COMPARATIVE ANALYSIS OF THE CONFLICT BETWEEN INSOLVENCY AND BANKRUPTCY LAWS & MONEY-LAUNDERING LAWS FOR ATTACHMENT OF PROPERTIES
The Hon’ble National Company Law Appellate Tribunal (‘NCLAT’) has passed a landmark judgment dated April 9, 2021 in the case of ‘Directorate of Enforcement v. Manoj Kumar Agarwal & ors.’i holding that the provisions of the Insolvency and Bankruptcy Code, 2016 (‘the Code’) will override the Prevention of Money Laundering Act, 2002 (‘PMLA’) with respect to attachment of Corporate Debtor’s property. In this case, the provisional attachment order for the Corporate Debtor’s property was confirmed by the Adjudicating Authority, PMLA after admission of insolvency petition against the Corporate Debtor by NCLT, Mumbai. Subsequently, NCLT directed the Adjudicating Authority, PMLA to release all properties. In appeal, the NCLAT held that proceedings for attachment of property under PMLA are of civil nature and thus IBC will override PMLA and the decision of NCLT, Mumbai was upheld, and properties of the Corporate Debtor were released. This update will draw a comparative analysis of the position of law with respect to the enforcement or attachment of properties of a juridical person undergoing insolvency/bankruptcy for India, the United States of America, United Kingdom and the Republic of Singapore.
1. Laws applicable to the Insolvency/ Bankruptcy Proceedings and offences of money laundering:
- India: Insolvency proceedings are governed by the Insolvency and Bankruptcy Code, 2016 and Insolvency rules and regulations. The offences of money laundering and provisions for attachment of property are captured in the Money Laundering Act, 2002.
- U.S.A.: Title 11 of the United States Code (‘U.S.C.’), known as The U.S. Bankruptcy Code, regulates voluntary and involuntary bankruptcy proceedings. The anti- money laundering provisions are mainly governed by Section 1956 and 1957 of the U.S.C., the Bank Secrecy Act,1970 and the Anti-Money Laundering Act, 2020.
- U.K.: Insolvency Proceedings are regulated by Insolvency Act, 1986 with amendment vide the Corporate Insolvency and Governance Act, 2020. The anti- money laundering provisions are encapsulated in the Sanctions and Anti-Money Laundering Act 2018, Proceeds of Crime Act 2002 and the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer), Regulations 2017.
- Singapore: The Insolvency, Restructuring and Dissolution Act 2018, as notified in May, 2020, now regulates the bankruptcy proceedings along-with the Insolvency, Restructuring and Dissolution (Corporate Insolvency and Restructuring) Rules 2020. The anti-money laundering provisions are implicitly captured in the
Corruption, Drug, Trafficking and other Serious Crimes (Confiscation of Benefits) Act (‘CDSA’).
2. Moratorium period for admission/continuation or any other action against the Debtor:
- India: The moratorium period commences from the date of order of admission of insolvency proceedings till the completion of the corporate insolvency resolution process (‘CIRP’). The proceedings for attachment of property under PMLA, being civil in nature, cannot be initiated, continued or executed during the moratorium periodii as no Civil Court has jurisdiction in matters which are under the jurisdiction of the NCLT or NCLAT as per the Code.iii The moratorium prohibits sale, disposing or otherwise transfer of property of the Corporate Debtor during the moratorium period.
- U.S.A.: The automatic stay commences from the time of filing of application for bankruptcy before the appropriate court.iv Section 362(b)(1) of U.S. Code creates an exception wherein the commencement or continuation of criminal proceedings against the debtor is not hit by the automatic stay imposed. However, the automatic stay bars any civil forfeiture proceedings that may be pending against the property of the debtor during the moratorium period.
- U.K.: The moratorium period commences from the date the papers are filed with the appropriate Court. The initial moratorium is for the period of 20 business daysv during which creditors cannot enforce pre-moratorium debts and there can no proceedings against the debtor. The said 20 days may be extended by another 20 days without any consent or longer with consent of pre-moratorium creditors. The appropriate Court under Regulation 80(3) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer), Regulations 2017 has the power to make a restraining order against any person who has violated any requirement under the Regulations as well as the Act.
- Singapore: In case there is a possible compromise or scheme of arrangement between the creditors and the Debtor, an application for moratorium needs to be filed to the appropriate court by the Debtor.vi However, an initial moratorium takes effect until the court hears the application or until 30 days after the date of the application, whichever is earlier.vii As per Section 64(1)(d) of the IRDA, the Court has the power to stay any legal processes against the property of the debtor company.
3. Attachment of debtor’s property and developments in law
- India: The proceedings for seeking attachment of property under PMLA is governed by civil provisions and the Adjudicating Authority, PMLA exercises civil jurisdiction as well.viii Thus, the attachment proceedings under PMLA are civil in nature.ix Therefore, provisions of Section 14 shall be attracted and once moratorium commences, no action towards attachment of the debtor’s property may be permitted under PMLA.
It is to be noted that IBC being a subsequent legislation shall override PMLA with respect to the civil nature of PMLA in accordance with Section 238 of the Code. Thereby, NCLT shall entertain matters relating to attachment of debtor’s property as per Section 60(5) of the Code.
As per the introduction of Section 32A of the Code, no action shall be taken against the property of the Corporate Debtor for offence committed prior to the commencement of insolvency process if the property is covered in the Resolution plan, as approved the Adjudicating Authority. Thus, the Indian legal position focuses on value maximisation to the Corporate Debtor and encourages prospective resolution applicants by providing sufficient the protection against attachment of the Corporate Debtor’s property.
- U.S.A.: The provisions of anti-money laundering are captured in Section 1956 and 1957 of the U.S. Code and one of the punishments applicable is forfeiture of property which may be civil or criminal. In criminal forfeiture, if the person has been convicted of money laundering, any property traceable to the offence is subject to forfeiture.x In civil forfeiture, forfeiture action can be brought against property involved or traceable to the offence of money laundering even if there has been no conviction.xi
The U.S. Bankruptcy Code is a federal legislation whilst majority of the states in the U.S. have enacted state legislations with respect to forfeiture of property involved in specific unlawful activity, owing to which there has been conflict between the State laws and the federal law. It is pertinent to note that all of debtors’ assets become property of the bankruptcy estate immediately upon filing.xii Furthermore, the doctrine of ‘relating back’ states that upon final judgment of forfeiture of property, statutes retroactively divest a person or entity of all interest in forfeited property as of the date of the seizure. Thus, the argument is raised that if a debtor’s property is seized pre-petition, and later forfeited pursuant to a final judgment of forfeiture in state court, that property arguably never becomes property of the bankruptcy estate because the debtor is determined, retroactively, to have lost all interest in the forfeited property prior to commencement of the bankruptcy case. Title only vests – albeit retroactive to the time of the illegal activity – upon entry of a judgment of forfeiture. Therefore, the conflict between the state forfeiture laws and the Bankruptcy Code is ongoing with recent outcomes supporting the doctrine of relating back although the supremacy clause as per Article 6(2) of the U.S. Constitution states that a federal law shall hold supremacy over state laws.
- U.K.: If the corporate debtors’ property if involved in a criminal offence relating to money-laundering as under Part 7 of the Proceeds of Crime Act, 2002(‘POCA’), it is the duty of the insolvency practitioner to report such suspicion of any criminal activity resulting in proceeds regardless of who may have committed the offence to National Criminal Intelligence Service(‘NCIS’).
It is also pertinent to note that Part 5 of POCA encapsulates a civil recovery regime whereby freezing orders and/or interim receiving order and/or civil recovery ordersxiii may be passed against the property, which is under suspicion of being arising out of or relating to unlawful conductxiv. However, Part 9 of POCA lists situations wherein the owner of the property is undergoing insolvency
proceedings under the 1986 Act. The Act states that if a restraint order is passed against the property of the debtor before the order adjudging the person as bankrupt, then that property shall not be a part of the Bankruptcy estate of the Debtor.xv Simultaneously, when an order adjudging a person as bankrupt has been passed, the property forming a part of the Bankruptcy estate cannot be proceeded against for seizure of property and/or a freezing order.xvi So far as a civil recovery order is concerned, a recovery order may not be continued or enforced against a property which forms part of the estate of an individual who has been declared bankrupt, except with leave of appropriate court.xvii
In securities upon which there is a floating charge, Section 15 of the Insolvency Act, 1986 states that the Insolvency Practitioner may dispose of securities on which floating charge is created without permission of the court and may dispose of other securities with the permission of the court. However, a complementary provision is present in POCA which states that the receiver cannot proceed against the properties with a floating charge if there is a restraint order against the property or if the property is being detained.xviii Therefore, the U.K. legislation is quite certain with respect to the attachment of the debtor’s properties when the debtor is undergoing insolvency proceedings.
- Singapore: The CDSA is quite clear with respect to the status of the realised property once the debtor is adjudged as bankrupt and the various powers available with the appropriate Court. Part III of the Act deals with Enforcement and exercise of orders wherein the Courts powers to exercise restraint as well as charging orders against properties are specified along-with orders for realisation of property. Section 23 of the CDSA states that where a person holding realisable property is adjudged as bankrupt and the order adjudging him bankrupt is made after the restraint order on the property then such property shall be excluded from the bankrupt’s estate for the purposes of IRDA,2018. Furthermore, after the adjudication of the debtor as bankrupt, this Section bars the Court to pass restraint or charging orders or orders towards realisation of property on the property that is included in the bankrupt’s estate as per IRDA. Further, Section 23(3) states that IRDA shall not be interpreted to restrict the provisions of CDSA to this regard.
Aarna Law Comment:
The basic tenet of Insolvency and Bankruptcy laws across the globe is value maximization of the Corporate Debtor’s asset whilst ensuring that creditors and other stakeholders rights are safeguarded. However, conflict arises when the private property(s) of the Corporate Debtor need to be proceeded against for offences of money- laundering, which is a matter of public policy. The act of balancing the objective of revival of Corporate Debtor and addressing the offences of money laundering is a question that has arisen in multiple jurisdictions.
The adoption of an outright protection for the property(s) of the debtor who has filed for insolvency or has been declared bankrupt is the approach that India is leading towards. The anti-money laundering laws of all four jurisdictions discussed above have relevant provisions for the attachment of property. Whilst India has recently clarified its position towards the issue of attachment of the debtor’s property with the Manish Kumar case and introduction of Section 32A of the Code, 2016, the United States of America is still dealing with the conflict of different federal laws with the centralized U.S. Bankruptcy Code owing to which both civil and criminal forfeiture of debtor’s property(s) have different outcomes in different states.
In contrast, the United Kingdom and Republic of Singapore have clear provisions with respect to treatment of property based on the date of adjudication of bankruptcy. Thus it can be seen that the position in India is oriented towards value maximisation of the assets of the Corporate Debtor and thus a creditor friendly approach on the issue.
i Company Appeal No. 575/2019, NCLAT Delhi 
ii See Manoj Kumar case, supra.
iii Section 63 of the Insolvency and Bankruptcy Code, 2016.
iv Under 11 U. S. Code, § 362.
v The Corporate Insolvency and Governance Act, 2020.
vi Section 64 of the Insolvency, Restructuring and Dissolution Act, 2018.
vii Section 64(14) of the Insolvency, Restructuring and Dissolution Act, 2018.
viii Sections 11 and 41 of the PMLA.
ix See Manoj Kumar case, supra.
x Under 18 U. S. Code, § 982. xi Under 18 U. S. Code, § 981. xii 11 U.S.C. § 541.
xiii Chapter 2, Part 5 of Proceeds of Crimes Act, 2002. xiv Chapter 1, Part 5 of Proceeds of Crimes Act, 2002. xv Section 417, Part 9 of Proceeds of Crimes Act, 2002. xvi Section 418, Part 9 of Proceeds of Crimes Act, 2002.
xvii Section 311, Part 5 of Proceeds of Crimes Act, 2002.
xviii Section 430, Part 9 of Proceeds of Crimes Act, 2002.