NCLAT: Insolvency law can’t override PMLA, ED asset attachment is valid

New Delhi: The National Company Law Appellate Tribunal (NCLAT) has ruled that the Insolvency and Bankruptcy Code (IBC) does not supersede the Prevention of Money Laundering Act (PMLA), stating that assets attached by the Enforcement Directorate (ED) and confirmed by the competent authority cannot be released for the purpose of insolvency resolution.

The three-member bench clarified that if a property is considered to be proceeds of crime and the attachment is validated by the adjudicating authority under the PMLA, such assets are outside the purview of the resolution estate, even if insolvency proceedings are ongoing.

“Where attachment is made by the ED and confirmed, the same cannot be undone under the IBC,” the tribunal observed in a 36-page order. It noted that Section 14 of the IBC, which imposes a moratorium on legal actions against the corporate debtor, does not extend to assets that are under investigation or adjudication as proceeds of crime under the PMLA.

Referring to Section 238 of the IBC, which gives the Code primacy over conflicting provisions in other laws, the tribunal held that no conflict arises when it comes to properties linked to money laundering. “There is no irreconcilable inconsistency between the IBC and the PMLA,” the order stated, highlighting that the ED acts not as a creditor but in its role as a public enforcement body.

The appellate body stressed that attached assets under the PMLA are meant to serve penal objectives and uphold obligations under international frameworks such as the Financial Action Task Force (FATF) and United Nations conventions. “These assets are not intended to be distributed among creditors,” NCLAT remarked.

The decision came in response to an appeal filed by the resolution professional of Dunar Foods, a company undergoing corporate insolvency proceedings. The professional had sought release of assets attached by the ED, which were allegedly connected to money laundering activities involving PD Agroprocessors, an associate firm.

The case dates back to December 22, 2017, when the Mumbai bench of the National Company Law Tribunal (NCLT) admitted a plea by a consortium of banks led by the State Bank of India for insolvency proceedings against Dunar Foods over a default of Rs 758.73 crore.

Subsequently, the ED began a probe under the PMLA, tracing the flow of funds between PD Agroprocessors and Dunar Foods. Based on its findings, the agency attached various assets belonging to Dunar Foods valued at Rs 177.33 crore.

The resolution professional moved NCLT to contest the provisional attachment, but the tribunal rejected the plea in May 2018, ruling that it lacked jurisdiction to intervene in matters governed by the PMLA. NCLT had observed that unless the attachment was nullified by the appropriate authority under PMLA, it remained beyond its reach.

Dunar Foods’ resolution professional then challenged the decision in NCLAT. During the course of the appeal, a resolution plan submitted by Amit Gupta was approved by the lenders in November 2019.

The appellate tribunal also cited the Supreme Court’s findings in the Embassy Property case, noting that issues involving confirmation of asset attachment fall outside the jurisdiction of insolvency forums.

While the ED’s attachment was executed after the initiation of insolvency proceedings, the tribunal observed that the agency’s investigation had commenced in 2013, underscoring that the action was not arbitrary or belated.