On March 1, 2024, the High Court of Bombay (“Bombay High Court”) pronounced a judgment in the matter of Mr. Shiv Charan and Others v. Adjudicating Authority under the Prevention of Money Laundering Act, 2002 and Another [Writ Petition (L) No. 9943 of 2023] and Directorate of Enforcement, Government of India v. Mr. Shiv Charan and Others [Writ Petition (L) No. 29111 of 2023]. The Bombay High Court has held that the Adjudicating Authority under the Insolvency and Bankruptcy Code, 2016 (“IBC”) is well within its jurisdiction in directing the Directorate of Enforcement (“ED”) to release the attached properties of a corporate debtor.

Facts

DSK Southern Projects Private Limited (“Corporate Debtor”) had been undergoing corporate insolvency resolution process (“CIRP”) under IBC since December 9, 2021. A resolution plan submitted by Mr. Shiv Charan, Ms. Pushpalata Bai and Ms. Bharti Agarwal (“Resolution Applicants”) was approved by the National Company Law Tribunal, Mumbai (“NCLT”) by its order dated February 17, 2023 under Section 31 (Approval of resolution plan) of IBC (“Approval Order”).

Prior to the commencement of CIRP of the Corporate Debtor, on October 20, 2017, various first information reports were filed against the Corporate Debtor and its erstwhile promoters, inter alia, alleging offences of cheating and criminal breach of trust. Considering that the alleged offences were prima facie “scheduled offences” under the Prevention of Money Laundering Act, 2002 (“PMLA”), the ED filed an enforcement case information report being ECIR/01/MZBO-II/2018 dated March 8, 2018 (“ECIR”). As per the ECIR, the estimated “proceeds of crime” was to the tune of INR 8,522.27 Crores. Pursuant thereto, an original complaint was filed by the ED, inter alia, leading to attachment proceedings against the assets of the Corporate Debtor. More particularly, four bank accounts of the Corporate Debtor with an aggregate balance of INR 3,55,298/- and 14 flats constructed by the Corporate Debtor valued at INR 32,47,55,298/- were attached (“Attached Properties”).

Initially, a provisional attachment was levied on February 14, 2019 under Section 5 (Attachment of property involved in money-laundering) of PMLA, which was subsequently continued by a confirmatory order dated August 5, 2019 passed by the Adjudicating Authority. The attachment continued even after the commencement of CIRP of the Corporate Debtor and further after the approval of resolution plan. Such continuation of attachment even after the approval of resolution plan led to filing of Writ Petition (L) No. 9943 of 2023 by the Resolution Applicants. The writ petition sought quashing of the ECIR, orders attaching the Attached Properties and the original complaint, in so far as they related to the Corporate Debtor and its assets, especially in light of the Approval Order. Simultaneously, the ED filed Writ Petition (L) No. 29111 of 2023, thereby challenging the authority of NCLT to pass orders invoking Section 32A (Liability for prior offences, etc.) of IBC in a manner which, as per the ED, negates and defeats the purpose and provisions of PMLA. Notably, the ED had not sought quashing of the Approval Order, but had sought quashing of a subsequent order dated April 28, 2023 whereby NCLT had once again directed the ED to release the Attached Properties.

Issues

• Whether Adjudicating Authority has the jurisdiction to direct the ED to release the properties attached under PMLA by invoking Section 32A of IBC.
• Whether Adjudicating Authority had exceeded its jurisdiction under Section 60(5 (Adjudicating Authority for corporate persons) of IBC by traversing beyond the domain of IBC and entering upon the domain of PMLA.

Arguments

Contentions of the ED:

The ED submitted that Resolution Applicants had other efficacious remedies available to them apart from invoking the writ jurisdiction of Bombay High Court and they ought not to have filed a writ petition. On the other hand, the ED did not have any other alternative remedy and therefore the writ petition filed by the ED is maintainable. The ED further contended that the Resolution Applicants had filed the application seeking release of Attached Properties, prior to the Approval Order, which was allowed by the NCLT on April 28, 2023. Further, it was contended that the Resolution Applicants have been misusing the writ jurisdiction of Bombay High Court as an execution court.

The ED submitted that Section 32A of IBC cannot be interpreted in a manner that defeats the special objectives behind enactment of PMLA and curtails the power of the ED to keep the properties attached under PMLA. Further, NCLT has no jurisdiction under Section 60(5) of IBC to transcend beyond the interpretation of the provisions of IBC and must refrain from venturing into other legislations.

The ED further contended that even prior to commencement of CIRP of Corporate Debtor, a provisional attachment on the assets of the Corporate Debtor was levied on February 14, 2019 under Section 5 of PMLA, which subsequently continued by a confirmatory order dated August 5, 2019 passed by the Adjudicating Authority under Section 8 of PMLA. Hence, it was in public knowledge that the Attached Properties were subject matter of attachment by the ED. As such, any person aggrieved by the aforesaid attachment had a statutory right to prefer appeal under Section 26(1) (Appeal to Appellate Tribunal) of PMLA and hence, efficacious remedy was already available under PMLA.

Contentions of the Resolution Applicants:

Resolution Applicants contended that Section 32A of IBC, being a non-obstante provision, would override the provisions of PMLA in the event of any inconsistency or conflict. It was further submitted that since the commencement of CIRP, the protection of moratorium will be triggered by virtue of Section 14 (Moratorium) of IBC. Thereafter, upon approval of resolution plan by Adjudicating Authority, jurisdiction of Section 32A of IBC would commence, as per which, no attachment can lie or continue against the property of the Corporate Debtor in relation to an offence committed prior to the commencement of CIRP of the Corporate Debtor, where such property is covered under a resolution plan approved by the Adjudicating Authority under Section 31 of IBC.

It was further contended that by virtue of Section 32A of IBC, there must be automatic vacation of attachment (if any) on the assets of the Corporate Debtor immediately after approval of resolution plan by NCLT, instead of the Resolution Applicants being compelled to knock on the doors of any forum to seek any positive grant of approval.

Resolution Applicants further contended that under the scheme of PMLA, any attachment can only be in the nature of interim measure that would enable the final measure of confiscation as provided under Section 8(5) of PMLA. However, by virtue of Section 32A of IBC, since the ultimate end of confiscation is protected, it is only natural and equitable that the interim measure of attachment must come to an end pursuant to approval of resolution plan.

Observations of the Bombay High Court

Bombay High Court examined the interpretation of Section 32A of IBC and observed that it is a non-obstante provision which comes into play only once a resolution plan is approved and such plan approval leads to a complete change in the character of ownership and control of the corporate debtor. Section 32A(1) of IBC provides that the liability of corporate debtor in respect of an offense committed prior to commencement of CIRP shall stand ceased, however not in a blanket or absolute manner, but subject change in management and control of the corporate debtor. It was further observed that even when the necessary ingredients of Section 32A(1) of IBC are met, it enables an automatic discharge qua the corporate debtor only and not qua any other person who was in management or control or was in any manner, in charge of, or responsible to, the corporate debtor for conduct of its business, or was associated with the corporate debtor in any manner, and directly or indirectly involved in the commission of the offense being prosecuted. Such others who are charged for the offense would continue to remain liable to prosecution. Further, Section 32A(2) of IBC also grants protection to the property of the corporate debtor from any attachment or restraint in the proceedings connected to the offense committed prior to commencement of CIRP. It provides that upon approval of resolution plan and a change in control and management, the property of the corporate debtor would get immunity from further prosecution of proceedings, which includes attachment, seizure, retention or confiscation of such property.

It was further observed that in the present case, NCLT had approved the resolution plan submitted by the Resolution Applicants in respect of the Corporate Debtor. Further, none of the Resolution Applicants were in charge of the Corporate Debtor or responsible for commission of alleged offence prior to the commencement of CIRP. Further, it was also not the case of the ED that Resolution Applicants were third parties who had aided or abetted the commission of alleged offences. In fact, the ED disputes the power of NCLT to rule upon the interpretation of Section 32A of IBC.

Further, Bombay High Court analyzed Section 31 of IBC and observed that proviso to Section 31(1) of IBC provides that the Adjudicating Authority shall, before passing an order for approval of resolution plan under this sub-section, satisfy that the resolution plan has provisions for its effective implementation. Therefore, keeping in mind the aforesaid provision, NCLT is entitled to direct the ED to raise its attachment on the Attached Properties by virtue of Section 32A of IBC once resolution plan is approved. Hence, Bombay High Court dismissed the contention of the ED raising questions on the power of NCLT to direct the ED to raise its attachment on the Attached Properties after resolution plan approval.

In so far as jurisdiction of NCLT under Section 60(5) of IBC is concerned, Bombay High Court observed that it is a non-obstante provision and confers NCLT with wide jurisdiction and power to dispose of any question of law in relation to the resolution proceeding pertaining to a corporate debtor under the provisions of IBC. Therefore, in the present case, NCLT was entitled in terms of Section 60(5) of IBC to decide the issue pertaining to release of Attached Properties as envisaged under Section 32A of IBC. Further, Bombay High Court observed that both Sections 32A and 60(5) of IBC are non- obstante provisions which operate notwithstanding anything contained in any other law, including PMLA. Further, it is not as if NCLT had transcended its boundaries and ventured into interpreting any provision of PMLA. On the contrary, NCLT has passed necessary orders to ensure compliance of Section 32A of IBC.

It was further observed that the jurisdiction of Section 32A of IBC commences when the protection of moratorium under Section 14 of IBC during CIRP ends, considering that the jurisdiction of Section 32A of IBC would not get attracted until resolution plan approval by NCLT. Bombay High Court observed that quasi-judicial authorities such as Adjudicating Authority under PMLA must take judicial notice of approval of resolution plan and therefore raise attachment in due compliance of Section 32A of IBC.

Bombay High Court further observed that Parliament while legislating Section 32A of IBC was fully aware of the provisions of PMLA and the legislative intent behind such enactment was that post approval of resolution plan of a corporate debtor by Adjudicating Authority under IBC, PMLA authority must raise attachment on the properties of the corporate debtor. Section 32A of IBC was introduced with effect from December 28, 2019 and the legislative intent was clear to give primacy to the provisions of IBC.

Decision of the Bombay High Court

In light of the above-mentioned observations, it was held that in the present case NCLT has the
jurisdiction to direct the ED to release the Attached Properties. Further, NCLT is well within its jurisdiction to pass such an order under Section 60(5) of IBC to ensure compliance of Section 32A of IBC. It was held that upon approval of resolution plan by NCLT, the Attached Properties became free from attachment under PMLA by virtue of Section 32A of IBC. Further, the jurisdiction or effect of Section 32A of IBC commences only upon approval of resolution plan under the provisions of IBC.

Therefore, the Bombay High Court directed the ED to release the attachment in view of the approval of resolution plan. The Bombay High Court ruled that the attachment of Attached Properties by the ED came to an end in law on February 17, 2023, that is, the date of approval of resolution plan, by virtue of operation of Section 32A of IBC.

Accordingly, Bombay High Court was pleased to dispose of both the writ petitions.

VA View:

Since the enactment of IBC, there have been multiple occasions and various conflicting judgments dealing with the question of primacy between the provisions of IBC and PMLA, in the event of inconsistency. However, the present judgment pronounced by the Bombay High Court is landmark and noteworthy in the sense that it explains and establishes the correct position of law in a clear and comprehensive manner.

Apart from giving a clear ruling which will go a long way in ensuring that similar questions are not put before the courts in future, this judgment explains in a lucid manner, the legislative intent behind enactment of Section 32A of IBC, which will stand defeated if a corporate debtor is not allowed to be taken over by a resolution applicant on a clean slate basis.

Therefore, this judicial pronouncement is a welcome step that will set the right precedent for quasi-judicial authorities such as the ED to automatically release attachment on the attached properties of a corporate debtor upon approval of resolution plan by virtue of operation of law, more specifically, Section 32A of IBC.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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