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Insolvency & Bankruptcy Code, 2016 (IBC) and Prevention of Money Laundering Act, 2002 (PMLA)

The Insolvency and Bankruptcy Code (Amendment) Act, 2020 inserted Section 32-A in IBC

Under Section 32-A, the liability of the Corporate Debtor for offences committed by a corporate debtor involving its property, and proceedings commenced therefrom, will cease from the date a resolution plan is approved by the NCLT.

The immunity is available only when the approved resolution plan mandates a change in the management or control of the corporate debtor Therefore, this amendment among others, provides immunity to the newly inserted Directors from all Offences committed by the Directors of the Corporate Debtor prior to the commencement or during the CIRP owing to certain conditions provided in the section.
However, PMLA, 2002 provide for,

• Authorizing certain officers of the Directorate of Enforcement to conduct investigations in cases which involve offence of money laundering and also to attach whatever property is involved in money laundering.
• Envisages establishment of an Adjudicating Authority to hold jurisdiction, power and authority conferred by it specially to confirm attachment or order confiscation of involved properties.

IBC Vs. PMLA – Genesis & Status Quo

Section 32-A very rightly protects the assets of the company undergoing insolvency in the course of its revival.

 In Bhushan Power and Steel[1], the NCLAT held that IBC will override PMLA to a limited extent involving the assets of the Corporate Debtor. Further, the Appellate Tribunal by analysing held that the attachment of assets of the Corporate Debtor by the Enforcement Directorate as illegal and without Jurisdiction but the confusion regarding overriding effect of laws remained.

A significant part of this issue was finally rendered clarity upon in the recent judgment dated 19.01.2021 of Manish Kumar Vs. Union of India & Anr.[2] The findings are as follows:

• The “provision is born out of experience”. The resolution applicants are reticent in putting up a Resolution Plan, and even if its forthcoming, it is not fair to the interest of the corporate debtor and the other stake holders.
• The Creation of Criminal offence, abolishment of liability must be left to the Judgement of legislature. A legislature cannot be invalidated just because of conflict of interest unless it is ultra vires to the constitution.
• It was concluded that the section cannot be impugned on the ground of violation of Article 19, 21 or 300A.
• The immunity is not just randomly being provided, but only in strict compliance with the law as laid down in 32-A by fulfilling requisites.

CONCLUSION:

The provisions of section 32-A of IBC, 2016 is based on the imperative need to attract resolution to applicants. The Hon’ble Court very well reiterated on the fact that the wrongdoers will not get away and will be completely liable but observed that in order to give the new management a clean break with the past and start on afresh, 32-A is necessary.

Moreover, the authorities will be well within their right to exercise their discretion to initiate any actions against such persons under PMLA has been clarified by the Hon’ble Supreme Court. As, proceedings against a Corporate Debtor over money-laundering charges would end once a resolution plan is approved but continue against wrongdoers in the erstwhile management. Thus, helping resolve the existing conundrum.

Abhinav Shrivastava is Co-Founding Partner of GSL Chambers and an Advocate on Record of Supreme Court of India. Nirmal Prasad is an Associate with GSL Chambers.

[1] (2020) SCC OnLine NCLAT 104

[2] WP(Civil) No. 26 of 2020