IBC Not 'Holy Ganges' To Wash Corporate Debtor's Criminality Under PMLA: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Delhi on Tuesday held that the moratorium under the Insolvency and Bankruptcy Code (IBC) does not prevent the Enforcement Directorate (ED) from attaching assets alleged to be proceeds of crime under the Prevention of Money Laundering Act (PMLA).

It observed that Parliament did not enact the IBC "to create a holy Ganges" that would wash a corporate debtor of criminality under the PMLA or legitimise ill-gotten wealth.

A three-member tribunal comprising Judicial Member Justice N. Seshasayee and Technical Members Arun Baroka and Indevar Pandey observed:

"..the PMLA in its working neither differentiates nor discriminates the companies that are drawn into a CIRP and those which are considered financially safe by its creditors. It must be emphasised that Parliament did not legislate IBC with an intent to create a holy Ganges out of the IBC to wash the corporate debtor of its sin of criminality under the PMLA, or as a mechanism for legitimizing any ill-gotten wealth of the CD. There is nothing in the code, that enables accommodating the wealth which is sourced by and out of a crime, in the resolution or liquidation process of a corporate debtor."

The ruling came in appeals filed by Value Wise Consultancy Private Limited in its capacity as the liquidator of Siddhi Vinayak Logistics Ltd. The appeals challenged an order of the National Company Law Tribunal (NCLT), Ahmedabad, which dismissed applications seeking release of assets attached by the ED, refund of about ₹2.29 crore withdrawn by the agency, and withdrawal of restraint notices issued to the company's customers.

The corporate debtor was accused of bank fraud and diversion of loan funds exceeding ₹1,600 crore. Following FIRs registered by the Central Bureau of Investigation, the ED issued notices to the company's customers in April 2017 directing them not to release payments to the company.

The ED provisionally attached the company's assets in June 2017. The attachment was later confirmed by the PMLA Adjudicating Authority.

The company was admitted into the corporate insolvency resolution process in September 2017, triggering the moratorium. During its operation, the ED withdrew about ₹2.29 crore from the company's ICICI Bank account.

The PMLA Appellate Tribunal later set aside the attachment order. However, the ED challenged that decision before the Bombay High Court, where the matter remains pending.

After the insolvency resolution process failed, the company was ordered to be liquidated. During liquidation, the ED issued fresh attachment orders covering 6,170 vehicles belonging to the company. The PMLA Adjudicating Authority later confirmed the attachment of 1,344 of those vehicles.

The liquidator argued that the ED's withdrawal of money during the moratorium violated the protections available under the IBC. It also contended that, since the PMLA Appellate Tribunal had set aside the attachment order and no stay had been granted by the Bombay High Court, the ED could not continue to retain the money.

The liquidator maintained that it was seeking enforcement of the protections available under the IBC. It argued that the applications did not require adjudication of proceedings under the PMLA.

The ED contended that proceedings under the PMLA are independent criminal proceedings concerning proceeds of crime. It argued that they operate separately from insolvency proceedings and that insolvency tribunals lack jurisdiction to interfere with attachment proceedings under the anti-money laundering law.

The tribunal held that the IBC and the PMLA operate in different spheres. While the IBC seeks to resolve the insolvency of a corporate debtor using its legitimate assets, the PMLA is aimed at identifying, attaching and confiscating proceeds of crime in the national interest.

Observing that the competing interests were those of creditors on one hand and the public interest behind the anti-money laundering law on the other, the tribunal stated,

"If this is unlayered more, it exposes the reality of a conflict between the interest of few creditors of a company in CIRP versus the national interest. While the former is compromisable, which, at any rate happens through the haircuts imposed during the distribution of the proceeds of a successful CIRP, or liquidation, which every creditor of a CD knows, accepts, and is prepared for, national interest at all times remains uncompromisable."

The tribunal also clarified the scope of the moratorium under the IBC.

It observed, "This in turn leads to a concomitant conclusion that, if the purpose behind Sec.14 is to freeze the existing liability of the corporate debtor as on the date when it is admitted to CIRP as part of the legislative strategy to preserve the status quo for a convenient resolution of insolvency of the CD, then operation of Sec.14 must be limited to those litigations and proceedings, both pending and prospective, either civil or criminal, which hold the likelihood of adding on to the existing debt-liability of the corporate debtor and not others. Needless to state that those crimes which spring from penal statutes of public law nature, with no prospect of adding to the debt-liability of civil nature of the CD, cannot be allowed to be impacted by the moratorium, even if they affect the net asset of the CD available for CIRP or liquidation."

The tribunal further observed, "IBC would unwittingly become a camouflage, a shield, to save the ill-gotten wealth of the corporate debtor and create a classification within the non-discriminatory character of the PMLA."

Relying on the Supreme Court's decision in Embassy Property Developments Private Limited v. State of Karnataka, the tribunal held that insolvency forums cannot interfere with actions taken under the PMLA. It observed that the tribunals constituted under the IBC are not the forums to entertain challenges against the ED.

The tribunal further observed that although the PMLA Appellate Tribunal had earlier set aside the attachment order, the ED's challenge to that decision is pending before the Bombay High Court. It held that the appellant would have to pursue its remedy before the High Court within the adjudicatory framework under the PMLA.

For Appellants: Advocates Sandeep Bajaj, Vipul Jai, Mayank Biyani, Saumya