IBC section 32A rules even the PMLA

Section 32A of the Insolvency and Bankruptcy Code, 2016 (code) protects the properties of a corporate debtor from any attachment, confiscation or restraint in proceedings connected to any offence committed prior to the approval of the resolution plan. The protection, however, is available only when there has been a complete change in the ownership and control of the corporate debtor and extends only to such properties that are included in the resolution plan. As a necessary corollary, any attachment by the Directorate of Enforcement (ED) of the property automatically ceases on the approval of a resolution plan that satisfies the requirements of section 32A.

The question, however, remained as to the power of the National Company Law Tribunal (NCLT) to direct the ED to release the attached properties because such a direction would directly affect proceedings under the Prevention of Money Laundering Act, 2002 (PMLA).

In Shiv Charan v Adjudicating Authority, the Bombay High Court decided that exact question, that is whether the NCLT had jurisdiction under section 32A of the code to direct the release of properties attached by the ED. DSK Southern Projects (DSK), the corporate debtor, had been subject, among other actions, to proceedings under the PMLA in the course of which the ED had attached 14 flats. The attachment was subsequently confirmed by the adjudicating authority under the same act.

Two years later, DSK underwent a corporate insolvency resolution process and the NCLT approved a resolution plan proposed by Shiv Charan and two other persons. In approving the resolution plan, the NCLT also directed the ED to release the 14 attached flats. The ED disputed the NCLT’s jurisdiction to make orders in matters otherwise governed by the PMLA. The ED contended that the NCLT’s jurisdiction under section 60(5) of the code extended to interpreting the code alone. The NCLT should confine itself to matters within the IBC and not intrude into the PMLA’s domain. Further, the PMLA framework provided remedies before the appellate tribunal and the special court, constituted under the PMLA, to any person with an interest in the attached properties.

Dismissing the ED’s arguments, the high court held that when approving a resolution plan, the NCLT had a duty, under section 31 of the code, to ensure that the resolution plan provided for its effective implementation. A direction for the release of the attached properties was a step in ensuring such effective implementation. The court also upheld the position that jurisdiction under section 32A did not come into effect until a resolution plan, fulfilling the prerequisites of section 32A, was approved by the NCLT under section 31 of the code.

The high court further held that because the attachment of assets of the corporate debtor automatically ceased on the approval of a resolution plan, the ED and quasi-judicial authorities such as the adjudicating authority must take judicial notice of the approval of the resolution plan and release attachments of their own volition without waiting for specific orders.

The Bombay High Court followed the judgment of the Supreme Court in Manish Kumar v Union of India that corporate debtors have to be allowed to begin with a clean slate. Section 32A was inserted into the code through a 2020 amendment as an economic measure to encourage successful corporate insolvency resolutions. It extinguished the criminal liability of the corporate debtor and protected the assets in the hands of the successful resolution applicant. Section 32A fulfilled the larger objective of the code, which was to maximise the value of the assets of the corporate debtor.

This judgment strongly encourages prospective resolution applicants to submit proposals for the resolution of stressed assets, knowing that they will not become entangled in legal disputes with the ED. Requiring a successful resolution applicant to seek remedies under the PMLA for the release of attached properties is unnecessary and leads to a multiplicity of proceedings. Section 32A clearly protects against the attachment of the corporate debtor’s assets following the approval of a resolution plan.

This comprehensive judgment of the high court is a step in the right direction. It confirms the code is self-contained and furthers its objectives. While the ED may appeal it, that has not yet been done.

Sonam Gupta is a counsel and Divyam Sharma is an associate at Bharucha & Partners.