Savvy Thakur
Published on: 12 November 2022 at 20:16 IST
The Delhi High Court ruled that the moratorium that takes effect in accordance with Section 14 of the Insolvency and Bankruptcy Code (IBC) will not affect the Enforcement Directorate‘s (ED) authority to attach properties in accordance with the Prevention of Money Laundering Act (PMLA).
According to Justice Yashwant Varma, a single judge, the PMLA’s provisions are independent of Section 14 of the IBC’s moratorium provision.
He stated that despite the fact that they are both special statutes in the broad sense, they both seek to subserve distinct legislative objectives and have distinct subject matter and focus.
According to the Court, Section 32A of the IBC must be used to determine the extent to which PMLA was intended to yield to the IBC.
The judge concluded, after examining the aforementioned provision, that the legislature made the decision to structure it so that the authorities authorized by the PMLA would no longer be able to attach or confiscate property until a resolution plan has been approved or a measure toward liquidation has been adopted.
The provision states, “The statutory injunction against the invocation or utilization of the powers available under the PMLA was ordained to come into effect only once the trigger events envisaged under Section 32A came into effect,”
The Court stated, “The Legislature thus in its wisdom chose to place an embargo on the continuation of criminal proceedings, including action of attachment under the PMLA, only after the approval of a Resolution Plan or the adoption of a measure in aid of liquidation.”
The same conclusion was reached by Justice Varma in the case of Nitin Jain Liquidator PSL Limited v. Enforcement Directorate.
The judge had also decided in that case that once the IBC liquidation process started, ED’s authority to attach assets under the PMLA would end.
Background:
Era Infra Engineering Limited’s resolution professional had filed a petition in the court challenging the Adjudicating Authority’s confirmation of ED’s Provisional Attachment Orders and their validity.
It was argued that the ED lacked the authority to exercise PMLA powers once Section 14 of the IBC’s moratorium went into effect.
The court concluded, after considering the arguments, that Section 14(1)(a) of the IBC would not apply to the power to attach granted by PMLA.
However, the Court has also addressed a number of other facets of the PMLA and the IBC in its 124-page ruling.
Affect of a Moratorium
According to the Court, the primary purpose of a moratorium is distinct from the goals and purposes of PMLA attachment actions.
It was noted that the IBC’s moratorium provision primarily aims to maximize value, preserve the debtor’s assets while possibilities for its resurrection are investigated, and prevent individual actions by its creditors that could impede or impede the resolution process.
The Court stated that its primary objectives are the preservation of the insolvency estate and the suspension of debtor-related actions.
“The moratorium order staves off actions that may be initiated for enforcing security interests, claims by individual creditors, a restraint against the dissipation of its assets while the process of its restructuring is explored. It essentially seeks to sequester the assets of the debtor from actions which may be initiated by its creditors. It is during this crucial period that the viability of the debtor is assessed during the CIRP,”
According to Justice Varma, the assets that may have been obtained through the commission of a scheduled offense cannot be granted exemption or immunity from the rigors of the PMLA, and accepting such a contention would not only go against legislative policy but also undermine the legislature’s efforts to combat money laundering.
The petition states, “In point of fact, if Section 14 were to be interpreted in the manner that the petitioner suggests, it would deprive the authorities charged with implementing the provisions of the PMLA of an essential weapon in their quest to confiscate proceeds of crime,”
The judgment stated that the government cannot be regarded as acting as a creditor seeking to enforce a debt while acting under the PMLA.
It would be pertinent to note that the ED does not act as a creditor when it moves to provisionally attach properties that are the proceeds of crime.
The actions taken in accordance with the aforementioned provisions primarily aim to bind the owner’s ability to deal with or dispose of properties that have been identified as representing the proceeds of crime.
The Court ruled that “it basically seeks to strip the perpetrator of the right to enjoy the same while the proceedings under the PMLA are in progress.”
The court stated that the attachment by the ED does not confer a title on the authority that has taken that step, and that its purpose is to prevent private alienations.
According to the Court, the attachment only grants the authorities under the PMLA the authority to prevent further property transactions until a money laundering-related trial is concluded.
“Property rights do not become null and void as a result of attachment under the PMLA.”
The judgment stated, “It is basically a fetter placed on the possessor of that property to deal with the same until such time as proceedings under the aforementioned enactment come to a definitive conclusion on the question of confiscation.”
“In any case, since the act of attachment does not result in the effacement of rights in property, it would clearly stand and survive outside the scope of a moratorium or an action relating to an action in respect of a debt due or payable,”
Third-party safeguards
The Court ruled that the enforcing authority under the aforementioned enactment does not have a superior or overarching interest in the property or the proceeds that may ultimately be obtained upon its disposal just because a specific property has been provisionally attached under the PMLA.
According to Justice Varma, the aggrieved party is granted the right to seek the release of property even after it may have been confiscated in favor of the Central government. This is in addition to the provision that allows for an appeal against the order that was issued by the Adjudicating Authority.
“The statutes provide sufficient means and avenues for claims and grievances to be resolved. A Resolution Professional may be able to approach the appropriate authorities under the PMLA for any reliefs regarding tainted properties that may be permitted by law. Axis Bank explained that a PAO issued by the ED under the PMLA does not grant that authority a superior or overriding property right.”
The Court added that, in the end, the parties’ claims on the attached property, as well as the issue of distribution and priority, would have to be resolved independently and in accordance with the law.