How to balance the IBC and the PMLA

Authored by Hammurabi & Solomon Partners

The Prevention of Money Laundering Act, 2002 (PMLA) seeks to prevent money laundering, to prosecute those committing money laundering and to recover and seize properties acquired by means of laundered money. However, the effective implementation of the PMLA has often been hindered by the provisions of other laws, including the Insolvency and Bankruptcy Code, 2016 (IBC).

In the June 2020 case of Deputy Director v Asset Reconstruction Company, the Madras High Court held that the National Company Law Tribunal (NCLT) has no jurisdiction under the IBC to make orders, in respect of property of the corporate debtor which has already been attached by the Enforcement Directorate (ED) under the PMLA, even though such property forms part of the resolution plan. The unsuccessful argument in that decision was that the operation of the PMLA in such cases would impact the efficacy of the resolution process under the IBC. Section 32A of the IBC, inserted by the Insolvency and Bankruptcy Code (Amendment) Act, 2019, and which came into force on 28 December that year, gives immunity to a corporate debtor and its assets from any prosecution, action, attachment, seizure, retention or confiscation on the approval of a resolution plan, provided that the resolution plan results in a change in the management or control of the corporate debtor.

Section 32A can be said to be the most powerful and overriding amendment made to the IBC. As read with section 238, it may be invoked to stop any or all prosecutions, attachments and seizures against the corporate debtor authorized by any law for the time being in force including those brought under the PMLA. Both the IBC and the PMLA have non-obstruct clauses and this leads to constant conflict between the two acts as to which clause, section 238 of the IBC or section 71 of the PMLA, should prevail in any given instance. Various high courts and the PMLA Appellate Authority have come to different decisions as to which would prevail. The Supreme Court, however, has held in various judgments including Innoventive Industries Ltd v ICICI Bank Ltd (2017), and Pr Commissioner of Income Tax v Monnet Ispat And Energy Ltd (2018), that the provisions of the IBC override other acts by virtue of section 238, and that the mandatory moratorium provided by section 14 of the IBC overrides an inconsistent provision in any other enactment, including the Income Tax Act, 1961.

That being said, however, the need to provide for efficacy in the implementation of laws meant to prevent and control money laundering, in the recovery of proceeds of crime by corporate debtors and in the need to keep to the economic rationale behind the IBC leading to the swift and efficient determination of the resolution process of a corporate debtor, are all crucial to corporate regulation and governance. Thus various courts have held that the objective of the PMLA is distinct from the purposes of other laws including the IBC, and that the latter does not prevail over the former. A harmonious construction of both laws should be followed. In Deputy Director Directorate of Enforcement Delhi v Axis Bank & Ors (2018), the Delhi High Court held that the PMLA, by virtue of section 71 overrides other laws in matters of money laundering and the proceeds of crime. The court held that an interpretation that negates one provision is not a construction that is harmonious and that a rational balance should be found to resolve such a conflict of laws.

While corporate creditors and investors have received better treatment with the insertion of section 32A, which seeks to ensure better valuations for investors for assets ring-fenced against PMLA attachments and wipes the slate clean of corporate debtors’ attachments under PMLA, society is perhaps less well served by the inability of enforcement agencies to recover ill-acquired gains.

However, since agencies enforcing PMLA provisions are now left to deal only with erstwhile promoters/managements of corporate debtors minus assets of proceeds of crime, a relook is round the corner for both the PMLA and IBC to coexist in a manner to achieve the objectives of both very important legislations in the corporate regulation space. It is, however, pertinent to note that the said Section 32A was not a part of the IBC when the aforesaid judgments were passed by the Supreme Court on the overriding effect of non-obstante clause of IBC. In fact the National Company Law Appellate Tribunal’s order applying Section 32A in the JSW Steel case holding the ED’s actions under the PMLA without jurisdiction is, however, under challenge before the Supreme Court.

This article was originally published in Indian Business Law Journal