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IBCInsolvency & Bankruptcy CodeNCLT Delivers First Impression In India: Insolvency Process Can Continue Despite Assets Of Corporate Debtor Being Attached By Enforcement Directorate

June 13, 2020by GLC & Partners

** This blog was co-published as a news item on https://legaldesire.com/insolvency-process-can-continue-despite-assets-of-corporate-debtor-being-attached-by-ed/

The case for the Applicant Resolution Professional was argued by one of our members – Counsel Krishna Grandhi of GLC & Partners.

The National Company Law Tribunal (NCLT), Hyderabad Bench, has delivered an important ruling impacting several ongoing tussles between the Prevention of Money Laundering Act, 2002 (“PMLA”) and the Insolvency and Bankruptcy Code, 2016 (“IBC”) and clarified that the Corporate Insolvency Resolution Process (CIRP) under the IBC can continue despite the attachment of the Corporate Debtor assets by the Enforcement Directorate. This is a case of first impression in India.

In the high-profile insolvency of Leo Meridian Resorts, Hyderabad, the Applicant moved the NCLT (IA No. 323 of 2020 in CP(IB) No. 43/7/HDB/2018) and sought clarity on this very issue. The Applicant contended that despite the attachment by the ED, if the NCLT felt it necessary to allow some other applications that sought extension of time in the CIRP, then by inference, the CIRP can continue despite the attachment.

Further, the PMLA and the IBC were dealing with different aspects of infractions committed by the Management and the Corporate Debtor respectively, and that the proceedings under the IBC should be allowed to be run in parallel with the attachment, and the eventual resolution may be subject to such attachment.

The ED opposed this application quoting that any relief related to the attachment issue must be agitated before the correct forum (PMLA) and not by seeking clarity from the NCLT itself.

The NCLT held that “The attachment does not prohibit in any way, the CIRP to continue”, “We make it clear that the CIRP to be continued as per the provisions of the Code and attachment over the assets of Corporate Debtor effected by the Enforcement Directorate is not at all an impediment to continue the CIRP against the Corporate Debtor.”

With the ED attaching the assets of many Corporate Debtors under insolvency, the most recent high-profile case being that of Bhushan Power & Steel Ltd, there was a lingering question all across India on whether the CIRP must be stopped/be suspended in light of the ED attachments. With this order, there is now clarity that as long as the prospective Resolution Applicants are notified of an ED attachment, the CIRP of the Corporate Debtor may continue despite the attachment.

Counsel for the Applicant Resolution Professional Krishna Grandhi commented “Essentially, the Hon’ble Tribunal held that as long as the prospective Resolution Applicants are made aware of the attachment, and they still choose to submit their resolution plans despite the attachment, then the IBC proceedings can be continued. The attachment under the PMLA is not an impediment to continue the CIRP of the Corporate Debtor.”

Background of the judgment

Under the Insolvency & Bankruptcy Code, 2016 (IBC), creditors or companies move insolvency petitions with NCLT. The NCLT, if it accepts the insolvency petition, initiates the Corporate Insolvency Resolution Process (“CIRP”) and appoints an Resolution Professional (RP) to run the affairs of the company for the duration of the CIRP proceedings under the guidance of the Committee of Creditors (CoC).

The RP thereafter, through some procedural formalities, invites prospective Resolution Applicants (RAs) to submit their bids for the resolution of the company. Typically, the RAs submit the bids to take over the Corporate Debtor as a going-concern. If an RAs bid is successful, their bid amount will be distributed amongst the various stakeholders of the corporate debtor under a pre-determined formula, post the payment of which, all liabilities of the corporate debtor stand extinguished.

The dichotomy between the IBC and other laws has been tested since the beginning of the IBC’s implementation. There have been several Supreme Court and NCLAT (the appellate body over NCLTs) decisions that went into great detail on whether or not IBCs provisions take supremacy over other laws of the land, some general laws and some specialized ones. One such issue that has constantly reared its head is the interplay between the Prevention of Money Laundering Act, 2002 (PMLA) and the IBC.

While IBC proceedings are underway for the Corporate Debtor, there are parallel criminal investigations into the management personnel of the Corporate Debtor run by the Central Bureau of Investigation (CBI) and the Enforcement Directorate (ED).

When ED proceedings are conducted, as one of the first steps, there is an attachment of the Corporate Debtor assets under the PMLA. This has led to a quandary under IBC. On one hand, the assets of the Corporate Debtor are “attached” by the ED under the PMLA, and on the other hand, the same assets are being put up for “resolution” by the RP and the CoC. The question, naturally, that has arisen in many minds is whether the RP and the CoC are even permitted to continue with the process of resolution under the IBC once the ED attaches the assets of the Corporate Debtor.

At last, in this ongoing tussle between the PMLA and the IBC, there appears to be some clarity on the progress of IBC proceedings in light of attachments under PMLA.