Harmonizing IBC and money laundering laws

The interplay between the Insolvency and Bankruptcy Code, 2016 (IBC), and the Prevention of Money Laundering Act, 2002 (PMLA), has been the subject of much debate. In light of multiple conflicting decisions of various forums, and to address concerns of secured financial creditors and incoming resolution applicants, the Insolvency and Bankruptcy Code (Second Amendment) Ordinance, 2019 (ordinance), has been promulgated. To what extent the ordinance harmonizes the consequences arising out of these legislations requires examination.

First, independent of the ordinance, what are the rights of secured creditors with respect to assets that, 1) are the subject of attachment proceedings, 2) have been attached; and 3) have been confiscated? Conversely, what are the rights of the state with respect to the assets of a corporate debtor (CD) that have been charged?

In the first case, the majority of decisions state that attachment proceedings are not subject to moratorium under section 14 of the IBC, i.e. they can continue after the insolvency commencement date (ICD) and the conclusion of the corporate insolvency resolution process (CIRP) period and the assets may be attached/confiscated accordingly. A resolution pursuant to a CIRP does not cleanse a tainted asset.

In the second case, charges created are not automatically voided upon attachment. Section 9 of the PMLA provides that charges may be declared void if they are created for the purpose of defeating the provisions of the PMLA. It follows that attachments shall be subject to charges created, unless declared void. In such cases, state action would be restricted to parts the assets whose value exceeds the charge of the creditor.

Once an order of confiscation is passed, as per section 9 of the PMLA, all rights to the assets vest with the state, free from all encumbrances. However, section 8 (8) of the PMLA provides that a claimant with a legitimate interest, acting in good faith and diligently, suffering a quantifiable loss as a result of money laundering (himself not being involved) may seek restoration of assets charged to him.

Creditors, therefore, cannot use proceeds of crime to seek discharge of their debt since the assets are not lawfully the CD’s for them to claim it. Proceeds of crime are not dues owed to the state. The state is not a creditor in such cases and is not competing with creditors for amounts due. The ordinance introduces a new provision, section 32A, which provides that no action shall be taken against the property of the CD in relation to an offence committed prior to the commencement of the CIRP, where such property is covered under a resolution plan approved by the National Company Law Tribunal (NCLT).

The ordinance, however, does not address the question as to what assets can be included in the resolution plan. If assets are attached or confiscated prior to the ICD, can they be included in the resolution plan?

The explanation to section 32A(2) provides that an action against the property of the CD in relation to an offence includes the attachment, seizure, retention or confiscation of such property. If action has already been taken prior to the approval of the resolution plan by the NCLT, section 32A will not apply. Property that is already attached/confiscated prior to the ICD cannot be part of the resolution plan. A creditor may seek the release of attachment or restoration of the confiscated property after the ICD and before the approval of the plan. If successful, the property can then be part of the resolution plan.

Since action cannot be taken after the resolution plan has been approved by the NCLT, two questions need to be answered, 1) can proceedings under the PMLA continue, and 2) can orders of attachment/confiscation be passed during the CIRP, but before the approval of the resolution plan. If yes, the purpose of section 32A may be frustrated as the authorities under the PMLA can simply expedite the proceedings and pass orders before the plan is approved. A practical challenge that arises from such an interpretation is that a resolution plan as negotiated or submitted to the NCLT may include assets that may be attached before the order of approval. This may result in the commercial failure of the resolution plan or require modification, or interfere with the timelines for CIRP completion, and lead to liquidation. The moratorium should apply to proceedings under the PMLA.

Since the government has control over PMLA enforcement, it must ensure that a going concern under an untainted new management is allowed to function in the interest of its stakeholders. Therefore, rather than merely amending the law, the government should ensure that its departments
act together.

Ashwin Mathew is a partner and Gopal Machiraju is a senior associate at Lakshmikumaran & Sridharan.