In a recent decision, the Bombay High Court was faced with an interesting question – whether the National Company Law Tribunal (NCLT), under the Insolvency and Bankruptcy Code, had powers to direct the Enforcement Directorate (ED) to release assets seized under the Prevention of Money Laundering Act, 2002 (PMLA).

The matter pertained to the insolvency resolution of DSK Southern Projects (corporate debtor). A few years prior to the commencement of the insolvency proceedings, the assets of DSK had been attached by ED, under PMLA. The attachment of DSK’s assets continued long after the commencement of the insolvency proceedings and even after the approval of the resolution plan.

It is the continuation of such attachment which became the heart of the dispute before the High Court, and writ petitions came to be filed in this regard.

The petitioner and successful resolution applicant who challenged the continuance of the attachment placed reliance on Section 32A of the IBC, which provides for immunity to the corporate debtor and its assets, upon the approval of a resolution plan provided the conditions stipulated in the provision were met. As per the petitioner, Section 32A, being a non-obstante provision, would override the provisions of PMLA should a conflict arise.

The ED argued that the continuance of attachment on two counts. (a) The attachment of assets happened prior to the insolvency proceedings. Hence, anyone aggrieved by the attachment could file an appeal under Section 26(1) of PMLA. (b) Section 32A of IBC could not be interpreted in a manner that nullified the special objectives for which the PMLA was enacted. The ED argued that Section 32A of IBC could not be stretched to curtail ED’s powers to keep properties attached under PMLA after the approval of the resolution plan.

The High Court felt that Section 32A could be attracted only if specific prerequisites were met. The immunity under Section 32A was available only when a resolution plan is approved, resulting in a change in the character of ownership and control of the corporate debtor. In such a case, the corporate debtor’s liability for an offence committed before the beginning of the insolvency proceedings ceases. The liability of individuals of the previous management of the corporate debtor would continue.

The HC observed that Section 32A(2) also protected the property of the corporate debtor from attachment linked to offences committed prior to the initiation of insolvency proceedings. The provision clearly stated that immunity would also be available in relation to attachment, seizure, retention, or confiscation of assets. Thus, as per the High Court, once the resolution plan was approved with the conditions set out in Section 32A being met, further prosecution of the corporate debtor and its properties would cease.

On the ED’s argument that the NCLT could not travers into PMLA, the Court said that NCLT directed the release of the attached assets of DSK—the ED had no other option but to obey the rule of law. The HC cited the decision of the Supreme Court in Manish Kumar vs Union of India, which discussed the tussle between the provisions of IBC and PMLA.

In Manish Kumar, the Supreme Court opined that Section 32A was a carefully thought-out provision. It was not as if the wrongdoers were permitted to get away with their crimes. It was only the corporate debtor whose criminal liability was extinguished to enable it to have a fresh start on a clean slate post-revival upon successful completion of insolvency proceedings.

Upon reiterating the legal position in Manish Kumar, the Bombay High Court found no infirmity in the directions passed by NCLT to ED, directing the money-laundering watchdog to release the assets of the corporate debtor.

The decision of the High Court further strengthens the legal position that NCLT is empowered to call for the release of assets of the corporate debtor if the conditions set out under Section 32A of the IBC are fulfilled. The object of the provision is to incentivise successful insolvency resolution where new management takes over the commercially ailing company and takes hold of its day-to-day affairs and assets to make the corporate debtor stand back on its legs.

(The authors are advocates at Trinity Chambers, Delhi)

Published on April 7, 2024