It would be of immense significance to mention right at the start itself that the Delhi High Court in a most learned, laudable, landmark and latest judgment titled Rajiv Chakraborty Resolution Professional of EIEL vs Directorate of Enforcement in W.P.(C) 9531/2020, CM APPL. 30578/2020(Direction) CM APPL. 22986/2022(Amendment) that was reserved on September 5 and then finally pronounced on November 11, 2022 has held explicitly that the Enforcement Directorate’s (ED) power to attach properties under the Prevention of Money Laundering Act (PMLA) will not be affected by the moratorium which comes into effect in terms of Section 14 of the Insolvency and Bankruptcy Code (IBC). It must be mentioned here that the Single Judge Bench of Hon’ble Mr Justice Yashwant Varma said that the provisions of PMLA are not subservient to the moratorium provision in Section 14 of the IBC. He plainly said that while both the statutes are special statutes in the generic sense, they both seek to sub-serve independent and separate legislative objectives and the subject matter and focus of the two legislations are clearly distinct.
At the very outset, this brief, brilliant and balanced judgment authored by the Single Judge Bench of Hon’ble Mr Justice Yashwant Verma sets the ball rolling by first and foremost putting forth in para 1 that, “This writ petition raises the important question of the impact that a moratorium that comes into effect in terms of Section 14 of the Insolvency and Bankruptcy Code, 2006 (IBC) would have on the powers of the Enforcement Directorate (ED) to enforce an attachment under the provisions of the Prevention of Money Laundering Act, 2002 (PMLA). The petition raises a challenge to orders of attachment which have been made by the ED in exercise of powers conferred by the PMLA. While the writ petition as originally framed had assailed the validity of Provisional Attachment Orders (PAO) dated 08 July 2020 and 05 August 2020, subsequently and since those orders came to be confirmed by the Adjudicating Authority, an amendment application was moved questioning the confirmation orders dated 01 January 2021 and 29 January 2021. The petition has been instituted by the Resolution Professional (RP) of Era Infra Engineering Limited (EIEL) which was admitted to insolvency proceedings under the provisions of the IBC. The challenge to the orders of attachment is essentially founded on the provisions of Section 14 of the aforesaid enactment with the petitioner contending that once the moratorium had come into effect, the ED stood denuded of jurisdiction to exercise powers under the PMLA. Before proceeding ahead to notice the submissions which have been addressed, it would be pertinent to notice the following essential facts.”
While dwelling on the essential facts of the case, the Bench then states in para 2 that, “On 19 April 2018, the ED proceeded to freeze 74 bank accounts of EIEL in purported exercise of powers conferred by Section 102 of the Code of Criminal Procedure, 1973 (CrPC). The insolvency proceedings would be deemed to have commenced on 08 May 2018 when the petition was admitted and it is this date which would thus constitute the date of commencement of the Corporate Insolvency Resolution Process (CIRP). Assailing the action initiated by the respondent under Section 102 of the CrPC, the petitioner preferred W.P.(C)9566/2019 which came to be allowed with the learned Judge quashing the orders dated 04 October 2018 and 19 April 2018 in terms of which its bank accounts had been frozen. The learned Judge, however, refrained from interfering with the order of 07 October 2019 which had been passed under Section 5 of the PMLA and had provisionally attached certain properties. The Court shall deal with the aforesaid order hereinafter. Proceeding further, it may be noted that on 04 October 2018, the Adjudicating Authority passed an order upholding the freezing of the bank accounts detailed hereinabove. Thereafter and on 07 October 2019, the respondent proceeded to attach 49 bank accounts of EIEL in exercise of powers conferred by Section 5 of the PMLA. It was this order which was left untouched on the first writ petition which had been filed by the petitioner and was referred to hereinabove.”
As it turned out, the Bench then discloses in para 3 that, “Aggrieved by the PAO pertaining to the 49 bank accounts of EIEL, the petitioner filed an application to set aside the same before the National Company Law Tribunal (NCLT). During the pendency of that challenge, the Adjudicating Authority by its order of 17 March 2020 confirmed the order of attachment. On 21 May 2020, the corporate debtor is said to have received an income tax refund pertaining to the assessment year 2015-2016. On 07 July 2020, the petitioner received an e mail from Axis Bank, with which its bank accounts afore-noted were maintained, to ascertain whether the debit freeze as imposed by ED stood lifted. The petitioner was also called upon to ascertain whether any other attachment orders had come to be passed effecting the assets of EIEL, the corporate debtor. On 08 July 2020, the respondent attached two tunnel boring machines valued at Rs. 33,71,19,466/- again in exercise of powers conferred under the PMLA. Aggrieved by the aforesaid action as initiated by the respondent, the petitioner filed an Interlocutory Application (IA) before the NCLT seeking directions for the respondent being restrained from proceeding further in terms of the order of 08 July 2020 of the Adjudicating Authority and for them being further restrained from taking any further action against the assets of EIEL during the pendency of the proceedings before the NCLT under the IBC.”
To put things in perspective, the Bench then envisages in para 4 that, “It appears that in the meanwhile confusion reigned with respect to the income tax refund which had been received by the petitioner. That amount is stated to have been credited in the accounts of the corporate debtor maintained with Axis Bank. Since the petitioner was apprised by the Axis Bank of a restraint which operated on its right to deal with the income tax refunds which had been received, the petitioner preferred a contempt petition before this Court. In the said contempt petition, on 06 August 2020, counsels appearing for the respondent are stated to have taken time to obtain instructions and apprise the Court whether the income tax refund also stood attached in proceedings under the PMLA. The petitioner alleges that after the hearing on the aforesaid contempt petition had concluded, the petitioner was e-mailed a copy of yet another PAO dated 05 August 2020 in terms of which the income tax refund also stood attached. In view of the aforesaid development, the contempt petition came to be dismissed on 13 August 2020 with the petitioner being accorded the liberty to initiate appropriate steps in challenge to the PAO of 05 August 2020. In the meanwhile, on 11 August 2020, the Supreme Court while dealing with a civil appeal preferred by another creditor of EIEL, aggrieved by its non-inclusion in the list of operational creditors, stayed further proceedings in the CIRP. That interim order was ultimately vacated on 16 November 2020. It is thereafter that the instant writ petition came to be preferred before the Court.”
Be it noted, the Bench notes in para 11 that, “In view of the stand as taken by and on behalf of the ED and so encapsulated in the order of 6 May 2022, the Court notes that the respondents cannot be permitted to approbate and reprobate. Having taken the stand that a challenge to orders of attachment made under the PMLA cannot be considered or ruled upon by the NCLT while discharging its functions under the IBC, the preliminary objections which are raised in this regard clearly do not merit acceptance. Once the respondents have taken the principled stand that the NCLT would have no jurisdiction to either decide or rule upon the validity of proceedings initiated under the PMLA, it would be wholly illogical to dismiss the instant writ petition and thus compel the petitioners to pursue the applications made and pending before the said tribunal. The Court also takes note of the orders dated 29 January 2021 and 08 April 2021 passed on the instant writ petition and in which the Court had clearly recognised the jurisdictional issues which stood raised and thus merited the writ petition itself being entertained.”
Most remarkably, the Bench holds in para 82 that, “The Court finds itself unable to accept the submission that the provisions of the PMLA are liable to be read as being subservient to the moratorium provision comprised in Section 14 of the IBC for the following additional reasons. PMLA seeks to subserve a larger public policy imperative. The enactment represents a larger public interest, namely the fight against crime and the debilitating impact that such activities ultimately have on the society and the economy of nations as a whole. Tainted assets are those which would have been obtained through surreptitious means and modes, through layered transactions aimed at obfuscating their origins. The legislation aims at denuding the perpetrators of crime of gains obtained from such activities. It is a reparation measure which seeks to strip and deprive criminals of benefits derived and retained by the adoption of illegal and dishonest action. The PMLA is an enactment which is aimed at affecting the disgorgement of illegal gains. The Court deems it apposite to note that the Insolvency Law Committee Report, 2016 had pertinently observed in Para 8.11 that the moratorium provision is not liable to be interpreted as barring all possible actions “especially where countervailing public policy concerns are involved”. It also took note of laws prevailing in different jurisdictions which permit regulatory actions which though not aimed at collecting moneys for the estate protect other vital and urgent public interests. This view finds reiteration in the UNCITRAL Legislative Guide on Insolvency Law which had recognised “actions to protect public policy concerns” falling outside the ken of a moratorium.”
Quite forthrightly, the Bench observes in para 108 that, “On a consideration of the aforesaid, the Court comes to the conclusion that Section 32A would constitute the pivot by virtue of being the later act and thus govern the extent to which the non obstante clause enshrined in the IBC would operate and exclude the operation of the PMLA. As has been observed hereinabove, while both IBC and the PMLA are special statutes in the generic sense, they both seek to sub-serve independent and separate legislative objectives. The subject matter and focus of the two legislations is clearly distinct. When faced with a situation where both the special legislations incorporate non obstante clauses, it becomes the duty of the Court to discern the true intent and scope of the two legislations. Even though the IBC and Section 238 thereof constitute the later enactment when viewed against the PMLA which came to be enforced in 2005, the Court is of the considered opinion that the extent to which the latter was intended to capitulate to the IBC is an issue which must be answered on the basis of Section 32A. The introduction of that provision in 2020 represents the last expression of intent of the Legislature and thus the embodiment of the extent to which the provisions of the PMLA are to give way to proceedings initiated under the IBC.”
It is worth noting that the Bench then holds in para 109 that, “The Court has independently come to the conclusion that the power to attach under the PMLA would not fall within the ken of Section 14(1)(a) of the IBC. Through Section 32A, the Legislature has authoritatively spoken of the terminal point whereafter the powers under the PMLA would not be exercisable. The events which trigger its application when reached would lead to the erection of an impregnable wall which cannot be breached by invocation of the provisions of the PMLA. The non obstante clause finding place in the IBC thus can neither be interpreted nor countenanced to have an impact far greater than that envisaged in Section 32A. The aforesaid issue stands answered accordingly.”
Adding more to it, the Bench then notes in para 113 that, “Viewed in the aforenoted backdrop it is manifest that an order of attachment when made under the PMLA does not result in the corporate debtor or the Resolution Professional facing a fait accompli. The statutes provide adequate means and avenues for redressal of claims and grievances. It could be open to a Resolution Professional to approach the competent authorities under the PMLA for such reliefs in respect of tainted properties as may be legally permissible. Similarly, and as was explained by Axis Bank, a PAO made by the ED under the PMLA does not invest in that authority a superior or overriding right in property. Ultimately the claims of parties over the property that may be attached and the question of distribution and priorities would have to be settled independently and in accordance with law.”
As a corollary, the Bench then holds in para 114 that, “Accordingly and for all the aforesaid reasons, the writ petition shall stand dismissed. The challenge to the Provisional Attachment Orders dated 08 July 2020 and 05 August 2020 as well as orders of confirmation passed by the Adjudicating Authority dated 01 and 29 January 2021 on grounds as raised fails and stands negatived.”
For sake of clarity, the Bench then clarifies in para 115 stating that, “This order, however, shall not preclude the petitioner Resolution Professional from seeking release of the provisionally attached properties in accordance with law.”
Finally, the Bench then concludes by holding aptly in para 116 that, “The Court further observes that the rights of the Enforcement Directorate over the properties subject to attachment would stand restricted to the extent that has been recognised in this decision as well as the judgment of the Court in Axis Bank.”
In conclusion, the Delhi High Court has made it indubitably clear that PMLA is not subservient to IBC. It was also made clear by the Court that ED’s power to attach properties is not affected by Section 14 IBC moratorium. Very rightly so!
Sanjeev Sirohi