The Delhi High Court recently ruled in Rajiv Chakraborty v Enforcement Department (ED) that the ED is empowered under the Prevention of Money Laundering Act 2002 (PMLA) to seize the assets of corporate debtors. did. Until the embargo under Section 32A of the Bankruptcy Code (IBC) was invoked, the decision focused a never-ending debate over which of the two laws (IBC and PMLA) took precedence.
IBCs are modest Otherwise, Section 14 of the IBC prohibits the commencement and continuation of civil actions against corporate debtors after the corporate insolvency process (CIRP) has commenced.
Similarly, Section 32A of the IBC protects a corporate debtor’s assets from seizure if a resolution plan is approved or if action toward liquidation is adopted.
IBC and PMLA have different purposes. The Supreme Court has ruled in P Mohanraj (above) and Swiss Ribbons vs Union of India that the IBC is a beneficial code intended to revive commercially distressed corporate entities. The purpose of an IBC is to protect the company’s debtors against the death of the company in liquidation. The moratorium is one of the means by which IBCs protect corporate debtors in bankruptcy proceedings.
PMLA aims to address the threat of money laundering. Temporary seizure of assets, a preemptive measure to prevent the erosion of criminal proceeds, has frustrated the ED investigation.
Proponents of IBC dominance modest The covenant and the moratorium under Section 14, coupled with Section 32A, means that the ED is not authorized to seize the assets of corporate debtors during the pendency of bankruptcy proceedings.
However, some believe that bankruptcy proceedings will not affect the ED’s ability to seize a debtor’s tainted assets. In Rajiv Chakraborty, the ED argued that “criminal proceeds” are in a different position than other laws.
Actions related to ED attachments and confiscations are aimed at depriving a person or entity of something illegally secured. Some experts feel that the IBC should not be allowed to be used as a “pardon route” for those accused under the PMLA.
Regarding the prohibition under Section 32A, the ED submitted to the Delhi High Court in the Rajiv Chakraborty case, stating that the embargo can only be initiated by approval of the settlement plan or enforcement of liquidation.
judicial trends
In Varrasana Ispat Ltd vs Deputy Director of Enforcement, on the interaction between IBC and PMLA, the National Company Law Appellate Tribunal (NCLAT) opined that PMLA is related to crimes of criminal proceeds and money laundering. Section 14 of the IBC therefore does not apply to proceedings initiated under the PMLA. Similarly, in Andhra Bank v. Sterling Biotech Ltd, NCLAT stated that it is always possible for the ED to seize a corporate debtor’s assets if they are criminal proceeds.
Sterling Biotech’s decision was repeated in Rotomac Global vs Deputy Director of Enforcement. The only decision in favor of IBC’s supremacy was the Enforcement Bureau v. Manoj Kumar Agarwal ruling, in which no attachments were permitted under the PMLA after the moratorium under Section 14 came into force.
To settle the controversy, the NCLAT’s larger bench decided in Kiran Shah v. ED, diametrically opposed to the case of Manoj Kumar Agarwal, that Article 14 of the IBC would allow ED officials to exercise authority under the PMLA. was determined not to preclude the exercise of .
Regarding Section 32A, the Delhi High Court said that in Rajiv Chakraborty’s case, only two trigger cases had the effect of barring the PMLA’s proceedings. First, when the resolution plan is approved. Second, if liquidation relief is taken.
The Delhi High Court further said that the power of attachment had sufficient checks and balances under the PMLA. Even otherwise, the seizure of a corporate debtor’s assets only enables the ED to restrain further transactions or private transfers of such assets. A foreclosure should therefore not be considered a removal of any rights that may exist in respect of the corporate debtor’s assets.
Problems before Apex Court
The debate over the impact of bankruptcy proceedings on the ED’s ability to seize a debtor’s assets appears to be unresolved. The Supreme Court recently issued a notice related to the Ashok Kumar Sarawagi v. ED case seeking to challenge his NCLAT ruling in the Varasanaispat and Kiran Shah cases. Therefore, it remains to be seen how the Supreme Court will resolve the issue and substantiate its legal position.
(The author is the founder and director of Trinity Chambers, Delhi)
Published December 4, 2022
