Insolvency law cannot override PMLA, says NCLAT; upholds asset attachment by ED

New Delhi: Insolvency & Bankruptcy Code cannot override the Prevention of Money Laundering Act (PMLA), said appellate tribunal NCLAT, adding assets of an debt-ridden firm once attached by the Directorate of Enforcement (ED) and confirmed by competent authority cannot be released for its resolution.

Under section 14 of IBC, a moratorium is applied on those assets for the purpose of resolution. However, if the property is alleged to be "proceeds of crime" and is already under adjudication by competent authority under a penal statute, such property cannot be deemed to be part of the freely available resolution estate, the National Company Law Appellate Tribunal (NCLAT) said.

The appellate tribunal held that if there is any attachment by ED under the PMLA, which is "validly made and confirmed, it cannot be undone under IBC (Insolvency and Bankruptcy Code).

Citing section 238 of IBC, which has an overriding effect over other laws, a three-member NCLAT bench said it "cannot override the PMLA in respect of proceedings involving proceeds of crime."

PMLA and IBC operate in distinct spheres and there is no "irreconcilable inconsistency" exists between the two, said NCLAT adding ED does not act as a creditor, but as a public enforcement agency.

"The attached assets are not to satisfy creditors, but to uphold penal objectives and international obligations under FATF and UN Conventions," said the appellate tribunal, while upholding an order of the National Company Law Tribunal (NCLT).

NCLAT also cited a directive issued by the Supreme Court in the Embassy Property matter, saying it "lacks jurisdiction to interfere with the PAO, which has been subsequently confirmed by the Adjudicating Authority under the PMLA".

The appellate tribunal's 36-page-order came over a plea filed by the resolution professional of Dunar Foods, challenging an NCLT ruling, which had refused to direct the ED to release provisionally attached assets of the debt-ridden company.

On December 22, 2027, the Mumbai bench of NCLT had ordered insolvency proceedings against Dunar Foods, which was engaged in processing and exporting basmati rice. The insolvency petition was filed by a consortium of banks led by public sector lender SBI for a loan repayment default of Rs 758.73 crore.

Accordingly, CIRP (corporate insolvency resolution process) was initiated against Dunar Foods with the appointment of a resolution professional.

Meanwhile, the ED initiated an investigation under PMLA against PD Agroprocessors, an associate company of Dunar Foods.

It traced the flow of alleged tainted funds to Dunar Foods based on scheduled offences under the Indian Penal Code and Foreign Exchange Management Act (FEMA), alleging that large export advances received by Dunar Foods from PD Agroprocessors were proceeds of crime.

ED then attached Dunar Foods' several immovable and movable assets worth Rs 177.33 crore, prompting the resolution professional (RP) of the firm to move NCLT seeking immediate de-attachment of the provisionally attached properties.

However, the NCLT on May 21, 2018 dismissed the RP's application and held that the provisional attachment order issued by the ED under PMLA did not fall within the scope of the moratorium under Section 14 of the IBC.

NCLT had said that PMLA is a special penal statute and has a 'distinct adjudicatory mechanism', hence unless and until the attachment was set aside by the PMLA adjudicating authority, the NCLT has no jurisdiction to direct its release.

Aggrieved by this decision, Dunar Foods' RP then approached appellate tribunal NCLAT.

Meanwhile, the lenders of Dunar Foods approved the resolution plan submitted by Amit Gupta in November 2019 during the pendency of the appeal in NCLAT.

The appellate tribunal said though Provisional Attachment Order (PAO) was issued by ED after the commencement of CIRP, ECIR (Enforcement Case Information Report) investigation commenced as far back as 2013.