PMLA not subservient to IBC; ED's power to attach properties not affected by Section 14 IBC moratorium: Delhi High Court

The Delhi High Court has held that the Enforcement Directorate’s (ED) power to attach properties under the Prevention of Money Laundering Act (PMLA) will not be affected by the moratorium which comes into effect in terms of Section 14 of the Insolvency and Bankruptcy Code (IBC) [Rajiv Chakraborty Resolution Professional of EIEL v Directorate of Enforcement]..Single-judge Justice Yashwant Varma said that the provisions of PMLA are not subservient to the moratorium provision in Section 14 of the IBC.He said that while both the statutes are special statutes in the generic sense, they both seek to subserve independent and separate legislative objectives and the subject matter and focus of the two legislations are clearly distinct..The Court said that the extent to which PMLA was intended to capitulate to the IBC is an issue which must be answered based on Section 32A of the IBC..After examining the said provision, the judge held that 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 has been approved or where a measure towards liquidation 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 Court said. .Justice Varma had come to the same conclusion while dealing with Nitin Jain Liquidator PSL Limited v Enforcement Directorate.In that judgment too, the judge had held that ED's power to attach assets under the PMLA would cease to be exercisable once the liquidation process under the IBC is set in motion. .Background.The court was dealing with a petition filed by the resolution professional of Era Infra Engineering Limited challenging the validity of ED’s Provisional Attachment Orders and their confirmation by the Adjudicating Authority.It was argued that once the moratorium under Section 14 of the IBC came into effect, the ED stood denuded of jurisdiction to exercise powers under the PMLA..After considering the arguments, the court came to the conclusion that the power to attach under PMLA would not fall within the ken of Section 14(1)(a) of the IBC..However, in its 124-page judgment, the Court has also dealt with various other aspects related to the PMLA and the IBC. .The impact of moratorium.The Court said that the primordial purpose of a moratorium is clearly distinct from the purpose and objectives of attachment action taken under the PMLA.It observed that the moratorium provision incorporated in the IBC is fundamentally aimed at maximisation of value, preservation of the assets of the debtor while possibilities of its resurrection are explored and ensuring that its various creditors do not initiate individual actions which may hamper or impede the resolution process. It is essentially aimed at preserving the insolvency estate and the suspension of actions against the debtor, the Court said. “The moratorium order staves off actions that may be initiated for enforcing security interests, claims by individual creditors, a restraint against the dissipation of its assets while the process of its restructuring is explored. It essentially seeks to sequester the assets of the debtor from actions which may be initiated by its creditors. It is during this crucial period that the viability of the debtor is assessed during the CIRP,” the judgment stated..Justice Varma held that the assets which may have been obtained by the commission of a scheduled offense thus cannot be accorded exemption or immunity from the rigours of the PMLA and that acceptance of such a contention would not only run contrary to the legislative policy but also undermine the efforts of the legislature to combat the offense of money laundering.“In fact if Section 14 were to be interpreted in the manner as suggested by the petitioner, it would deprive the authorities charged with implementing the provisions of the PMLA of an essential weapon in their quest to confiscate proceeds of crime.”.Attachment not a debt recovery action .The judgment said that the government, while proceeding to act under the PMLA cannot be considered as acting as a creditor who seeks to enforce a debt.“It would be relevant to note that when the ED moves to provisionally attach properties which constitute proceeds of crime, it does not do so acting as a creditor. The steps that are taken under the aforesaid provisions are aimed at principally attaching properties which have been determined as representing proceeds of crime and thus placing a fetter on the right of the holder thereof to deal with or fritter away the same. It essentially seeks to strip the perpetrator of the right to enjoy the same during the pendency of proceedings under the PMLA,” the Court ruled..Attachment by ED and its effects.The court said that the attachment by ED is aimed at preventing private alienations and that it does not confer a title on the authority which has taken that step.The attachment only enables the authorities under the PMLA to restrain any further transactions with respect to the property till such time as a trial with respect to the commission of an offence of money laundering comes to an end, the Court said.“Attachment under the PMLA does not result in an extinguishment or effacement of property rights. It is essentially a fetter placed upon the possessor of that property to deal with the same till such time as proceedings under the aforesaid enactment come to a definitive conclusion on the question of confiscation,” the judgment stated.It added,“In any case, since the act of attachment does not result in the effacement of rights in property, it would clearly stand and survive outside the scope of a moratorium or an action relating to an action in respect of a debt due or payable.”.Third Party safeguards.The Court held that merely because a particular property may have come to be provisionally attached under the PMLA, that does not confer on the enforcing authority under the aforesaid enactment, a superior or overarching interest either in the property or the proceeds that may ultimately be obtained upon its disposal.Justice Varma said that apart from the provision of an appeal that may be taken against the order passed by the Adjudicating Authority, the aggrieved party is also granted a right to seek release of property even after it may have been confiscated in favour of the Central government.“The statutes provide adequate means and avenues for redressal of claims and grievances. It could be open to a Resolution Professional to approach the competent authorities under the PMLA for such reliefs in respect of tainted properties as may be legally permissible. Similarly, and as was explained by Axis Bank, a PAO made by the ED under the PMLA does not invest in that authority a superior or overriding right in property.”Ultimately the claims of parties over the property that may be attached and the question of distribution and priorities would have to be settled independently and in accordance with law, the Court added..Senior Advocate Abhinav Vashisht and advocate Shivank Diddi appeared for the petitioner.ED was represented through its standing counsel Zoheb Hossain and advocates Vivek Gurnani and Kavish Garach..[Read Judgment]