SC urges govt to resolve PMLA vs IBC deadlock
If the Enforcement Directorate (ED) attaches properties purchased under the insolvency process for financial crimes of the previous owner, it would frustrate the objective of the Insolvency and Bankruptcy Code (IBC), the Supreme Court observed on Tuesday, asking the central government to quickly resolve the conundrum.
“This is worrying... objective of the IBC will be frustrated,” remarked a bench headed by Chief Justice of India NV Ramana.
Why should the ED be allowed to attach properties that are bought by a new purchaser in an auction lawfully conducted under the IBC, the bench asked solicitor general Tushar Mehta.
The bench, which also comprised justices Krishna Murari and Hima Kohli, pointed out that nobody would be interested to buy assets under the insolvency process if the central agency can attach such properties under the money laundering law on account of illegalities committed by previous owners. “Suppose a property was purchased using tainted money and it is put up for auction. It
would have been a different scenario if the previous entity (corporate debtor or promoter) sold it privately, but that is not the case. There is an auction approved by you under IBC. How can ED then attach such properties?” it asked Mehta, who appeared for the Centre and the ED in the matter.
At this point, Mehta disclosed there was a divergence of opinion on this issue between the ED and the corporate affairs ministry, and attempts are being made to resolve the differences. The ED operates under the finance ministry.
“Suppose there is a plot or land which was bought using the proceeds of a crime. Someone else buys it under IBC. There is no ambiguity that the new buyer will not be prosecuted under the PMLA (Prevention of Money Laundering Act, 2002). But the divergence of opinion is about the property because the ED says that the property is liable to be attached as proceeds of crime,” he said.
The two ministries are going to resolve this question of law and that a meeting is likely to be held after the current session of Parliament concludes on April 8, Mehta said. “Whatever the ministries may decide, we may also want to know how and why this should happen,” the court retorted. The SC then posted the matter for April 19. Both the corporate affairs and finance ministries are headed by Nirmala Sitharaman.
The court was hearing a dispute over ED’S 2019 provisional attachment order with respect to properties of the now bankrupt Bhushan Power and Steel, which, despite being the sixth-largest non-performing account, is awaiting resolution for nearly four years.
A month after the National Company Law Tribunal in Delhi approved JSW Steel’s successful resolution plan, the ED provisionally attached assets of Bhushan worth ₹4,025 crore in October 2019. The National Company Law Appellate Tribunal stayed both the resolution plan approval and the attachment order on appeal.
But the ED refused to release the attached assets on the grounds that the money-laundering law prevails over IBC when it comes to attachment of properties obtained as proceeds of crime. It contended that properties could be released only when a suitable order is obtained by a party from the appellate authority under PMLA.
Left with no alternative, Bhushan’s lenders moved the Supreme Court, which granted an interim stay in 2019.
Meanwhile, in December 2019, the Union government introduced Section 32A in IBC, to provide that the criminal proceedings against former promoters will not affect a resolution applicant when acquiring a stressed firm, and that no prosecution could be launched against a successful resolution applicant or the assets once a resolution plan was approved.
Citing this, the appellate tribunal in 2020 vacated the attachment of Bhushan’s assets and approved JSW Steel’s bid for the company. But the ED moved the SC to argue that the IBC amendment could not be given retrospective effect since the resolution plan was approved prior to the amendment. JSW Steel too moved the apex court, seeking immunity from the ED.