The Tussle for Supremacy – The IBC v. PMLA Conundrum

The author is Ishita Warghat, third year student at National Law Institute University, Bhopal.

Introduction

The Indian Bankruptcy Code, 2016 (IBC) and the Prevention of Money Laundering Act, 2002 (PMLA) are both special legislations operating within their own demarcated spheres. The IBC was primarily enacted to streamline the process of insolvency and explore the possibility of revitalising the company for the purpose of maximization of interests of all the stakeholders. On the other hand, the PMLA was enacted to deprive the offender the right to enjoy the property that has been acquired with the profits from illegal sources.

Despite the clear demarcation of domains of both the legislations, sometimes, the corporate debtor or the management of the company is involved in some ‘scheduled offences’ under the domain of the PMLA while undergoing corporate insolvency resolution process (CIRP) resulting in parallel proceedings. This creates a friction in the ambit of operation of both the legislations. The Honourable Delhi High Court in the case of Rajiv Chakraborty vs. The Directorate of Enforcement attempted to resolve this tussle by defining the position of both the laws.

The author in the current piece, through the judgement, seeks to analyse the overlap in the operation between the two legislations and propose a solution that could enable their peaceful co-existence. (For a more detailed summary of the judgment, click here)

Background

In the instant case, the ED, after the initiation of CIRP of EIEL, (Corporate Debtor), froze 74 bank accounts of the CD and issued Provisional Attachment Orders (PAO) under section 5 of the PMLA. Subsequently, the Resolution Professional, Rajiv Chakraborty filed an application before the National Company Law Tribunal (Adjudicating Authority) which upheld the orders of the ED. Aggrieved by this, a writ petition was filed in the Hon’ble Delhi High Court (the court) on the grounds that the order was at loggerheads with section 14 of the IBC. An important question raised before the Delhi High Court was whether the issuance of a moratorium on the assets of the CD leads to the disqualification of ED to attach property under section 5 and section 8 of the PMLA?

Judgement

The High Court observed that the IBC and PMLA are different in nature. The subject matter of both the legislations are inherently different and therefore, can operate parallelly without having the need to override each other. Additionally, with reference to the application of moratorium and the subsequent position of the PMLA with respect to this aspect, the court noted that notwithstanding the ongoing CIRP, the ED can exercise its power in lieu of sections 5 and 8 of the PMLA keeping in mind the Kiran Shah v. ED judgement. However, this aspect came with a caveat due to the specific introduction of Section 32A of the IBC, i.e., the ED could not claim action over a property for which (i) A resolution Plan has been approved (ii) Any liquidation measure is adopted.

Analysis

Before delving into the intricacies of the judgement, it would be pertinent to note the interplay between Section 71 of the PMLA and Section 238 of the IBC. The aforementioned sections provide for a ‘non obstante clause’ which give overriding effects to the provisions of both the legislations in terms of their application. Based on the latin maxim ‘Leges posteriores priores contraries abrogant’ this clause signifies that if two legislations with conflicting provisions are enacted, the latter shall override the former assuming that the latter legislation was enacted taking into consideration all the factors and developments of the previous legislation. Similarly, it is always argued that the IBC should be given precedence over the PMLA in terms of its application. Numerous judgements such as Punjab National Bank v. Deputy Director, Directorate of Enforcement and Bank of India v. The Deputy Directorate of Enforcement of Mumbai have propounded the supremacy of the IBC over previous legislations (in this case PMLA) in furtherance of the same principle. Advocates of this reasoning also base their claim on an economic rationale stating that the process under IBC is more time-efficient and therefore enables a speedy solution unlike the PMLA which puts the creditors at a disadvantageous position due to the attachment of property belonging to the CD. Additionally, it is also said that the introduction of Section 32A made the intention of the legislature clear, i.e., to uphold the supremacy of IBC should there be any conflict between legislations.

However, the logic above is devoid of sound reasoning as it fails to take into consideration all the factors involved. Firstly, the principle of ‘latter act shall prevail’ is not inviolable. Secondly, it is a well-established principle of law in accordance with the rules of interpretation that the non-obstante clauses should be given a restricted meaning to avoid conflict between legislations. Thirdly, both the legislations in question are special legislations which were enacted to serve different purposes. Subserving the PMLA to IBC would defeat the purpose of passing both the legislations in the first place. For example, attaching the impugned property to the common pool of assets of the debtor would defeat the statutory objective for the enactment of PMLA. It would also create an escape route for the CD allegedly involved in the scheduled offences under PMLA. It was observed in case of The Deputy Director Directorate of Enforcement Delhi Vs. Axis Bank & Ors-Delhi High Court that a person whose property has been attached by the ED in accordance with the PMLA cannot use it to discharge its civil liability under the IBC because that shall give legitimacy to the property to discharge the civil liability of the offender/debtor. Lastly, the PMLA seeks to subserve a larger public imperative by limiting the property rights of the offender. Moreover, the government does not hold the position of a secured creditor and therefore its position cannot be equated with that in the IBC to state that PMLA should subserve the IBC.

Additionally, there are contentions regarding the reliance on the Varrsana Ispat Ltd. v. Deputy Director, Directorate of Enforcement judgement. Basing such contention on the differences between the factual matrices of the two judgements due to the initiation of the CIRP and moratorium before the attachment made by the ED in the aforementioned judgement, such contentions lack understanding of the intricacies. Since the attachment of the tainted property does not result in effacement of rights over the property, i.e., it is just a symbolic takeover, the action stands outside the purview of a moratorium or CIRP and individual claims of the creditors regarding the tainted property can be handled independently. Therefore, the core objective of the IBC, specifically section 14 stands undisturbed despite the attachment made by the ED in accordance with the PMLA.

The way forward – Adopting a balanced approach

The solution to the above-mentioned conundrum would be to adopt a balanced approach by harmoniously constructing the two legislations to iron out the discrepancies. Doing so would ensure that the legislations are interpreted in such a way that all provisions of the statues are given as much effect as possible. The provisions should be interpreted in such a way that there is no head-on clash between the two legislations and the sole enforcement of one legislation should not defeat the purpose of another. Any interpretation that altogether negates the applicability of a provision or legislation, cannot be labelled as harmonious construction. As rightly pointed out by Justice Krishna Iyer, “legislative futility is to be ruled out as long as interpretative possibility permits.”

While the IBC is a boon to the creditors, it is pertinent to note that the PMLA ensures that stringent action is taken against people who indulge in the offence of money laundering and it is quintessentially important to ensure effective implementation of laws relating to money laundering. The IBC serves well to the interests of the creditors but the PMLA serves better to the society in general. It should be ensured that no undue weightage is given to a particular legislation such that it harms the interests of a particular section of the society. While this depends on a case to case basis, a mechanism that ensures the fulfilment of the objectives of both the legislations should be adopted. Therefore, by interpreting the statues in a harmonious manner, the court can ensure enforceability of both the legislations so that they coexist peacefully. Delineating the contours of both the enactments would be another step in the right direction. While the current judgement has not conclusively put rest to the issue at hand, it is left to the apex court to crystallise the abstruse legal position on this issue and ensure that the objectives of both the legislations are fulfilled.