HIMACHAL PRADESH NATIONAL LAW UNIVERSITY, SHIMLA

2022-2023

ASSIGNMENT OF INSOLVENCY & BANKRUPTCY TEAM

TOPIC: Directorate of Enforcement v. Manoj Kumar Agarwal 2021 SCC

OnLine NCLAT 121

Submitted by – Palak Singh Submitted to – Dr. Nutan Kanwar

B.B.A.LL.B (Hons.), (Teaching Associate)

9TH Semester

Roll No. - 1120181958

 DECLARATION

This is to certify, that the project submitted by me is an outcome of my independent and original
work. I have duly acknowledged all the sources from which the ideas and extracts have been taken.
The project has not been submitted elsewhere for publication.

TOPIC: Directorate of Enforcement v. Manoj Kumar Agarwal 2021 SCC

OnLine NCLAT 121

Author:
Palak Singh
Designation: Student, B.B.A. LL.B (HONS.), 9th Semester, 5th Year
E-mail: palakbba1858@hpnlu.ac.in
Contact no. – 8887529985

HIMACHAL PRADESH NATIONAL LAW UNIVERSITY

GHANDAL, SHIMLA, P.O. SHAKRAH, SUB-TEHSIL DHAMI
DISTRICT SHIMLA, HIMACHAL PRADESH-171014
Ph. 0177-2779802, 0177-2779803, Fax: 0177-2779802
Website: http://hpnlu.ac.in
 Table of Contents
DECLARATION ............................................................................................................................. 2
INTRODUCTION ........................................................................................................................... 4
FACTS- ............................................................................................................................................ 5
NCLAT OBSERVATIONS-............................................................................................................ 5
JUDGEMENT- ................................................................................................................................ 6
COMMENT ..................................................................................................................................... 7
INTRODUCTION-

The Insolvency and Bankruptcy Code, 2016 (hereinafter referred as IBC) has been enacted
with a vision to balance between the protection of the company as going concern and
safeguarding the interests of creditors by approving the corporate insolvency resolution plans
by the learned Adjudicating Authority i.e., National Company Law Tribunal (NCLT). Since,
its promulgation, IBC has undergone multiple amendments to plug-in the loopholes, in
furtherance of the aim:

The Hon’ble Supreme Court in Innoventive Industries Ltd. v. ICICI Bank has observed as
below:

“One of the important objectives of the Code is to bring the insolvency law in India under a
single unified umbrella with the object of speeding up of the insolvency process.”

The Hon’ble Supreme Court in Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset
Reconstruction Co. Ltd. has reiterated the statement of object and reason (SOR) and opined in
regard to the same as follow:

“Perusal of the SOR would reveal that one of the prime objects of the I&B Code was to provide
for implementation of the insolvency resolution process in a time-bound manner for
maximisation of value of assets in order to balance the interests of all stakeholders. However,
it was noticed that in some cases there was extensive litigation causing undue delays resultantly
hampering the value maximisation. It was also found necessary to ensure that all creditors are
treated fairly. It was therefore in view of the various difficulties faced and in order to fill the
critical gaps in the corporate insolvency framework, it was necessary to amend certain
provisions of the I&B Code.”

The Prevention of Money Laundering Act, 2005 (hereinafter referred as PMLA), was an act to
prohibit and prosecute offence which are related to the commission of the scheduled offences.

The Hon’ble Supreme Court in P. Chidambaram v. Directorate of Enforcement have examined

the object and scheme of the legislation wherein it was observed that Section 3 of the PMLA
stipulates “money laundering” as an offence involving proceeds of crime, directly or indirectly.
Further, the Hon’ble Court observed that Section 5 of PMLA prescribes the power of
attachment of the tainted property involved in money laundering on account of “reason to
believe” and since the legislation does not provide definition of “reason to believe”, the
Hon’ble Court cited Section 26 of the Indian Penal Code, 1860.

FACTS-

The Appellant lodged the appeals after being aggrieved by the Adjudicating Authority’s
decision in an application filed under Section 7 of the Code. The Directorate of Enforcement
(ED) was ordered by the National Company Law Tribunal of Mumbai (NCLT, Mumbai) to lift
its attachment on the properties of two group companies in view of Sections 14(1)(a), 63and
238 of IBC, 2016 and hand them over to the resolution professionals (RP’s) of these companies.

Prior to the start of the CIRP process, the Provisional Attachment Order (“PAO”) dated May
29, 2018 (read with Corrigendum dated June 14, 2018) was issued under Section 5 of the
PMLA, which attached some corporate debtor properties. On November 20, 2018, the PMLA
adjudicating authority announced the aforementioned PAO (post-initiation of the CIR Process).
Following that, the Resolution Professional lodged an application with the adjudicating
authority, requesting the release of the attached assets under the PAO, after the CIR process
began. On February 22, 2019, the Hon’ble adjudicating authority granted the application and
ordered that the assets be released to the Resolution Professional for the Code’s necessary
processes. The claimant argued that the impugned injunction should be overturned because the
properties had been properly attached under the PMLA. It was claimed that in the matter of
Sterling Biotech Ltd vs. Andhra Bank before another Bench of the same Tribunal, where
quashing of attachment was requested, the concerned Bench did not intervene and stated that
the appeal could only be filed under the provisions of the PMLA. It was argued that in criminal
trials, there is no such thing as a moratorium.

NCLAT OBSERVATIONS-

NCLAT reconsidered the judicial pronouncements and re-examined the legal situation in this
respect, arriving at the following conclusions, where a corporate insolvency resolution process
(CIRP) has begun, Sec. 14 of IBC prohibits the institution and continuation of those
proceedings before the adjudicating authority under the PMLA. Where a matter is brought
before the adjudicating authority under the PMLA, the proceeding before the adjudicating
authority for approval is civil in nature. By using the ruling of the Hon’ble Supreme Court’s
three-judge bench in the case of Pareena Swarup vs. Union of India, the NCLAT concluded
that the act of attachment and confirmation of the same by the PMLA adjudicating authority
are both civil in nature. The offenses under the PMLA are mentioned in Chapter 2 and are
prosecuted by special courts under Chapter 7 of the Code of Criminal Procedure Section 46,
and the attachment is carried out under section 5, and the adjudicating body adjudicates and
confirms it under Sec. 8 as observed by the honourable NCLAT. As a result, the adjudicating
authority’s duties are civil in nature, as it does not rule on the criminality of the offense and
does not have the authority to enact penalty or punishment.

The NCLAT rejected the ED’s argument that the NCLT in Mumbai lacked jurisdiction under
S. 60(5) IBC to intervene in provisional attachment orders (PAOs) and that the resolution
professional (RP) should have sought the release of the attachment of properties from the
adjudicating authority under the PMLA. It was decided that problems like taking over and
managing a corporate debtor’s property are covered by the IBC. Any impediment caused by
the attachment or taking ownership of property will be a priority issue arising out of or in
relation to the CIRP or liquidation proceedings, which can be determined under IBC Sec.
60(5)(c).

Even if the PMLA is a special statute, it also has an overriding effect. Sec. 238 of the IBC is a
subsequent provision and is also a separate statute. If this section is read, the rules of this Code
will take place regardless of anything inconsistent with them found “in any other law” in
existence at the time. The connection rendered under the PMLA will continue under effect in
the following two cases, according to the NCLAT: when the application accepted under Sec. 7
IBC is revoked under Sec. 12A IBC, and when the order of admission into CIRP is set aside in
appeal.

JUDGEMENT-

The NCLAT while upholding the orders passed by the NCLT, Mumbai laid down the following
principles of law:

 Adjudicating Authority's power under S. 60(5) IBC: The NCLAT rejected ED's
contention that NCLT, Mumbai did not have the jurisdiction to interfere with the PAOs
and the RP should have approached the Adjudicating Authority under the PMLA for
seeking release of the attachment of properties. It was held that issues such as taking
over and management of corporate debtor's property fall within the purview of IBC.
Any hindrance created by the attachment or taking over of the possession of property
 would be a question of priority arising out of or in relation to the CIRP or liquidation
proceedings which can be decided under S. 60(5)(c) of IBC.
 Impact of moratorium on attachment proceedings under the PMLA: After the
provisional attachment of property under S. 5 PMLA, when the matter goes before the
Adjudicating Authority under the PMLA for confirmation of the said attachment, such
proceedings would be civil in nature. If CIRP has commenced, the institution and
continuation of such proceedings before the Adjudicating Authority under the PMLA
would be barred by S. 14 IBC. The provisional attachment cannot be confirmed and
will be treated as non-est in law.
 Overriding effect of IBC: While recognizing that both IBC and PMLA are special
statutes, the NCLAT held that the IBC (enacted later in time) will override the PMLA
by virtue of S. 238 IBC5. S. 238 IBC provides that the provisions of IBC have effect
notwithstanding anything contained in any other law. Hence, the authorities under the
PMLA cannot resist the handing over of the attached properties of the corporate debtor
to the IRP/RP/Liquidator as that would obstruct the corporate debtor from being kept
as a going concern till the resolution takes place or liquidation proceedings are
completed. The NCLAT clarified that the attachment made under the PMLA will
remain in force in the following two scenarios:
(i) when the application admitted under S. 7 IBC is withdrawn under S. 12A IBC, and
(ii) the order of admission into CIRP is set aside in appeal.
 Availability of corporate debtor's properties during CIRP and S. 32A IBC: The NCLAT
took note of the various steps which are required to be taken during the CIRP for
maximizing the value of the properties to achieve the successful resolution of the
corporate debtor. The NCLAT also took note of S. 32A IBC (enacted after the Orders
were passed) which provides immunity against prosecution of the corporate debtor,
action against its property and the successful resolution applicant in relation to an
offence committed prior to the commencement of the CIRP, subject to the fulfilment
of certain conditions. The NCLAT impliedly accepted the contention of the ED that S.
32A IBC is not helpful in the present case as the matter had not reached the stage of
acceptance of resolution plan or the stage of liquidation.

COMMENT
The Manoj Kumar Agarwal decision marks a watershed development in the IBC-PMLA
jurisprudence in India. It will ensure that the properties of the corporate debtor are available
for achieving the salutary objectives under the IBC i.e., to provide time bound insolvency
resolution, maximization of value of assets, to promote entrepreneurship, availability of credit
and balance the interests of all the stakeholders. The decision is timely and puts to rest a
contentious issue where assets of a corporate debtor may also be considered as 'proceeds of
crime' under PLMA and subject to attachment. The decision rightly gives primacy to the IBC
whose objective is to provide a quicker and time bound resolution for the debt-ridden
companies. Under the PMLA, the properties attached by the ED are required to be confirmed
by an order of the Adjudicating Authority and a determination is required to be made during a
trial as to whether an offence of money laundering has been committed and if so, whether the
assets are proceeds of crime.

The Manoj Kumar Agarwal decision should not be viewed as providing amnesty to the
properties being the proceeds of crime or from appropriate action under the PMLA only
because of the commencement of CIRP and initiation of moratorium under the IBC. The
NCLTs in India have come across instances where the corporate debtors collude with the
creditors to get themselves admitted under the CIRP regime in order to avoid actions from the
investigation agencies. Such instances will have to be adjudicated on a case-to-case basis. The
authorities under the PMLA and the IRP/RP will be at liberty to approach the Adjudicating
Authorities/Appellate Tribunals under the PMLA and the IBC for issues arising in respect of
the attachment of properties. The decision in Manoj Kumar Agarwal will be used to remove
bottlenecks in the insolvency resolution process and not to prejudice money laundering
investigations. There will be a need for some jurisprudence or a final word from the Supreme
Court to strike the right balance between the attainment of objects under the IBC to resolve bad
debts and the State's ability to recover the proceeds of crime under the PMLA without affecting
the rights of bona fide stakeholders in a CIRP.