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Bombay High Court Clarifies the Interplay between IBC and PMLA in Asset Release Post CIRP

Introduction

In a landmark ruling, the Hon’ble Bombay High Court (‘HC’) addressed a pivotal issue concerning the interplay between the Insolvency and Bankruptcy Code, 2016 (‘IBC’), and the Prevention of Money Laundering Act, 2002 (‘PMLA’), through the combined consideration of two writ petitions[i]. This case, Shiv Charan v. Adjudicating Authority under the PMLA,[ii] centred around the release of assets previously attached under the PMLA post-approval of a resolution plan under the IBC. This confrontation sets a significant precedent in the resolution process of companies entangled in both financial and criminal complexities.

Brief Facts

  • DSK Southern Projects Private Limited, the Corporate Debtor (‘CD’) undergoing a corporate insolvency resolution process (‘CIRP’) since 09.12.2021. Before the commencement of CIRP, multiple first information reports (‘FIRs’) had been filed against the CD alleging offences including cheating and criminal breach of trust. The Directorate of Enforcement (‘ED’) filed an enforcement case information report (‘ECIR’) under PMLA, estimating the proceeds of crime (‘POC’) to be around Rs. 8,522.27 crores. Resultantly, various assets of the CD were attached including 4 bank accounts and 14 flats, both before and after the commencement of CIRP.

  • During the resolution process, a significant event occurred as Mr. Shiv Charan and associates (‘Resolution Applicants’) submitted a resolution plan (‘Plan’), which subsequently received approval from the National Company Law Tribunal, Mumbai Bench (‘NCLT’).

  • Post-approval of the Plan, a legal issue surfaced regarding the continued attachment of the CD’s assets under the PMLA, despite the Plan’s acceptance under the IBC. This situation led to a dispute challenging the application and implications of s. 32A of the IBC with respect to the previously legally embroiled assets under the PMLA. Subsequently, the NCLT passed orders directing the ED to release the attached properties of the CD by placing reliance on s. 32A of the IBC.

  • While the Resolution Applicants moved the HC to quash the ECIR, attachment orders and the original complaint related to the CD and its assets, the ED moved the HC challenging the NCLT’s authority to pass orders invoking s. 32A of the IBC. Hence, the core issue before the HC was whether the NCLT had jurisdiction to direct the release of attached properties under s. 32A of the IBC.

Held

  • The HC allowed the petitions and directed the release of the attached assets under the PMLA, thereby highlighting s. 32A of the IBC to be a non-obstante clause that prioritizes the objectives of the IBC by ensuring that the liability of a CD for offences committed prior to the commencement of CIRP ceases with the approval of the resolution plan.

  • The HC upheld the interpretation and application of s. 32A of the IBC by the NCLT and confirmed that the NCLT does hold the necessary authority under the IBC to direct the release of assets previously attached under the PMLA. It was also noted by the HC that the NCLT order approving the Plan remained unchallenged by the ED and was also correct in requiring the release of the attached properties.

  • This judgment cited various legal precedents and principles, including the landmark judgment in Manish Kumar v. Union of India[iii], elucidating the judicial reasoning and legislative intent underpinning s. 32A of the IBC. The HC also drew attention to s. 60(5) of the IBC, which clearly states that the NCLT has the jurisdiction to entertain and dispose of any question of facts or law pertaining to the CIRP of the CD. The HC emphasized that s. 32A of the IBC aims to ensure that once a Plan is approved, the CD should be freed from past offences and liabilities, enabling a fresh start. It was held that the NCLT’s interpretation of s. 32A of the IBC did not render nugatory to the provisions of the PMLA or its legislative objectives.

  • The HC clarified that, alongside granting authority to the NCLT, s. 32A of the IBC implicitly requires agencies like the ED to comply with the provisions of the IBC. It was clarified that quasi-judicial authorities such as the NCLT and Adjudicating Authority under the PMLA have distinct roles and must comply with the law declared by the Hon’ble Supreme Court.

Our Analysis

This HC ruling brings significant clarity to handling the CD resolutions entangled in PMLA-related challenges. Affirming the NCLT’s authority, the judgment highlights the integral role of s. 32A of the IBC, ensuring that insolvency resolutions proceed efficiently without being derailed by external legal disputes. The decision advocates for a holistic resolution approach while upholding the IBC’s objectives and fostering a synergistic interpretation with the PMLA to protect stakeholder interests.

The HC’s balanced perspective reconciles the need to address economic crimes with the imperative of facilitating corporate recoveries, crucial for sustaining economic vitality. Establishing a precedent, this ruling guides professionals through the nuanced interplay of insolvency proceedings and criminal law, highlighting the judiciary’s role in maintaining the integrity of both domains for justice and economic resurgence.

In cases where one statute is pitted against another, it is common for Courts to adopt the harmonious construction approach, whereby the conflict between the acts is resolved, and provisions of both acts are implemented. This was one such case where the HC interpreted and reconciled the conflict between the provisions of the IBA and the PMLA. This approach warrants the provisions to be construed in a manner that prevents one from overriding the other. Rather, the provisions of each act should be harmoniously interpreted to avoid conflicting effects.




End Notes

[i] Writ Petition (L) No. 9943 of 2023, dated 09.01.2024 and Writ Petition No. 29111 of 2023.

[ii] 2024 SCC OnLine Bom 701

[iii] (2021) 5 SCC 1






Please find below the write-ups on where the IBC overrides other laws:






Authored by Srishty Jaura & Preethi Suresh, Associates at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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