Imp. Rulings - Attachment of Assets under PMLA & Section 32A
Index;
HC Bombay (2024.03.01) in Mr. Shiv Charan & Ors Vs. Deputy Director, Directorate of Enforcement & Ors. [Writ Petition (L) No.9943 Of 2023] [Liquidation Process]
HC Gujarat (2023.08.24) In AM Mining India Private Limited vs Union of India [R/Special Civil Application No. 808 of 2023]
HC Gujarat (2023.02.17) In Welspun Steel Resources Pvt. Ltd. Vs. Union of India [R/Special Civil Application No. 19387 of 2022 ]
NCLT Jaipur (2022.12.05) in M/s Packwell (India) Ltd. Vs. M/s Emgee Cables And Communication Ltd. [IA No. 15/JPR/2022 in CP No. (IB)- 601/ND/2018] held that;
HC Delhi (2022.11.11) in Rajiv Chakraborty RP of EIEL Vs. Directorate of Enforcement [W.P.(C) 9531/2020]
NCLAT (2022.01.03) in Kiran Shah,‘RP’ of KSL and Industries Ltd Vs Enforcement Directorate, Kolkata [Company Appeal (AT)(Insolvency) No.817/2021 ]
High Court Delhi (2021.12.15) in Nitin Jain Liquidator PSL Limited Vs. ED Through Raju Prasad Mahawar, Assistant Director PMLA [W.P.(C) 3261/2021, CM APPLs. 32220/2021, 41811/2021, 43360/2021, 43380/2021]
Supreme Court (2021.01.19) Manish Kumar Vs. Union of India & Ors. [Writ Petition (C) No.26 of 2020]
NCLAT (2020.02.17) in JSW Steel Ltd. Vs. Mahender Kumar Khandelwal & Ors. [Company Appeal (AT) (Insolvency) No. 957 of 2019]
High Court Delhi (2019.04.02) in Deputy Director, Directorate of Enforcement Delhi and others V. Axis Bank and others [CRL.A. 143/2018 & Crl.M.A. 2262/2018 ]
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Blogger’s Comments; All said and done, the principal objectives of attachment & confiscation of tainted property in PMLA is that a person/company is not able to enjoy the proceeds of crime. Under IBC, as soon as the application under section 7, 9 or 10 is accepted, the control of the company is divested from its promoters/directors/existing management & the promoters/directors are prevented from taking back the control of the company (Section 29A & section 32A) either during insolvency proceedings or during liquidation process, thus fulfilling the principal objectives of PMLA.
Rather, attachment of company’s property (particularly liquid assets i.e. bank accounts etc.) under the provisions of PMLA, during insolvency/liquidation proceedings frustrate the principal objectives of the IBC, to put the assets of insolvent companies in the beneficial use of the society. In contrast due to protracted proceedings in PMLA the value of the assets gets diminished, which ultimately is the loss of the society.
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1). HC Bombay (2024.03.01) in Mr. Shiv Charan & Ors Vs. Deputy Director, Directorate of Enforcement & Ors. [Writ Petition (L) No.9943 Of 2023] held that;
Section 60(5) clearly empowers the NCLT to answer the question of whether the statutory immunity under Section 32A has accrued to a corporate debtor. As a consequence, the NCLT is well within its jurisdiction and power to rule that prior attachment of the property of a corporate debtor that is subject matter of an approved resolution plan, must be released, if the jurisdictional facts for purposes of Section 32A exist.
No further act, deed or thing is required to be done, since the immunity fastens itself by operation of law from the point in time at which the resolution plan is approved. Therefore, there is no requirement for any partial quashing of the instruments of enforcement under the PMLA, 2002.
These instruments of enforcement would simply have no effect whatsoever against the corporate debtor to its detriment. The corporate debtor would indeed be obligated to cooperate in the investigation and prosecution that would continue against the other accused. Summary of Conclusions:
Consequently, it is but logical that the property of the corporate debtor would have protection from any continued attachment by reason of Section 32A(2).
As quasi-judicial authorities exercising the powers of civil courts and functioning within the territory of India, the law declared by the Hon’ble Supreme Court would bind the quasi-judicial authorities.
As required under Article 141 of the Constitution of India, such quasi judicial authorities must act consistent with the law declared by the Hon’ble Supreme Court rather than disobey the rule of law to give rise to avoidable litigation.
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2). HC Gujarat (24.08.2023) In AM Mining India Private Limited vs Union of India [R/Special Civil Application No. 808 of 2023] held 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 bar against action against the property, is available, not only to the corporate debtor but also to any person who acquires property of the corporate debtor under the CIRP or the liquidation process.
Sine qua non to arrive at a determination that the assets are proceeds of crime, the foremost requirement is that the author has to have ‘reason to believe’ on the basis of material in his possession. ‘Reason to believe’ cannot arise from mere suspicion, gossip or rumour. Merely because the impugned order records alleged fraudulent transactions and diversion of funds, it cannot automatically lead to a conclusion that the properties acquired by the petitioners are proceeds of crime. In order to arrive at a conclusion that ‘reason to believe’ exists, there must be some material to suggest such formation of opinion.That reason to believe must be founded on sufficient material. It cannot be founded on mere suspicion but based on evidence. It must be held in good faith, cannot be merely a pretense. It is always open for the court to examine whether the reason to believe has a rational connection or a relevant bearing to the formation of the belief and the reasons are not extraneous or irrelevant to the purpose.
The principle of natural justice has twin ingredients; firstly, the person who is likely to be adversely affected by the action of the authorities should be given notice to show cause thereof and granted an opportunity of hearing and secondly, the orders so passed by the authorities should give reason for arriving at any conclusion showing proper application of mind. Violation of either of them could in the given facts and circumstances of the case, vitiate the order itself. Such rule being applicable to the administrative authorities certainly requires that the judgment of the Court should meet with this requirement with higher degree of satisfaction.
The rule requiring reasons to be given in support of an order is, like the principle of audi alteram partem, a basic principle of natural justice which must inform every quasi-judicial process and this rule must be observed in its proper spirit and mere pretence of compliance with it would not satisfy the requirement of law. ..."
Right to reason is an indispensable part of a sound judicial system; reasons at least sufficient to indicate an application of mind to the matter before Court. Another rationale is that the affected party can know why the decision has gone against him. One of the salutary requirements of natural justice is spelling out reasons for the order made; in other words, a speaking-out.
Section 32A of the IBC Act would govern to the extent to which the non-obstante clause enshrined in the IBC would operate and exclude the operation of PMLA.
The protection granted under Section 33(5) and Section 32A(2) of the IBC Act would override the power of the respondent No.1 to attach the properties under the PMLA Act.
Further Section 238 of the Act provides that the provisions of IBC would override anything inconsistent with any other law. Though the PMLA has similar provision under Section 71, the same is subservient to the provisions of IBC Act, since IBC Act was enacted after PMLA Act.
When there are two enactments of non-obstante clauses, like the present one, the enactment which is subsequent in time overrides the other in line with the ratio as laid down in (2008) 8 SCC 148.
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3). High Court of Gujarat (2023.02.23) In Welspun Steel Resources Pvt. Ltd. Vs. Union of India [R/Special Civil Application No. 19387 of 2022 ] held that;
The bar against action against the property, is available, not only to the corporate debtor but also to any person who acquires property of the corporate debtor under the CIRP or the liquidation process. The bar against action against the property of the corporate debtor is also available in the case of a person subject to the same limitation as prescribed in sub-Section (1) and also in sub- Section (2), if he has purchased the property of the corporate debtor in the proceedings for the liquidation of the corporate debtor.
The extinguishment of the criminal liability of the corporate debtor is apparently important to the new management to make a clean break with the past and start on a clean slate.
Therefore, what is clear is that it is only such property which is derived or obtained directly or indirectly as a result of a criminal activity can be regarded as proceeds of crime.
In the facts of the case, obviously apparent it is that the only allegation and the gist that had been discussed is that the corporate debtor used the credit raised from the bank for purposes other than intended purposes to carry out circular transactions with various group companies and making overseas investments.
There is no explanation as to how the properties standing in the name of corporate debtor and which form part of the assets sold to the petitioners are proceeds of crime especially since these assets are neither overseas assets or that of the group companies.
Merely because the impugned order records alleged fraudulent transactions and diversion of funds, it cannot automatically lead to a conclusion that the properties acquired by the petitioners are proceeds of crime.
That reason to believe must be founded on sufficient material. It cannot be founded on mere suspicion but based on evidence. It must be held in good faith, cannot be merely a pretense. It is always open for the court to examine whether the reason to believe has a rational connection or a relevant bearing to the formation of the belief and the reasons are not extraneous or irrelevant to the purpose.
When the assumption of jurisdiction by the authorities itself is non-existent and the respondent proceeds on facts which have no nexus to the objects sought to be achieved, and the opinion is not based on any tangible material, ‘reason to believe’ is a jurisdictional fact and in absence of such ‘reason to believe’ arrived at by the authorities, the bar of alternative remedy cannot oust the jurisdiction of this court.
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4). NCLT Jaipur (2022.12.05) in M/s Packwell (India) Ltd. Vs. M/s Emgee Cables And Communication Ltd. [IA No. 15/JPR/2022 in CP No. (IB)- 601/ND/2018] held that;
Notwithstanding the above, the Legislature chose to structure that provision in a manner that the authorities under the PMLA would cease to have the power to attach or confiscate only when a Resolution Plan had been approved or where a measure towards liquidation had been adopted.
The statutory injunct against the invocation or utilisation of the powers available under the PMLA was thus ordained to come into effect only once the trigger events envisaged under Section 32A came into effect.
The Legislature thus in its wisdom chose to place an embargo upon the continuance of criminal proceedings including action of attachment under the PMLA only once a Resolution Plan were approved or a measure in aid of liquidation had been adopted.
The PMLA would cease to have the power to attach the property at this juncture when the order of the Liquidation has already been passed. Further, the attachment of the properties of the Corporate Debtor under the PMLA has to be lifted in lieu of section 32A of the IBC.
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5). HC Delhi (2022.11.11) in Rajiv Chakraborty RP of EIEL Vs. Directorate of Enforcement [W.P.(C) 9531/2020] held that;
# 105. The introduction of Section 32A constitutes an event of vital import since it embodies a provision which effectively shut out criminal proceedings including those under the PMLA upon the CIRP reaching the defining moment specified therein. However, when the Legislature introduced the said provision, it was conscious and aware of the fact that the provisions of the PMLA could be enforced against the properties of a corporate debtor notwithstanding the pendency of the CIRP. This the Court notes in light of the extent to which Section 14 could be recognised to legally operate under the statutory scheme and as has been explained hereinabove. Notwithstanding the above, the Legislature chose to structure that provision in a manner that the authorities under the PMLA would cease to have the power to attach or confiscate only when a Resolution Plan had been approved or where a measure towards liquidation had been adopted. The statutory injunct against the invocation or utilisation of the powers available under the PMLA was thus ordained to come into effect only once the trigger events envisaged under Section 32A came into effect. The Legislature thus in its wisdom chose to place an embargo upon the continuance of criminal proceedings including action of attachment under the PMLA only once a Resolution Plan were approved or a measure in aid of liquidation had been adopted.
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6). NCLAT (2022.01.03) in Kiran Shah,‘RP’ of KSL and Industries Ltd Vs Enforcement Directorate, Kolkata [Company Appeal (AT)(Insolvency) No.817/2021 ] Held that;
The process of attachment (leading to confiscation) of proceeds of crime under PMLA is in the nature of civil sanction which runs parallel to investigation and criminal action vis-a-vis the offence of money-laundering
The objective of PMLA being distinct from the purpose of RDBA,SARFAESI Act and Insolvency Code, the latter three legislations do not prevail over the former.
An order of attachment under PMLA is not illegal only because a secured creditor has a prior secured interest (charge) in the property, within the meaning of the expressions used in RDBA and SARFAESI Act.
Similarly, mere issuance of an order of attachment under PMLA does not ipso facto render illegal a prior charge or encumbrance of a secured creditor, the claim of the latter for release (or restoration) from PMLA attachment being dependent on its bonafides.”
Thus, we have no hesitation in holding that the NCLT has got no jurisdiction to go into the matters governed under the PMLA.
Adjudicating Authority has no jurisdiction under Section 60(5) and/or 32A(2) of the IB Code or under Rule 11 of the NCLT, to quash and/or set aside the order so passed by a Competent Authority of Enforcement Directorate (ED) under the PMLA.
This Adjudicating Authority is not vested with the power of judicial review over administrative action or is sitting as an Appellate Authority for the order so passed by the Competent Authority.
Further, Section 32A of the IBC does not envisages any rights upon this Adjudicating Authority to interfere in order passed by some Competent Authority. For this purpose, Applicant may approach the Appellate/Higher Authority of the concerned Competent Authority, who has passed the order in question.
‘Tribunal’ makes it candidly clear that filing of Application under Section 60(5) of the I & B Code is not an ‘all pervasive’ one, thereby conferring ‘Jurisdiction’ to an ‘Adjudicating Authority’ (NCLT) to determine ‘any question/issue of priorities’, question of Law or Facts pertaining to the ‘Corporate Debtor’ when in reality in ‘Law’, the ‘Adjudicating Authority’ (NCLT) is not empowered to deal with the matters falling under the purview of another authority under PMLA.
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7). High Court Delhi (2021.12.15) in Nitin Jain Liquidator PSL Limited Vs. ED Through Raju Prasad Mahawar, Assistant Director PMLA [W.P.(C) 3261/2021, CM APPLs. 32220/2021, 41811/2021, 43360/2021, 43380/2021] held that;
Regard must also be had to the fact the cessation of prosecution stands restricted to the corporate debtor and not the individuals in charge of its affairs. The PMLA and its provisions stand steadfast and do not stand diluted in their rigour and application against persons who were in control of the corporate debtor. It was this delicate balance struck by the Legislature which met approval in Manish Kumar. Section 32A in unambiguous terms specifies the approval of the resolution plan in accordance with the procedure laid down in Chapter II as the seminal event for the bar created therein coming into effect.
It must consequently be held that the power to attach as conferred by Section 5 of the PMLA would cease to be exercisable once any one of the measures specified in Regulation 32 of the Liquidation Regulations 2016 comes to be adopted and approved by the Adjudicating Authority.
The power otherwise vested in the respondent under the PMLA to provisionally attach or move against the properties of the corporate debtor would stand foreclosed once the Adjudicating Authority comes to approve the mode selected in the course of liquidation.
The Court thus comes to hold that from the date when the Adjudicating Authority came to approve the sale of the corporate debtor as a going concern, the cessation as contemplated under Section 32A did and would be deemed to have come into effect.
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8). Supreme Court (2021.01.19) Manish Kumar Vs. Union of India & Ors. [Writ Petition (C) No.26 of 2020] held that;
Head Notes; The Insolvency and Bankruptcy Code (Amendment) Act, 2020, among others, inserted three provisos to section 7(1), an additional explanation to section 11, and section 32A in the Insolvency and Bankruptcy Code, 2016 (Code). These provisions were challenged in these writ petitions under Article 32 of the Constitution of India. The Hon’ble Supreme Court, in its 465-page judgment, while upholding these amendments, made important findings and observations, and issued directions as under:
# 257. We are of the clear view that no case whatsoever is made out to seek invalidation of Section 32A. The boundaries of this Court’s jurisdiction are clear. The wisdom of the legislation is not open to judicial review. Having regard to the object of the Code, the experience of the working of the code, the interests of all stakeholders including most importantly the imperative need to attract resolution applicants who would not shy away from offering reasonable and fair value as part of the resolution plan if the legislature thought that immunity be granted to the corporate debtor as also its property, it hardly furnishes a ground for this this Court to interfere. The provision is carefully thought out. It is not as if the wrongdoers are allowed to get away. They remain liable. The extinguishment of the criminal liability of the corporate debtor is apparently important to the new management to make a clean break with the past and start on a clean slate. We must also not overlook the principle that the impugned provision is part of an economic measure. The reverence courts justifiably hold such laws in cannot but be applicable in the instant case as well. The provision deals with reference to offences committed prior to the commencement of the CIRP. With the admission of the application the management of the corporate debtor passes into the hands of the Interim Resolution Professional and thereafter into the hands of the Resolution Professional subject undoubtedly to the control by the Committee of Creditors. As far as protection afforded to the property is concerned there is clearly a rationale behind it. Having regard to the object of the statute we hardly see any manifest arbitrariness in the provision
# 258. It must be remembered that the immunity is premised on various conditions being fulfilled. There must be a resolution plan. It must be approved. There must be a change in the control of the corporate debtor. The new management cannot be the disguised avatar of the old management. It cannot even be the related party of the corporate debtor. The new management cannot be the subject matter of an investigation which has resulted in material showing abetment or conspiracy for the commission of the offence and the report or complaint filed thereto. These ingredients are also insisted upon for claiming exemption of the bar from actions against the property. Significantly every person who was associated with the corporate debtor in any manner and who was directly or indirectly involved in the commission of the offence in terms of the report submitted continues to be liable to be prosecuted and punished for the offence committed by the corporate debtor. The corporate debtor and its property in the context of the scheme of the code constitute a distinct subject matter justifying the special treatment accorded to them. Creation of a criminal offence as also abolishing criminal liability must ordinarily be left to the judgement of the legislature. Erecting a bar against action against the property of the corporate debtor when viewed in the larger context of the objectives sought to be achieved at the forefront of which is maximisation of the value of the assets which again is to be achieved at the earliest point of time cannot become the subject of judicial veto on the ground of violation of Article 14. We would be remiss if we did not remind ourselves that attaining public welfare very often needs delicate balancing of conflicting interests. As to what priority must be accorded to which interest must remain a legislative value judgement and if seemingly the legislature in its pursuit of the greater good appears to jettison the interests of some it cannot unless it strikingly ill squares with some constitutional mandate suffer invalidation.
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9). NCLAT (2020.02.17) in JSW Steel Ltd. Vs. Mahender Kumar Khandelwal & Ors. [Company Appeal (AT) (Insolvency) No. 957 of 2019] deliberated & ordered on the following issues;
Whether after approval of a ‘Resolution Plan’ under Section 31 of the Insolvency and Bankruptcy Code, 2016, is it open to the Directorate of Enforcement to attach the assets of the ‘Corporate Debtor’ on the alleged ground of money laundering by erstwhile Promoters.
Persons/ Authorities empowered to decide whether a ‘Resolution Applicant’ is ineligible being ‘related party’ in terms of Section 29A or not
Distribution of profit during the ‘Corporate Insolvency Resolution Process’.
Distribution of monies to be recovered on account of the Identified Transaction
Interim management of the ‘Corporate Debtor’ until the implementation of the ‘Resolution Plan’.
Can a Successful Resolution Applicant’ be asked to face with undecided claims after the Resolution Plan’ submitted by him and accepted by the ‘Committee of Creditors’
Whether ‘JSW Steel Limited” is to be treated as promoter of ‘Nova Iron Steel’.
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10). High Court Delhi (2019.04.02) in Deputy Director, Directorate of Enforcement Delhi and others V. Axis Bank and others [CRL.A. 143/2018 & Crl.M.A. 2262/2018 ] held that;
An order of attachment under PMLA is not illegal only because a secured creditor has a prior secured interest (charge) in the property, within the meaning of the expressions used in RDBA and SARFAESI Act.
Similarly, mere issuance of an order of attachment under PMLA does not ipso facto render illegal a prior charge or encumbrance of a secured creditor, the claim of the latter for release (or restoration) from PMLA attachment being dependent on its bonafides.
A party in order to be considered as a "bonafide third party claimant" for its claim in a property being subjected to attachment under PMLA to be entertained must show, by cogent evidence, that it had acquired interest in such property lawfully and for adequate consideration,
The party itself not being privy to, or complicit in, the offence of money-laundering, and that it has made all compliances with the existing law including, if so required, by having said security interest registered.
If the order confirming the attachment has attained finality, or if the order of confiscation has been passed, or if the trial of a case under Section 4 PMLA has commenced, the claim of a party asserting to have acted bonafide or having legitimate interest in the nature mentioned above will be inquired into and adjudicated upon only by the special court.
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