SAFEMA Says ED Cannot Continue PMLA Attachment After Valid Resolution Plan Under Section 32A IBC

In a landmark decision on the point of conflict between insolvency law and proceedings for anti-money laundering, the Appellate Tribunal SAFEMA ruled that a corporate debtor who has gone through a valid insolvency resolution process and undergone a complete change of management would be protected by Section 32A of the Insolvency and Bankruptcy Code from further continuation of the attachment proceedings in the Prevention of Money Laundering Act.

Key Takeaways

• The Action Resolution applicants lenders insolvency office-holders and enforcement agencies will need to demonstrate due consideration of the impact of Section 32A when deciding whether to proceed with the attachment of assets under resolution plans.
• Arguments Raised by Viceroy Hotels Viceroy Hotels submitted that after the resolution plan was passed and executed, section 32A of IBC provided immunity to the corporate debtor and its property from proceedings for offences committed before CIRP.
• The approved resolution plan worked out a total change of management Because of this, the company had made a case that furtherance of attachment proceedings was violative of Section 32A of the IBC.
• Crucially, about the Article 32A the SAFEMA pointed out that 'section 32A was introduced for the sole purpose of enabling bona fide resolution applicants to be able to participate in the insolvency process without the risk of inheriting the shadow of nebulous criminal liabilities attaching to the corporate assets'.
• Conclusion The current core holding on SAFEMA rules for Viceroy Hotels Ltd. v Deputy Director, Directorate of Enforcement is an important validation of the doctrine of fresh start provided for under Section 32A of the Insolvency and Bankruptcy Code.

SAFEMA Holds Section 32A IBC Overrides Continued PMLA Attachment After Change in Management

The Update

SAFEMA provided a respite to Viceroy Hotels by setting aside the Provisional Attachment Order issued by the Enforcement Directorate, after it found that an authentic resolution plan under the IBC had led to a total change of management, as contemplated under Section 32A.

The Impact

Increases the protections for successful resolution applicants and upholds the 'clean slate' approach (applied under insolvency law).

The Action

Resolution applicants lenders insolvency office-holders and enforcement agencies will need to demonstrate due consideration of the impact of Section 32A when deciding whether to proceed with the attachment of assets under resolution plans.

Background of the Dispute Involving Viceroy Hotels

This matter pertained to transactions under the Business Transfer Agreement executed in 2011 between Viceroy Hotels Ltd. and Mahal Hotels Ptv. Ltd. with a hotel project in Chennai. Willz.2.1) As per the terms of the said agreement, the Mahal Hotels were to buy the Chennai hotel business for (about Rs.480 crores.) But the breach of completion clause in the agreement a toll on the completion of the same which was ultimately terminated by mutual consent of the parties. As per the facts recorded in the Judgment, it is found that the payment to the tune of Rs.124 crores had already been made by the Mahal Hotels Company to the Viceroy Hotels before the termination of the transaction.

Later on it was treated as a payment in advance to be refunded by the Viceroy Hotels. Later allegations emerged that the money had come from a series of shams and fictitious bank loans advanced to Best & Crompton Engineering Projects Ltd and its group companies. The CBI registered FIRs alleging the commission of a banking scam on a mass scale and diversion of funds to the group companies.

How the Enforcement Directorate Attached the Properties?

After the enquiry, proceedings were initiated by the Enforcement Directorate under the Prevention of Money Laundering Act, 2002. Per the ED the proceeds of crime were channelled from the Mahal Hotels through into the Viceroy Hotels as per the deal to transfer the business failed. The ED issued a Provisional Attachment Order in March, 2019 attaching the immovable properties worth over Rs. 315 crores with other movable properties.

The Adjudicating Authority came to the later conclusion that the attachment of the property was valid under Sec. 8(3) of the Act. The ED submitted that the attached properties were proceeds of crime and Because of this continued to be subject to attachability, even if the resultant insolvency proceedings was carried through.

What Happened During the Insolvency Resolution Process?

In the midst of the proceedings of PMLA, proceedings under the IBC in respect of the Viceroy Hotels were initiated. Proceedings under the Corporate Insolvency Resolution Process to liquidate the Viceroy Hotels were instituted against the company in March 2018. The moratorium under Section 14 of the IBC was imposed. One resolution failed initially and in the second bid round, the successful resolution applicant was Anirudh Agro Farms Ltd.

Collectively, the Committee of Creditors endorsed the resolution plan with a voting share of 95.82% and following an appellate process before the NCLAT, it acquired finality and was implemented. The successful resolution applicant took over management and paid all the agreed payments to the lenders.

Arguments Raised by Viceroy Hotels

Viceroy Hotels submitted that after the resolution plan was passed and executed, section 32A of IBC provided immunity to the corporate debtor and its property from proceedings for offences committed before CIRP. The company argued that it had no connection whatsoever with the previous promoters, management and its alleged offences.

The new management wasn't a promoter or connected person. Not previously administered or under control No allegation was made that it had aided and abetted the said offences. The approved resolution plan worked out a total change of management Because of this, the company had made a case that furtherance of attachment proceedings was violative of Section 32A of the IBC.

ED’s Objections Against Section 32A Protection

The ED (Enforcement Directorate) challenged the order on appeal and indicated that the Section 32A shield could not operate as an automatic positive interruption to the PMLA structure. The ED contended that: The attached properties were all proceeds of crime. The PAO had been provided before closing of CIRP Criminal liability under PMLA went on autonomously.

Moratorium under Sec.14 did not curtail ED's powers The ED is of the view that the effect of attachment immunity would undermine the purpose of PMLA and would enable assets involved in money-laundering to escape enforcement action solely on the grounds of proceedings for insolvency.

What SAFEMA Held on Section 32A and PMLA?

The SAFEMA dismissed the agencies and also found that the Section 32A was directly applicable in this case.

The Tribunal then noted that:

• A technically and commercially feasible plan for the resolution of the Corporate Debtor is confirmed by the resolution professional under Section 31
• The plan leads to change of management or control
• The new leader is not tarnished with previous wrong habits
• The Tribunal stressed that the successful resolution applicant in this case was the one that met all the statutory preconditions for the Section 32A protection.

As a consequence attachments seizures, forfeiture or confiscation proceedings against the properties of the corporate debtor could not be instituted.

Supreme Court Observations Relied Upon by the Tribunal

The Tribunal used large extracts from the Supreme Court's historic judgment in Manish Kumar v. Union of India which supported the standing of Section 32A to survive constitutionally. The Supreme Court accepted that a successful resolution applicant would have to be given a "clean slate" after taking over a distressed business.

• The corporate debtor from past criminal liability
• Assets that are the subject of approved resolution plans
• Successful resolution applicants unrelated to the preceding offences

Simultaneously, the Supreme Court made it clear that the persons responsible for commission of the previous wrong-doing still remains subject to prosecution and punishment. SAFEMA found that what comes next principles could be directly applied to Viceroy Hotels, as the new management group were completely separated from the alleged fraudulent activity.

Why the Attachment Order Was Ultimately Set Aside?

Having examined the statutory provisions and decisions of the Supreme Court, SAFEMA held that the attachment under the PMLA could not be sustained. The Tribunal also observed that the representations made by Mahal Hotels in the insolvency proceedings had already been dismissed by the NCLAT and had reached finality.

Crucially, about the Article 32A the SAFEMA pointed out that 'section 32A was introduced for the sole purpose of enabling bona fide resolution applicants to be able to participate in the insolvency process without the risk of inheriting the shadow of nebulous criminal liabilities attaching to the corporate assets'.

Conclusion

The current core holding on SAFEMA rules for Viceroy Hotels Ltd. v Deputy Director, Directorate of Enforcement is an important validation of the doctrine of fresh start provided for under Section 32A of the Insolvency and Bankruptcy Code.

The judgment states that the moment the resolution plan pays off in the shape of a full and genuine transfer of control, attachment proceedings in respect of corporate debtor assets cannot go on merely for the reason that the alleged offences were committed by the erstwhile management.

This is an important ruling that greatly enhances the confidence of resolution applicants and lenders and insolvency professionals in the certainty of the law for approved resolution plans. And, this ruling encourages accountability by making it clear that even where there is a corporate debtor, the naturally involved persons on whom burdens have been imposed in the first place have a continuing personal burden.

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Official External Resources

Use these primary/official sources to verify rules, forms, fees, timelines and regulatory updates before publication.

• Ministry of Corporate Affairs (MCA)
• National Company Law Tribunal (NCLT)
• India Code - Central Acts