The National Company Law Appellate Tribunal (NCLAT) recently clarified that the Insolvency and Bankruptcy Code (IBC) does not serve as a sanctuary to shield criminal assets from enforcement actions under the Prevention of Money Laundering Act (PMLA). In the case of Value Wise Consultancy v. Deputy Director ED, a bench comprising Justice N. Seshasayee, Arun Baroka, and Indevar Pandey emphasized that assets suspected to be proceeds of crime cannot be absorbed into the insolvency or liquidation estate simply because a corporate debtor is under moratorium or liquidation.
IBC Not a ‘Holy Ganges’
The Tribunal asserted, “Parliament did not legislate the IBC as a ‘holy Ganges’ to cleanse corporate debtors of criminality under the PMLA or to legitimize ill-gotten wealth.” The NCLAT was addressing appeals filed by a liquidator against a July 19, 2022 order from the National Company Law Tribunal (NCLT) Ahmedabad, which had rejected applications for relief against actions initiated by the Enforcement Directorate (ED).
Background of the Case
The case originated from ED actions against the corporate debtor over allegations of bank fraud and misappropriation of loan funds. The ED had issued notices under Section 50 of the PMLA to various debtors and customers of the corporate debtor, instructing them not to transact with or release funds to the company. Furthermore, the ED had attached both movable and immovable assets associated with the corporate debtor and related parties.
The corporate debtor entered the corporate insolvency resolution process on September 12, 2017, triggering a moratorium under Section 14 of the IBC. During this moratorium, the ED withdrew ₹2.29 crore from the debtor’s ICICI Bank account. The liquidator argued that this withdrawal contravened the moratorium and unlawfully diminished the insolvency estate. The liquidator also sought orders for entities including Ashok Leyland, Haldia Petrochemicals, Sonalika International Tractors, and Hindustan Coca Cola Beverage to release dues owed to the corporate debtor.
ED’s Stance and NCLAT’s Decision
The ED contended that proceedings under the PMLA are independent criminal actions concerning the proceeds of crime, beyond the jurisdiction of the NCLT and NCLAT to intervene. The NCLAT concurred with the ED, highlighting the “IBC vs PMLA” conflict when both statutes are operative. The Tribunal held that while the IBC safeguards legitimate assets of a corporate debtor for resolution or liquidation, it does not extend this protection to wealth alleged to be derived from criminal activities.
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The Tribunal warned, “The IBC would unwittingly become a camouflage, a shield, to save the ill-gotten wealth of the corporate debtor.” It further ruled that challenges to ED attachments should be directed to the adjudicatory mechanism under PMLA or the relevant High Court, rather than IBC tribunals. “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,” the Tribunal stated.
Representing the appellant were Advocates Sandeep Bajaj, Vipul Jai, Mayank Biyani, and Saumya. Special Counsel Zoheb Hossain, along with Advocates Vivek Gurnani, Kanisk Maurya, Pranjal, and Vivek Gaurav, appeared for the ED. Advocate Abhijeet Pandey represented Haldia Petrochemicals.
