Conflict between IBC and PMLA

India's legal system faces complexity due to overlapping jurisdictions of the Prevention of Money Laundering Act (PMLA) of 2002 and the Insolvency and Bankruptcy Code (IBC) of 2016.

• The PMLA targets money laundering and stopping terrorist financing.
• The IBC focuses on resolving corporate insolvency.

This analysis dives into the PMLA's provisions and argues for a practical approach by PMLA authorities when handling cases involving seized assets. It also examines Section 32A of the IBC, providing insights into the continuing liabilities of promoters and directors facing PMLA charges.

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Demystifying the PMLA: Provisions, Goals, and Enforcement

Understanding the Act's Framework: The Prevention of Money Laundering Act (PMLA) tackles money laundering head-on. Its core provisions criminalize the act and establish a system for investigating, prosecuting, and seizing the proceeds of crime. The PMLA covers a wide range of financial transactions and offers a comprehensive process for attaching and confiscating tainted assets.

Combating the Web of Money Laundering: The PMLA's primary objective, as stated in its title, is to prevent money laundering and confiscate property derived from it. It aims to safeguard the integrity of the financial system by cracking down on illicit financial activities and dismantling the complex networks used for money laundering.

A Broad Net for Diverse Crimes: The PMLA casts a wide net to capture various offenses that contribute to money laundering. It encompasses not only money laundering itself but also crimes under other laws like the Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, and the Unlawful Activities (Prevention) Act. This expansive approach ensures the PMLA addresses a multitude of criminal activities that feed into money laundering, such as terrorism, drug trafficking, human trafficking, and corruption.

*Enforcement Powers: The PMLA equips designated authorities, primarily the Enforcement Directorate (ED), with extensive powers. These include conducting investigations, attaching properties suspected to be involved in money laundering, and initiating proceedings to confiscate the proceeds of such activities. The broad scope of the ED's powers reflects the seriousness with which the law treats money laundering.

Investigation and Seizure Tools: The PMLA empowers authorities with robust tools for investigating and seizing assets linked to money laundering. Section 5 allows them to seize properties potentially related to such crimes. Significantly, Section 24 creates a legal presumption that assets are involved in money laundering unless proven otherwise. This places a significant burden on the accused and anyone possessing the proceeds of crime.

Balancing Power with Fairness: While Section 8 of the PMLA grants enforcement agencies like the ED the power to arrest, attach, search, and seize property when evidence of wrongdoing exists, a recent Supreme Court verdict highlighted concerns about overreach. The court cautioned against arbitrary application of these powers. The balance lies in using these powers effectively to investigate and confiscate criminal proceeds while ensuring fairness in the process.

Balancing Public Interest: PMLA, Charged Assets, and IBC

The Prevention of Money Laundering Act (PMLA) is a powerful tool against financial crimes. However, a practical approach is crucial, especially when assets are secured by banks and insolvency resolution is underway under the Insolvency and Bankruptcy Code (IBC). When banks hold legitimate claims, prioritizing orderly insolvency resolution under the IBC serves the public interest better. This ensures business continuity, protects jobs, and fosters economic stability.

IBC: Promoting Resolution and Economic Stability

The IBC, enacted in 2016, deals with insolvency, bankruptcy, and revival of financially distressed businesses. Its primary goals are time-bound resolution of insolvency cases, maximizing asset value, promoting entrepreneurship, ensuring credit availability, and balancing stakeholder interests.

The IBC empowers creditors, shifting control from debtors. This incentivizes responsible financial management and provides a structured framework for insolvency resolution. It acts as a cornerstone for India's evolving market economy by offering a comprehensive law for efficient insolvency resolution, maximizing asset value, and facilitating the closure of non-viable businesses.

Reconciling Competing Claims

Conflicts arise when the IBC and PMLA have competing claims on the same assets. This often happens when secured creditors with legitimate claims on assets clash with PMLA enforcement agencies seeking to seize them due to suspected money laundering. The situation escalates further when lenders finance assets targeted by PMLA authorities based on alleged offenses by the owner.

Adding complexity is the IBC's moratorium under Section 14, which protects the corporate debtor during the Corporate Insolvency Resolution Process (CIRP). This can potentially hinder the PMLA's objective of seizing assets linked to money laundering. Additionally, Section 32A of the IBC shields the debtor from further prosecution for pre-insolvency offenses once a resolution plan is approved.

Courts Navigate the IBC-PMLA Intersection

Recent court rulings shed light on the complex interplay between the PMLA and the IBC. A key development is a Bombay High Court judgment emphasizing Section 32A of the IBC. This section protects a corporate debtor from further prosecution after a resolution plan is approved, giving the entity a clean slate.

Several courts have favored the IBC in conflicts with the PMLA. They cite the IBC's "non-obstante" clause, mirrored in Section 71 of the PMLA. This clause suggests the PMLA prevails in most cases of conflicting provisions.

The Delhi High Court judgment in Rajiv Chakraborty RP of EIEL Vs Directorate of Enforcement offers a nuanced perspective. It emphasizes a view similar to the one expressed in Nitin Jain Liquidator PSL Ltd. v. Directorate of Enforcement. These judgements argue that action against a corporate debtor's properties for pre-insolvency offenses cannot be taken during the CIRP. Once a resolution plan is approved or liquidation begins, the process must proceed unimpeded. This interpretation of Section 32A benefits all stakeholders, particularly by attracting resolution applicants who might be deterred by the threat of penalties for past offenses.

The judgment also highlights the Supreme Court's decision in Biswanath Bhattacharya v. Union of India. This case clarifies that the attachment powers under PMLA Sections 5, 6, and 8 are based on civil forfeiture principles. The aim is to deny money laundering offenders the benefits of their crimes. Asset attachment under PMLA is a form of civil forfeiture, allowing authorities to seize illegally acquired property. There's no right to enjoy property derived from unlawful activities, making non-conviction-based asset forfeiture a globally accepted tool against money laundering and organized crime.

The Directorate of Enforcement v. Axis Bank judgment further clarifies that there's no inherent conflict between the PMLA and IBC. Bona fide third-party purchasers can always seek release of attached assets from the adjudicating authority by proving their legitimate interest.

Regarding the IBC moratorium, courts have clarified that "proceedings" under Section 7 refer to those related to enforcing or recovering debts owed by the corporate debtor. This doesn't extend to criminal or quasi-criminal proceedings concerning "proceeds of crime" or tainted property derived from illegal activities. Therefore, the IBC's moratorium under Section 7 doesn't prevent PMLA authorities from exercising their powers under Sections 5 and 8 during a CIRP.

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Balancing Priorities: PMLA and IBC

While the PMLA is crucial for combating financial crimes, enforcement authorities need to acknowledge the purpose of insolvency proceedings under the IBC. The IBC isn't intended to protect individuals from consequences of financial crimes. Its role is to provide a structured framework for reviving distressed businesses. When banks have secured claims on assets, their participation in the resolution process strengthens the chances of success. This, in turn, fosters a more robust financial system.

This revision emphasizes the need for balance between combating financial crimes and facilitating economic recovery. It also highlights how secured bank claims contribute to successful resolutions under the IBC.

Section 32A of IBC: A Balancing Act

Section 32A of the IBC, introduced in December 2019, plays a key role in conflicts with the PMLA. It shields the corporate debtor and its assets from actions under other laws, including the PMLA. However, there are crucial exceptions:

• Continued Liabilities for Promoters and Directors:?While the corporate debtor itself is protected from post-resolution actions, Section 32A preserves the liability of promoters and directors implicated in PMLA offenses. This ensures that those involved in financial crimes face consequences.

Court Decisions Shed Light

Several court cases have addressed the interplay between IBC and PMLA:

• Divergent Objectives: The Delhi High Court judgment in Rajiv Chakraborty highlighted the distinct goals of each law. The IBC prioritizes maximizing asset value and preserving the corporate debtor during resolution, while the PMLA focuses on seizing illicit gains and fighting financial crime. These contrasting objectives can create tension.
• PMLA Actions During Moratorium: Courts have generally held that the IBC moratorium (Section 14) doesn't prevent PMLA authorities from exercising their powers under Sections 5 and 8 during a CIRP. The government, under PMLA, isn't considered a creditor seeking debt repayment; it's aiming to take away ill-gotten gains.
• Section 32A's Timing: The Delhi High Court clarified that Section 32A's immunity from prosecution only applies after a resolution plan or liquidation is approved. This clarifies when the IBC's shield against prosecution comes into effect.

Precedents and Jurisdictional Issues:

• Non-Obstante Clauses: Cases like Kohinoor Creations v. Syndicate Bank and PR Commissioner of Income Tax v. Monnet Ispat & Energy Limited establish that a later-enacted statute with a non-obstante clause (meaning it prevails over conflicting provisions) takes precedence. The IBC's non-obstante clause strengthens its position in conflicts with the PMLA.
• Secured Creditors: The Madras High Court, in Assistant Commissioner (CT) v. Indian Overseas Bank, supported prioritizing secured creditors' debts during the moratorium period under the IBC.
• Section 63 of IBC: This section emphasizes that the NCLT's jurisdiction under IBC for debt recovery actions supersedes the jurisdiction of the adjudicating authority under PMLA during CIRP.

Key Takeaways:

Courts have navigated the complex interplay between IBC and PMLA. While the IBC generally takes precedence during CIRP, there are exceptions, such as continued liability for promoters and directors involved in PMLA offenses. Understanding the nuances of relevant court decisions is crucial for navigating these situations.

Conclusion: Striking a Balance

Court rulings paint a nuanced picture of the interplay between IBC and PMLA. While the IBC, particularly Section 32A, often takes precedence during insolvency proceedings, exceptions exist. Promoters and directors implicated in PMLA offenses remain liable. Courts consistently emphasize the need for a strict definition of "proceeds of crime" with a clear link to criminal activity. The apparent tension between protecting creditors' rights and preventing money laundering necessitates a careful balancing act. Recent judgments suggest a path toward harmonious interpretation, acknowledging the importance of Section 32A's protections for corporate debtors. The conflicting judgments also highlight the need for a nuanced approach that avoids outright conflict and fosters co-existence.

The Supreme Court's upholding of Section 32A's constitutionality (Manish Kumar vs. Union of India) underscores its role in facilitating resolutions without burdening applicants with additional liabilities. To achieve a practical solution, a collaborative approach is key. PMLA authorities should consider the validity of creditor charges and ensure substantial evidence before taking action. Recognizing the global nature of money laundering and the importance of international cooperation can lead to a more cohesive application of both legislations. In conclusion, while PMLA remains a vital tool against financial crime, a pragmatic approach is crucial when dealing with bank-charged assets undergoing insolvency resolution under the IBC. Orderly resolution in such cases serves a broader public purpose, ensuring business continuity, job protection, and economic stability.

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