91视频

In Value Wise Consultancy Private Limited v Deputy Director, Enforcement Directorate, the National Company Law Appellate Tribunal (NCLAT) held that the (NCLT) has no jurisdiction over the Enforcement Directorate (ED) withdrawing funds from a corporate debtor’s account.

The case began with police complaints against the corporate debtor alleging loan diversion, ED notices restraining creditors from transacting with or releasing money to the corporate debtor, and provisional attachment of the corporate debtor’s assets in June 2017.

Insolvency proceedings commenced in September 2017. Despite the moratorium, the ED withdrew INR22.9 million (USD237,000) from the corporate debtor’s account in August 2018, and the insolvency resolution process failed in November 2018.

PMLA attachment set aside

Under the Prevention of Money Laundering Act, 2002 (PMLA), the appellate tribunal set aside the attachment in December 2018.

By exempting the ED from the NCLT’s oversight of a corporate debtor’s assets during the insolvency resolution process, the NCLAT dilutes the protection of the statutory moratorium.

The Insolvency and Bankruptcy Code, 2016 (IBC) bars any “suit or other legal proceeding” against the corporate debtor under sections 14 and 33(5). The insolvency moratorium protects the corporate debtor as a “going concern”, while the liquidation moratorium protects creditors’ interests in the liquidation estate, including statutory priority between classes of creditors.

ED attachments undermine IBC objectives

The NCLAT reasoned that the IBC was never intended to be a “holy Ganges” to wash the corporate debtor of its sin, or legitimise crime proceeds. Public policy may demand confiscation of tainted assets. But refusal to intervene where the ED’s actions during moratorium pushed a going concern into liquidation undermines the IBC’s objectives.

The ED seldom attaches assets for confiscation or its own interests; its aim is usually restoration to victims of financial crime.

In several cases, especially those related to loan diversion, the ED has laudably restored crime proceeds to banks. However noble, the ED’s discretion cannot override parliament’s wisdom in preserving the corporate debtor as a going concern where possible.

The Supreme Court recently reiterated that the IBC process is not meant for debt recovery. If the IBC cannot be used for debt recovery, neither should the PMLA, especially where it undoes the IBC’s legislative intent.

While the NCLAT relied on ED v Axis Bank and Anil Kohli v ED to treat the PMLA and IBC as distinct domains, the Value Wise case creates a blind spot in the NCLT’s jurisdiction.

Value Wise case creates moratorium blind spot

As affirmed by the Supreme Court, in Gujarat Urja Vikas Nigam Ltd v Amit Gupta, the NCLT can stay actions that threaten the corporate debtor’s going concern status. By validating the ED’s notices that freeze receivables and upholding the ED’s withdrawals from the corporate debtor’s accounts despite a moratorium, the NCLAT gives the ED a free pass to extinguish the possibility of resolution without oversight.

This creates a precarious environment for resolution applicants. Given the misuse of criminal process to recover bad debt in India, including by banks (who are not without blame for their non-performing assets), insolvency proceedings and anti-money laundering enforcement are bound to overlap.

PMLA timelines undercut IBC

Unlike the time-bound nature of the IBC, the PMLA’s actions have no strict resolution timelines. The NCLAT has upheld the ED’s ability to thwart going concern status and upset liquidation priority despite moratoria.

Its “holy Ganges” reasoning will deter resolution applicants from bidding for corporate debtors under investigation unless rectified, and encourage misuse of the PMLA process to facilitate recovery to the prejudice of other creditors.

Whether termed a “clean slate” or “holy Ganges”, the IBC works because it gives the corporate debtor a fresh start. The Value Wise case tilts towards ED discretion, ignoring the commercial wisdom the IBC seeks to protect.

Ambar Bhushan is a partner and Divyam Sharma is a senior associate at Bharucha & Partners