Delhi High Court rules ED's power to attach properties under PMLA not affected by IBC moratorium

Delhi High Court rules ED's power to attach properties under PMLA not affected by IBC moratorium

The claims of parties and the question of distribution and priorities would be settled independently and in accordance with the law

The Delhi High Court has held that the power of the Enforcement Directorate (ED) to attach properties under the Prevention of Money Laundering Act (PMLA) will not be affected by the moratorium, which comes into effect in Section 14 of the Insolvency and Bankruptcy Code (IBC).

The single-judge bench of Justice Yashwant Varma said that while the statutes were special, both subserved independent and separate legislative objectives. The subject matter and focus of the two legislations were distinct.

In the Rajiv Chakraborty Resolution Professional of EIEL vs Directorate of Enforcement case, the court said that the extent to which PMLA intended to capitulate to the IBC was an issue to be answered based on Section 32A.

The judge held, "The statutory injunct against the invocation or utilization of the powers available under PMLA was ordained to come into effect only after the trigger events under Section 32A. The legislature placed an embargo upon the continuance of the criminal proceedings, including the action of attachment under the PMLA, once a resolution plan was approved or a measure was adopted towards liquidation."

Justice Varma had come to the same conclusion while dealing with the Nitin Jain Liquidator PSL Limited vs Enforcement Directorate case. He had held that ED's power to attach assets ceased to be exercisable once the liquidation process was set in motion.

The court was dealing with a petition filed by the Resolution Professional (RP) of Era Infra Engineering Limited challenging the validity of ED's Provisional Attachment Orders and their confirmation by the Adjudicating Authority (AA).

It was argued that once the moratorium under Section 14 of the IBC came into effect, the ED stood denuded of jurisdiction to exercise powers under PMLA.

The court concluded the power to attach under PMLA would not fall within the ken of Section 14(1)(a) of the IBC. In its 124-page judgment, the bench also dealt with various other aspects related to PMLA and IBC. It said that the primordial purpose of the moratorium was clearly distinct from the purpose and objectives of attachment action taken under PMLA.

The provision incorporated in IBC was aimed at the maximization of value and preservation of the assets of the debtor, even as the possibilities of its resurrection were explored, ensuring that its various creditors did not initiate individual actions, hampering the resolution process.

The bench ruled, "The moratorium order staves off actions that may be initiated for enforcing security interests, claims by individual creditors, a restraint against the dissipation of its assets while the process of its restructuring is explored. It essentially seeks to sequester the assets of the debtor from actions, which may be initiated by its creditors. It is during this crucial period that the viability of the debtor is assessed during the Corporate Insolvency Resolution Process."

It held that assets obtained by the commission of a scheduled offense could not be exempted from the rigors of PMLA. The acceptance of such a contention would not only run contrary to the legislative policy but also undermine the efforts of the legislature to combat the offense of money laundering.

Justice Varma stated, "If Section 14 was interpreted as suggested by the petitioner, it would deprive the authorities implementing the provisions of PMLA of an essential weapon in their quest to confiscate the proceeds of the crime."

He added, "It would be relevant that when the ED moves to provisionally attach properties constituting the proceeds of the crime, it does not do so acting as a creditor. The steps taken under the provisions aim at attaching the properties and placing a fetter on the right of the holder to deal with or fritter away the same. It strips the perpetrator the right to enjoy it during the pendency of the proceedings."

The judgment stated, "The attachment does not result in an extinguishment or effacement of property rights. It is a fetter on the possessor of the property to deal with it until the proceedings come to a definitive conclusion."

On the question of confiscation."

The bench added, "Since the act of attachment does not result in the effacement of rights in the property, it would clearly survive outside the scope of a moratorium or an action in respect of a debt due or payable."

Merely because a property was provisionally attached under PMLA did not confer on the enforcing authority the superiority on the property or the proceeds that may be obtained upon its disposal.

The judge said that apart from the provision of an appeal against the order passed by the AA, the aggrieved party was also granted a right to seek the release of the property even after its confiscation in favor of the Central government.

He reiterated, "The statutes provide adequate means for the redressal of claims and grievances. The RP could approach the authorities for relief as may be legally permissible."