Supreme Court to decide if PMLA overrides IBC, Legal News, ET LegalWorld – Legal Firms

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The Supreme Court is expected to soon decide on whether the Prevention of Money Laundering Act (PMLA) overrides the Insolvency and Bankruptcy Code (IBC). The apex court will also provide its views on whether moratorium also applies to action initiated by the Enforcement Directorate (ED).

Taking up an appeal filed in the matter of Ashok Kumar Sarawgi versus the ED, the apex court issued notices on November 11 to all parties and the case will be taken up for admission on November 21 tentatively.

Until recently, it was accepted that the IBC overrides any other regulatory actions since the objective of the code is to let new promoters take over a distressed firm and start afresh. In several insolvency cases there are allegations of fraud against erstwhile promoters. During the insolvency resolution process, the assets are taken over by the lender and sold to the highest bidder. The whole process may face uncertainties if authorities attach the assets or even if there is a future possibility of such an event happening.

The IBC currently has a special section 32A, which prohibits authorities and regulators from taking any action against property of a corporate debtor covered in the resolution plan for an offence committed prior to insolvency proceedings. For instance, in case promoters of a company put under IBC by its lenders have committed any fraud or crime before the insolvency resolution process, the law says that the regulators cannot attach any properties claimed by the banks.

“If a company is under IBC then attachment of assets may derail the complete process. Section 32A of IBC clearly provides protection to corporate debtors and their assets from being subject to any penal laws,” said Manoj Kumar, partner, Corporate Professionals. “If PMLA overrides IBC, it could defeat the purpose of IBC – timely resolution.”

Till now, it was largely agreed by jurisprudence that the provisions of the IBC override all the other laws and assets under the code. But in the past few months, decisions by various courts including the Delhi High Court, PMLA Adjudication Tribunal and the National Company Law Appellate Tribunal (NCLAT) suggest that the PMLA overrides the IBC.

“Considering PMLA AA and NCLAT decisions were in sync earlier, the change in view presents challenges in the process and it is hoped that the SC will clarify the position,” said Piyush Mishra, partner, Luthra & Luthra Law Offices. “An attachment under the PMLA will impact the CIRP (corporate insolvency and resolution process) since it will discourage resolution applicants and present significant challenges for valuation.”

There are two key questions in this regard: one, whether the PMLA can be invoked against properties of a bank or new promoter for past violations, and if so, whether such action can be taken while the company is under IBC moratorium. In a judgement dated November 11, the Delhi High Court held that the PMLA overrides the IBC saying that the contention of IBC overriding PMLA runs contrary to the legislative policy and undermines the efforts being put in by the legislature to combat money laundering. The case related to applicability of the PMLA during moratorium.



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