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.
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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.)
