Between The Lines - April 2024 - Arbitration & Dispute Resolution

Key Highlights

Bombay High Court: NCLT has jurisdiction to direct Directorate of Enforcement to release attached properties of a corporate debtor.
Delhi High Court: Designation of seat of arbitration is similar to an exclusive jurisdiction clause.
Bombay High Court: Orders issued by banks and financial institutions while declaring a wilful defaulter must be reasoned orders.
Supreme Court: Workers who are engaged in the performance of work which is perennial or permanent in nature would not be classified as contractual workers.

I. Bombay High Court: NCLT has jurisdiction to direct Directorate of Enforcement to release attached properties of a corporate debtor.

On March 1, 2024, the High Court of Bombay ("Bombay High Court") pronounced a judgment in the matter of Mr. Shiv Charan and Others v. Adjudicating Authority under the Prevention of Money Laundering Act, 2002 and Another [Writ Petition (L) No. 9943 of 2023] and Directorate of Enforcement, Government of India v. Mr. Shiv Charan and Others [Writ Petition (L) No. 29111 of 2023]. The Bombay High Court has held that the Adjudicating Authority under the Insolvency and Bankruptcy Code, 2016 ("IBC") is well within its jurisdiction in directing the Directorate of Enforcement ("ED") to release the attached properties of a corporate debtor.

Facts

DSK Southern Projects Private Limited ("Corporate Debtor") had been undergoing corporate insolvency resolution process ("CIRP") under IBC since December 9, 2021. A resolution plan submitted by Mr. Shiv Charan, Ms. Pushpalata Bai and Ms. Bharti Agarwal ("Resolution Applicants") was approved by the National Company Law Tribunal, Mumbai ("NCLT") by its order dated February 17, 2023 under Section 31 (Approval of resolution plan) of IBC ("Approval Order").

Prior to the commencement of CIRP of the Corporate Debtor, on October 20, 2017, various first information reports were filed against the Corporate Debtor and its erstwhile promoters, inter alia, alleging offences of cheating and criminal breach of trust. Considering that the alleged offences were prima facie "scheduled offences" under the Prevention of Money Laundering Act, 2002 ("PMLA"), the ED filed an enforcement case information report being ECIR/01/MZBO-II/2018 dated March 8, 2018 ("ECIR"). As per the ECIR, the estimated "proceeds of crime" was to the tune of INR 8,522.27 Crores. Pursuant thereto, an original complaint was filed by the ED, inter alia, leading to attachment proceedings against the assets of the Corporate Debtor. More particularly, four bank accounts of the Corporate Debtor with an aggregate balance of INR 3,55,298/- and 14 flats constructed by the Corporate Debtor valued at INR 32,47,55,298/- were attached ("Attached Properties").

Initially, a provisional attachment was levied on February 14, 2019 under Section 5 (Attachment of property involved in money-laundering) of PMLA, which was subsequently continued by a confirmatory order dated August 5, 2019 passed by the Adjudicating Authority. The attachment continued even after the commencement of CIRP of the Corporate Debtor and further after the approval of resolution plan. Such continuation of attachment even after the approval of resolution plan led to filing of Writ Petition (L) No. 9943 of 2023 by the Resolution Applicants. The writ petition sought quashing of the ECIR, orders attaching the Attached Properties and the original complaint, in so far as they related to the Corporate Debtor and its assets, especially in light of the Approval Order. Simultaneously, the ED filed Writ Petition (L) No. 29111 of 2023, thereby challenging the authority of NCLT to pass orders invoking Section 32A (Liability for prior offences, etc.) of IBC in a manner which, as per the ED, negates and defeats the purpose and provisions of PMLA. Notably, the ED had not sought quashing of the Approval Order, but had sought quashing of a subsequent order dated April 28, 2023 whereby NCLT had once again directed the ED to release the Attached Properties.

Issues

Whether Adjudicating Authority has the jurisdiction to direct the ED to release the properties attached under PMLA by invoking Section 32A of IBC.
Whether Adjudicating Authority had exceeded its jurisdiction under Section 60(5) (Adjudicating Authority for corporate persons) of IBC by traversing beyond the domain of IBC and entering upon the domain of PMLA.

Arguments

Contentions of the ED:

The ED submitted that Resolution Applicants had other efficacious remedies available to them apart from invoking the writ jurisdiction of Bombay High Court and they ought not to have filed a writ petition. On the other hand, the ED did not have any other alternative remedy and therefore the writ petition filed by the ED is maintainable. The ED further contended that the Resolution Applicants had filed the application seeking release of Attached Properties, prior to the Approval Order, which was allowed by the NCLT on April 28, 2023. Further, it was contended that the Resolution Applicants have been misusing the writ jurisdiction of Bombay High Court as an execution court.

The ED submitted that Section 32A of IBC cannot be interpreted in a manner that defeats the special objectives behind enactment of PMLA and curtails the power of the ED to keep the properties attached under PMLA. Further, NCLT has no jurisdiction under Section 60(5) of IBC to transcend beyond the interpretation of the provisions of IBC and must refrain from venturing into other legislations.

The ED further contended that even prior to commencement of CIRP of Corporate Debtor, a provisional attachment on the assets of the Corporate Debtor was levied on February 14, 2019 under Section 5 of PMLA, which subsequently continued by a confirmatory order dated August 5, 2019 passed by the Adjudicating Authority under Section 8 of PMLA. Hence, it was in public knowledge that the Attached Properties were subject matter of attachment by the ED. As such, any person aggrieved by the aforesaid attachment had a statutory right to prefer appeal under Section 26(1) (Appeal to Appellate Tribunal) of PMLA and hence, efficacious remedy was already available under PMLA.

Contentions of the Resolution Applicants:

Resolution Applicants contended that Section 32A of IBC, being a non-obstante provision, would override the provisions of PMLA in the event of any inconsistency or conflict. It was further submitted that since the commencement of CIRP, the protection of moratorium will be triggered by virtue of Section 14 (Moratorium) of IBC. Thereafter, upon approval of resolution plan by Adjudicating Authority, jurisdiction of Section 32A of IBC would commence, as per which, no attachment can lie or continue against the property of the Corporate Debtor in relation to an offence committed prior to the commencement of CIRP of the Corporate Debtor, where such property is covered under a resolution plan approved by the Adjudicating Authority under Section 31 of IBC.

It was further contended that by virtue of Section 32A of IBC, there must be automatic vacation of attachment (if any) on the assets of the Corporate Debtor immediately after approval of resolution plan by NCLT, instead of the Resolution Applicants being compelled to knock on the doors of any forum to seek any positive grant of approval.

Resolution Applicants further contended that under the scheme of PMLA, any attachment can only be in the nature of interim measure that would enable the final measure of confiscation as provided under Section 8(5) of PMLA. However, by virtue of Section 32A of IBC, since the ultimate end of confiscation is protected, it is only natural and equitable that the interim measure of attachment must come to an end pursuant to approval of resolution plan.

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India: Between The Lines - April 2024