NCLAT upholds ED’s PMLA powers over insolvency moratorium

The National Company Law Appellate Tribunal (NCLAT) has said the moratorium available to companies undergoing insolvency proceedings cannot be used to shield assets alleged to be proceeds of crime, while upholding actions taken by the Enforcement Directorate (ED) under the Prevention of Money Laundering Act (PMLA) against Siddhi Vinayak Logistics Ltd.

The appellate tribunal said if there has been any attachment by the ED, then the adjudicatory mechanism created under the PMLA alone will have jurisdiction to deal with it. A three-member NCLAT bench has upheld the previous order passed by the Ahmedabad bench of the National Company Law Tribunal (NCLT), saying “tribunals constituted under the IBC are not the forums which can entertain any plea against the ED.”

“The writing is on the wall for the appellant: whether to attach or not to attach the properties of a corporate debtor is for the Enforcement Directorate to decide, and where there has been any such attachment by the ED, the adjudicatory mechanism created under the PMLA alone will have jurisdiction to deal with any challenge to it,” said NCLAT.

The legislative intent behind the scheme of the IBC only aims to deal with the issue of corporate insolvency, either in a CIRP or in a liquidation process, and to pay off the creditors of the corporate debtor through the sale proceeds of the legitimate assets of the corporate debtor either as a going concern or as liquidated assets, and not out of the ill-gotten wealth of the CD.

“Otherwise, and as indicated earlier, IBC would unwittingly become a camouflage, a shield, to save the ill-gotten wealth of the corporate debtor and create a classification within the non-discriminatory character of the PMLA,” said the bench comprising Justice N. Seshasayee, Arun Baroka and Indevar Pandey.

NCLAT’s observation came while delivering its judgement over the petition filed by the liquidator of Siddhi Vinayak Logistics, challenging ED’s withdrawal of Rs 2.29 crore from the corporate debtor’s bank account during the subsistence of the insolvency moratorium and seeking release of assets and receivables allegedly restrained under the PMLA.

Directorate of Enforcement (DE) had initiated proceedings over serious allegations of bank fraud, forgery, criminal conspiracy and diversion of loan funds involving an amount exceeding Rs 1,600 crore against Siddhi Vinayak Logistics and promoter Rupchand Baid.

In June 2017, ED had attached properties worth Rs 1,609 crore in 2019 under the Prevention of Money Laundering Act (PMLA).

After the provisional order of attachment, Siddhi Vinayak Logistics was drawn into CIRP (Corporate Insolvency Resolution Process) by NCLT on September 12, 2017, and consequently, moratorium under section 14 of the IBC came into operation.

CIRP against Siddhi Vinayak Logistics failed as it could not attract a buyer within the specified timeline and on November 19, 2018, NCLT ordered its liquidation.

Meanwhile, on August 2, 2018, during the subsistence of the moratorium, the Enforcement Directorate withdrew a sum of Rs 2.29 crore from the ICICI Bank account of Siddhi Vinayak Logistics’.

Moreover, when the liquidation process was underway, on June 18, 2019, ED issued a fresh order of Provisional Attachment of 6,170 vehicles belonging to Siddhi Vinayak Logistics.

This move was challenged by the liquidator before NCLT, contending that the actions of ED were in direct violation of the moratorium under Section 14 of the IBC and that they had the effect of frustrating CIRP/liquidation by depriving the Corporate Debtor of its receivables and assets.

However, NCLT rejected it, following which the matter came before NCLAT, which also rejected it, observing that insolvency proceedings cannot be used as a shield to protect assets allegedly derived from criminal activity.

It further held that the moratorium under Section 14 of the IBC and protections available during liquidation are intended to preserve legitimate assets of the corporate debtor and do not extend to assets that fall within the ambit of “proceeds of crime” under the PMLA.

The appellate tribunal said criminal proceedings under public law statutes such as the PMLA cannot be allowed to be impacted by the moratorium merely because they may affect the value of assets available for insolvency resolution or liquidation.

NCLAT said PMLA, in its working, neither differentiates nor discriminates between companies that are drawn into a CIRP and those which are considered financially safe by their creditors.

“It must be emphasised that Parliament did not legislate IBC with an intent to create a holy Ganges out of the IBC to wash the corporate debtor of its sin of criminality under the PMLA, or as a mechanism for legitimising any ill-gotten wealth of the CD,” said NCLAT.

There is nothing in the code, that enables accommodating the wealth which is sourced by and out of a crime, in the resolution or liquidation process of a corporate debtor.