment to IBC in 2019. This decision signals the closure of all criminal investigations against the corporate debtor. The ED has, however, appealed this NCLAT judgment to the Supreme Court. Therefore, it is now, by the insertion of Section 32A to the IBC, that the IBC has authority over the PMLA. Section 32A of IBC was added to IBC by the 2019 amendment which states that the corporate debtor’s liability for any of his actions done before the initiation of CIRP will stop, and he will not be punished for such an offence from the date the approval of resolution plan.
CASES WHERE IBC EXERCISED SUPREMACY OVER PMLA
In the important case of Solidaire India Ltd. v. Fairgrowth Financial Services Private Limited,[18] the court ruled that the act which is passed afterwards should take precedence over the previous enactment since at the time it was passed; the later law was cognizant of the older legislation. The above principle is used in many cases. In SREI Infrastructure Finance Limited v. Sterling SEZ and Infrastructure Limited,[19] NCLT Mumbai referred to the NCLAT’s decisions in Bank of India v. The Deputy Directorate of Enforcement of Mumbai[20] and Punjab National Bank v. Deputy Director, Directorate of Enforcement, Raipur,[21] and the application of Section 238 of the IBC led to the conclusion that the Adjudicating Authority under PMLA could not retain the property attached after the proclamation of the moratorium. Justice Manmohan Singh in both the above cases has ruled that: “The non-obstante clause contained in IBC Code, which is a later statute, shall prevail over the non-obstante clause contained in Section 71 of PMLA[22].”
PRESENT STATUS QUO
After observing decisions rendered by various courts and tribunals on the controversy between IBC and PMLA over their supremacy, and after noting section 32A of IBC, 2016[23] which was inserted as an amendment, it can be observed that IBC takes precedence over PMLA.
CONCLUSION
In conclusion, one can notice the supremacy of IBC over PMLA based on two things: i) by observing judgments rendered by various courts and tribunals by taking the judgment of Solidaire India Ltd case as a precedent, ii) by the recent amendment in IBC, 2016 where Section 32A[24] was inserted according to which assets of the Corporate Debtor cannot be seized if the procedure for resolution is already permitted by the Adjudicating Authority. So, in case the corporate debtor has committed any scheduled offence, any of his actions done before the initiation of CIRP will stop, and he will not be punished for such an offence from the date of the approval of the resolution plan under IBC.
Author(s) Name: Chidige Sai Varnitha (Damodaram Sanjivayya National Law University (DSNLU), Visakhapatnam)
References:
[1] The Prevention of Money Laundering Act 2002
[2] The Insolvency and Bankruptcy Code 2016
[3]Nayani Agarwal, ‘PMLA v. IBC Conundrum: Is it really settled?’ (ILJ India Law Journal) <https://indialawjournal.org/pmla-vs-ibc-conundrum.php> accessed 16 August 2022
[4]Mahi Yadav, ‘PMLA v. IBC’ (Tax Guru 30 Mar, 2022) <https://taxguru.in/corporate-law/pmla-v-ibc.html> accessed 16 August 2022
[5] The Prevention of Money-Laundering Act 2002, s 71
[6] The Insolvency and Bankruptcy Code 2016, s 238
[7] The Prevention of Money-Laundering Act 2002, s 5
[8]The Insolvency and Bankruptcy Code 2016, s 18
[9]The Insolvency and Bankruptcy Code 2016, s 14
[10]Supra note 6
[11]Harsh Khanchandani, ‘IBC v. PMLA: Conundrum of Primacy’ (IBC 4. Apr, 2021) <https://ibclaw.in/ibc-vs-pmla-conundrum-of-primacy-by-mr-harsh-khanchandani/> accessed 17 August 2022
[12]M/s Nathella Sampath Jewelry Pvt Ltd., [2020] ibclaw.in 77 NCLT
[13]Rotomac Global Private Limited v. Deputy Director, Directorate of Enforcement, MANU/SCOR/09247/2020
[14] Supra note 9
[15]Deputy Director Directorate of Enforcement, Delhi v. Axis Bank, 2019 SCC Online Del 7854
[16]JSW Steel Ltd. v. Mahender Kumar Khandelwal & Ors., Company Appeal (AT) (Insolvency) No. 957 of 2019
[17] The Insolvency and Bankruptcy Code 2016, s 32A
[18]Solidaire India Ltd. v. Fairgrowth Financial Services Private Limited, (2001) 3 SCC 71
[19]SREI Infrastructure Finance Ltd. v. Sterling SEZ and Infrastructure Ltd., MANU/ND/0924/2019
[20] Bank of India v. The Deputy Directorate of Enforcement of Mumbai, MANU/ML/0036/2018
[21] Punjab National Bank v. Deputy Director, Directorate of Enforcement, Raipur, MANU/ML/0003/2019
[22] Supra note 5
[23] Supra note 17
[24] Supra note 17
