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Supreme Court to decide whether PMLA overrides IBC?

The Supreme Court of India (SC) is anticipated to decide in the coming days whether the Prevention of Money Laundering Act, 2002 (PMLA) overrides the Insolvency and Bankruptcy Code, 2016 (IBC). It is also expected the Apex Court will direct on whether the moratorium applies to action initiated by the Enforcement Directorate (ED).

An Appeal was filed in the matter of Ashok Kumar Sarawagi v. the ED, REED 2022 SC 11560, the Supreme Court issued notices on 1 November 2022 to all parties and the case will be taken up for admission on 21 November 2022.

Learned Senior Advocate appearing for the petitioner submitted that the order presently under challenge has relied upon two previous orders passed by NCLAT--(i) Varrasana Ispat Limited v. Deputy Director of Enforcement, REED 2019 NCLAT Del 05510 and (ii) Kiran Shah vs. Enforcement Directorate, REED 2022 NCLAT Del 01502.

The Learned Counsel also invited the court's attention to the orders passed by the NCLAT in both matters. In the judgment dated 02.05.2019, REED 2019 NCLAT Del 05510, in the first matter the judgment made it clear that the order of attachment made by the Deputy Director, Directorate of Enforcement was much prior to the initiation of the CIRP.

Similarly, in the case of Kiran Shah v. Enforcement Directorate, REED 2022 NCLAT Del 01502, the concerned provisional attachment order dated 08.05.2019 was prior in point of time before the admission of application on 06.09.2019. Learned counsel submitted that the facts in the instant case were completely distinguishable. In the instant case, the provisional attachment order was passed after the initiation of proceedings under the Insolvency and Bankruptcy Code, 2016.

Supreme Court issued notices to all parties and the case will be taken up for admission on 21 November 2022 tentatively.

It was accepted that the IBC overrides any other laws since the objective of the Code is to let new promoters take over a distressed firm and start afresh. In several insolvency cases, there are allegations of fraud against erstwhile promoters. During the corporate insolvency resolution process (CIRP), the assets are taken over by the lender and sold to the highest bidder. The whole process may face uncertainties if authorities attach the assets or if there is a future possibility of such an event happening.

The Insolvency and Bankruptcy Code, 2016 (IBC) currently has a special section 32A, which prohibits authorities and regulators from taking any action against the property of a corporate debtor covered in the resolution plan for an offence committed prior to insolvency proceedings. For instance, in case promoters of a company put under IBC by its lenders have committed any fraud or crime before the CIRP, the law says that the regulators cannot attach any properties claimed by the banks.

If the Prevention of Money Laundering Act, 2002 (PMLA) overrides the Insolvency and Bankruptcy Code, 2016, it could defeat the purpose of IBC, i.e., timely resolution of the distressed corporate debtor. An attachment under the PMLA will impact the corporate insolvency and resolution process since it will discourage resolution applicants and present significant challenges for valuation. Section 32A of IBC clearly provides protection to the Corporate Debtors and their assets from being subject to any penal laws.

The Apex Court would certainly clarify the position of the two statutes. Till now, it was broadly agreed that the provisions of the IBC override all the other regulatory laws. But in the past few months, decisions by various courts including the Delhi High Court, PMLA Adjudication Tribunal and the National Company Law Appellate Tribunal (NCLAT) suggest that the PMLA overrides the IBC. Read Order


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