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March 2020

INSOLVENCY CODE VS. PMLA – CONFLICT OR OVERLAP?

By Dr.Dilip K.Sheth
Chartered Accountant
Reading Time 12 mins

The Insolvency and Bankruptcy Code, 2016 (the Code) came into force on 28th May, 2016. It was enacted as a special statute to deal with important aspects of insolvency and bankruptcy. Being a complete Code, it is to prevail over other laws so that no person can take advantage of pendency of a proceeding under any other law to stall insolvency and bankruptcy proceedings1. A specific provision in the Code that confers overriding powers is section 238 which reads as under:

 

‘The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law’ (emphasis supplied).

 

A review of section 238 of the Code, particularly the non-obstante expression therein, shows that provisions of the Code have overriding effect over the provisions of other statutes which are inconsistent with the Code.

 

The Prevention of Money-Laundering Act, 2002 (‘PMLA’) came into force on 1st July, 2005. PMLA was enacted as a special statute to prevent money-laundering and for matters connected therewith and incidental thereto. A specific provision of the PMLA that confers overriding powers is section 71 which reads as under:

 

‘The provisions of this Act shall have effect notwith-standing anything inconsistent therewith contained in any other law for the time being in force’ (emphasis supplied).

 

Thus, a review of section 71 of the PMLA, particularly the non-obstante expression therein, shows that the provisions of the PMLA have overriding effect over provisions of other statutes which are inconsistent with the provisions of the PMLA.

 

TWO SPECIAL ENACTMENTS – OVERLAP OR CONFLICT?

From a review of the preamble to the Code and the PMLA which specify their respective objectives, it is evident that both the Code and the PMLA are special Acts. The moot issue for consideration is: when there are two Special Acts, how to resolve overlap or conflict between the two?

This issue has been addressed by Courts and other forums in the following manner: When there is an overlap or conflict between any two Acts, both of which are special Acts, then the Act which came later must prevail2.

 

Reiterating the view that it is the subsequent legislation which will have the overriding effect, the Supreme Court3 observed that it is possible that both the enactments have the non-obstante clause. In that case, the proper approach would be that one must be guided by the object and the dominant purpose for which the special enactment was made.

 

Where the dominant purpose of a law is covered by certain contingencies, even then the intention can be ascertained by looking to the objects and reasons notwithstanding that the law might have come at a later point of time.

 

OVERRIDING EFFECT OF THE CODE

The overriding effect of the Code has been examined in various decisions in the context of specific legislations and proceedings thereunder. Thus, in respect of proceedings under PMLA vis-a-vis the Code, the following important propositions have been laid down:

 

(i)   PMLA is a statute which came into effect much prior to the coming into force of the Code and, therefore, the Code has overriding effect over the PMLA4.

(ii)   Where the properties of a corporate debtor under liquidation were attached under PMLA, the question whether attached properties were proceeds of crime or whether lenders were bona fide lenders must be decided by the authorities under

 

PMLA. Besides, the liquidator appointed under the Code has to approach the authorities under PMLA for withdrawal of the attachment5.

(iii) Since the PMLA relates to a different field of penal action regarding proceeds of crime, it can be simultaneously invoked with the Code. Because of the absence of inconsistency, the PMLA has no overriding effect over the Code and vice versa6.

(iv) Where prior to admission of the Corporate Insolvency Resolution Process certain properties of a corporate debtor were attached under the PMLA, the same could not be released as section 14 of the Code does not have overriding effect on the PMLA7.

RECENT CASES

Keeping in mind the afore-mentioned legal position, a few recent cases are examined.

 

PMT Machines case

In this case8, in 2011-12, the debt-laden Sterling Biotech’s subsidiary, PMT Machines (‘the company’) defaulted on its debt repayments following which the consortium of banks, led by UCO Bank, initiated recovery proceedings in 2013 before the Debt Recovery Tribunal.

In 2017, the Enforcement Directorate conducted search and seizure under the provisions of the Foreign Exchange Management Act and the Income-tax Act at the Mumbai and Vadodara premises of the Sterling group’s promoters and the group companies. In 2018, the Enforcement Directorate (ED) passed orders for provisional attachment of the properties of PMT Machines.

The company was admitted for insolvency resolution by the Mumbai Bench of the National Company Law Tribunal in 2018.

The Resolution Professional approached the appellate authority under PMLA with the plea that the properties were wrongly attached by the ED. This plea was made on the premise that the attached properties were acquired before the ‘alleged commission of offences and charges on the properties were created prior to the date of alleged offences’.

The Resolution Professional submitted that because of the attachment by the ED, the Corporate Insolvency Resolution Process cannot achieve its objective of maximisation of value of the stressed assets. He pleaded that the attachment of properties by the ED was delaying the Corporate Insolvency Resolution Process of the company.

 

Upholding the prevalence of the Code over the PMLA, the appellate authority (PMLA) released the properties of the company which had been attached by the ED. The appellate authority (PMLA) observed that since the properties attached had no relation to the alleged crime committed by the management of the corporate debtor, the same must be released to the Resolution Professional to ensure quick insolvency resolution for the company.

 

Holding that the recovery proceeding initiated by the banks was ‘valid and legal’ and that the same could not be ‘blocked for years without valid reasons’, the PMLA appellate authority observed that the ED is not precluded from attaching other private properties and all other assets of the alleged accused.

 

The appellate authority, however, clarified that the ruling will ‘have no bearing in any proceedings initiated against the alleged accused including extradition proceedings pending or proposed to be initiated in any part of the world’.

 

In response to the ED plea that banks were the victim of the alleged fraud perpetrated by the management of the corporate debtor and that the banks were entitled to recover their dues, the PMLA appellate authority held that the banks should approach the special court set up for that purpose.

 

The judgment, thus, paves the way to achieve the desired objective of the insolvency process.

 

JSW Steel case

In the case of JSW Steel (‘the Company’), the main issue was whether PMLA has overriding effect on the Code?

 

The National Company Law Tribunal (‘NCLT’) approved JSW Steel’s resolution plan for Bhushan Power & Steel – one of the 12 big cases mandated by the Reserve Bank of India for resolution under the Code. This should have ended the two-year-long Corporate Insolvency Resolution Process for the stressed company. Instead, an appeal was filed by JSW seeking protection from attachment and from the liability resulting from criminal proceedings, highlighting conflict between two apparently overlapping laws, the PMLA and the Code.

 

The company explained its concern to NCLT about the main issue, viz., whether the PMLA has overriding effect on the Code, in the following words:

 

‘What is concerning us is that contrary judgments are coming up in some ongoing PMLA cases. Today, no bidder is aware of criminal liabilities. Criminal liability will be on the person who has done it and the new management in no way would be responsible for it. But can the assets of the corporate debtor be attached, that is the main question’.

 

The company’s offer for Bhushan Power was Rs 19,350 crores. Certain issues about the overriding provisions of the PMLA and the Code had caused apprehensions to the bidders and creditors of the stressed steel assets under the Code.

 

One of the bidders expressed concern over the attachment of assets under the PMLA. The bidder sought to secure the bid amount and creditors were concerned about recovering their money.

 

THE CODE AND PMLA – OPERATE IN DIFFERENT SPHERES

In Deputy Director, Directorate of Enforcement, Delhi vs. Axis Bank9, the Delhi High Court has held that both the PMLA and the Code have non-obstante clauses but since they do not operate in the same sphere, they can co-exist.

 

It was observed that the objective of the PMLA being distinct from that of the Recovery of Debts Due to Banks and Finance Institutions Act, the SARFAESI Act, and the Code, these three legislations do not prevail over the PMLA. By virtue of section 71 of the PMLA, PMLA has overriding effect on other existing laws in the matter of dealing with ‘money laundering’ and ‘proceeds of crime’.

 

In two differing judgments, however, the NCLAT in Rotomac Global10 and the PMLA Appellate Authority in PMT Machines11 had dealt with the issue of overlap between PMLA and the Code. In the Rotomac Global case, it was held by the NCLAT that section 14 of the Code (moratorium) is not applicable to proceedings under the PMLA and that neither law has an overriding effect on the other because both the laws operate in different spheres.

 

In the case of PMT Machines, however, the PMLA appellate authority had upheld the prevalence of the Code over the PMLA and set aside the order of attachment under PMLA and released the properties on the ground that the properties were acquired much prior to the date of the alleged offence of money laundering.

 

GROUND REALITIES

Indeed, banks will have to establish that the security interest was created prior to the crime period. The issue is: ‘Operationally, how would a creditor establish that its charge on the property was created before the crime period?’

 

Bidders, too, are awaiting clarity. In some cases, change of control had already taken place but yet there was litigation. If the assets of the corporate debtor are allowed to be attached, it will pose huge risk if, after paying a substantial sum, there is no assurance about possession of the asset.

 

Sterling SEZ and Infrastructure Finance case

In this case12, the Corporate Insolvency Resolution Process had commenced. The application of the financial creditor initiating the Corporate Insolvency Resolution Process was admitted, the Resolution Professional was appointed and moratorium was declared.

 

The Enforcement Directorate attached the assets of the corporate debtor. The Resolution Professional informed the ED about the declaration of moratorium and sought withdrawal of the attachment. However, the ED contended that the attached properties constituted ‘proceeds of crime’ and, therefore, moratorium would not be applicable to the proceedings under the PMLA. The adjudicating authority under the Code was called upon to decide whether proceedings before the PMLA Court in respect of attachment of properties were merely civil proceedings and, accordingly, the adjudicating authority under the PMLA had no jurisdiction to attach properties of the corporate debtor undergoing the Corporate Insolvency Resolution Process.

 

After examining the relevant provisions of the Code and the PMLA, the Adjudicating Authority under the Code held that the Adjudicating Authority under the PMLA had no jurisdiction to attach properties of the corporate debtor undergoing the Corporate Insolvency Resolution Process.

 

It also held that the attachment order passed under the PMLA was non-est in law since it was hit by declaration of moratorium under the Code. Accordingly, it was finally held that the Resolution Professional could proceed to take charge of the properties as if there was no attachment order.

 

GOVERNMENT’S APPROACH

After completing the resolution under the Code, several bidders faced demands from different government authorities. The biggest concern, however, was the threat of attachment under PMLA.

 

A number of representations have been made by bidders to the Ministry of Corporate Affairs on the issues pertaining to the PMLA, especially with regard to the attachment of property.

 

In a holistic view of the matter, it is suggested that the PMLA should either be amended or the bidder should be allowed to revise the bid to the extent of the liability in respect of the alleged ‘proceeds of crime’. The amount may be put in an escrow account.

 

Government has taken cognisance of this issue and has sought to amend the Code in December, 2019 to ring-fence the prospective bidder for stressed assets against the liability for prior offences.

 

__________________________________________-

1   Neeraj Jain vs. Yes Bank Ltd. (2019) 106 taxmann.com 35 (NCLAT)

2   Solidaire India Ltd. vs. Fair Growth AIR 2001 SC 958; Raman Ispat (P) Ltd. vs. Executive Engineer (Paschimanchal Vidyut Vitran Nigam Ltd.) (2018) 97 taxmann.com 223 (NCLT-All).

3   Bank of India vs. Ketan Parekh AIR 2008 SC 2361; (2008) 8 SCC 148

4      Siddhi Vinayak Logistic Ltd. vs. Dy. Director, DoE, Mumbai (2019) 101 taxmann.com 491 (PMLA-AT)

5   Anil Goel, Liquidator, Rotomac Global (P) Ltd. vs. Ms Ramanjit Kaur Sethi, Dy. Director, DoE (2019) 102 taxmann.com 152 (NCLT-All)

6   Varrsana Ispat Ltd. vs. Dy. Director, DoE (2019) 108 taxmann.com 96 (NCL-AT) Per contra Asset Reconstruction Co. (India) Ltd. (ARCIL) vs. Dy. Director (2019) 109 taxmann.com 192 (NCLT-Hyd.)

7   Varrsana Ispat Ltd. vs. Dy. Director, DoE (2019) 108 taxmann.com 96 (NCL-AT)

8      PMT Machines Ltd. vs. Dy. Director, DoE (2019) 111 taxmann.com 362 (PMLA-AT)

9 (2019] 104 taxmann.com 49 (Delhi)

10 Rotomac Global (P) Ltd. vs. Dy. Director, DoE [2019] 108 taxmann.com 397 (NCLAT)

11 PMT Machines Ltd. vs. Dy. Director, DoE (2019) 111 taxmann.com 362 (PMLA-AT)

12 SREI Infrastructure Finance Ltd. vs. Sterling SEZ & Infrastructure Finance Ltd. [2019] 105 taxmann.com 167 (NCLT – Mum.)

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