The conflict between the Insolvency and Bankruptcy Code, 2016 (“IBC”) and the Prevention of Money-Laundering Act, 2002 (“PMLA”) has once again surfaced with a stay order being passed by the National Company Law Appellate Tribunal (“NCLAT”) in the case of JSW Steel Limited v. Mahender Kumar Khandelwal (Company Appeal (AT) (Insolvency) No. 957 of 2019) on October 14, 2019.

Brief Facts:

On September 5, 2019, the National Company Law Tribunal, Principal Bench, New Delhi had passed an order approving the resolution plan submitted by JSW Steel Limited (“JSW Steel”) for the insolvency resolution of Bhushan Power and Steel Limited (“Bhushan Power”) (“NCLT Order”). Thereafter, on October 10, 2019, properties of Bhushan Power in Odisha were attached by ED, the same being declared as “proceeds of crime” under the PMLA. The attachment of the property of the Bhushan Power was opposed by the Ministry of Corporate Affairs, Government of India (“MCA”), JSW Steel and the committee of creditors of Bhushan Power.

Issues:

The following issues arose for consideration before NCLAT:

1. Whether ED has jurisdiction to attach the property of a corporate debtor or part thereof which is undergoing a ‘corporate insolvency resolution process’; and
2. Whether ED comes within the meaning of ‘operational creditor’ under IBC for the purpose of money claim (civil matter), which may be generated out of the attached property/ part thereof of the corporate debtor.

Submissions MCA:

The following submissions were made by the MCA:

1. ED has no jurisdiction to attach the property of a corporate debtor which is undergoing corporate insolvency resolution process and particularly when an appeal is pending consideration of the issue of attachment of property.
2. According to the process envisaged under IBC, once a resolution plan is approved by the adjudicating authority, it is binding on all stakeholders including all governmental agencies.
3. Any investigation of a corporate debtor by the Central Bureau of Investigation, Serious Fraud Investigation Office and/ or the ED are separate and independent of the corporate insolvency resolution process under the IBC and both can run simultaneously and independent of each other.
4. The erstwhile management of a company would be held responsible for the crimes committed under their regime. The new management taking over the company, pursuant to the IBC process cannot be held responsible for the acts of the previous management. Therefore, no criminal liability can be fixed on the resolution applicant or new management of the company.
5. As far as the corporate debtor or its assets are concerned, after the completion of the corporate insolvency resolution process under the IBC, there cannot be any attachment or confiscation of the assets of the corporate debtor by any enforcement agencies after the approval of the resolution plan.
6. Threat of attachment of the assets of the corporate debtor or subjecting the corporate debtor to proceedings by investigating agencies for wrong doings of the previous management will defeat the very process and scheme of corporate insolvency resolution process, which is to hand over the company of the corporate debtor to the resolution applicant. The resolution of insolvency, revival of the company and realisation of dues would be derailed by such attachment. Attaching the property which is now in the hands of a resolution applicant or new promoters would only negate the very purpose of IBC and eventually destroy the value of assets.
7. The ED, while conducting their investigation under PMLA, is free to deal with or attach the personal assets of the erstwhile promoters and other accused persons, acquired  through crime proceeds and not the assets of the corporate debtor which have been financed by creditors and acquired by bona fide third parties pursuant to the statutory process under the IBC.
8. Where the resolution applicant is concerned, they would not be in wrongful enjoyment of any proceeds of crime after acquisition of the corporate debtor and its assets, as a resolution applicant would be a bona fide party acquiring assets through a legal process. Upon an acquisition under the statutory process by a resolution applicant, the corporate debtor and its assets are not derived or obtained through proceeds of crime under the PMLA and need not be subject to attachment by the ED after approval of resolution plan by the adjudicating authorities.

Decision of NCLAT:

After taking into consideration the submissions, NCLAT stayed the order of attachment passed by the ED and also prohibited it from attaching property of Bhushan Power without seeking prior approval of the NCLAT. NCLAT also directed the that the property already attached by the ED be realised in favour of the resolution professional immediately.

It may be noted that the NCLAT has permitted the ED and Central Bureau of Investigation to file their reply affidavits, if necessary. In the meanwhile, to ensure that the resolution plan is not given effect before deciding the aforementioned issues, the NCLAT also stayed the NCLT Order passed on September 5, 2019, so far as it relates to payment of the creditors.

This update has been contributed by Adity Chaudhury (Partner) and Radhika Kothari (Associate).