ED Vs IBC: Govt To Resolve Legal Clash Impacting Homebuyers In Builder Bankruptcies

(MENAFN- Live Mint)

New Delhi: The government is set to decide how two overlapping laws can work harmoniously so that homebuyers aren't adversely affected when a real estate developer slips into bankruptcy and also faces regulatory action for financial crimes, two people familiar with the development said.

The ministry of corporate affairs, the Insolvency and Bankruptcy Board of India (IBBI) and the Directorate of Enforcement (ED) have held several meetings on aligning the two laws-the Prevention of Money Laundering Act (PMLA) and the Insolvency and Bankruptcy Code (IBC)-and now the government has to take a view on the matter, one person said.

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The ED has prepared a new protocol to guide resolution professionals running bankrupt companies on how they can get assets attached under the anti-money laundering law for inclusion in the prospectus when they invite investors for a distressed developer, Mint reported on 16 September. It requires resolution professionals to approach the special PMLA courts to get those assets released.

However, given that the IBC specifies strict timelines for the rescue of insolvent companies, the government is keen to iron out the conflicts between the two statutes and avoid any associated litigation.

Under the PMLA, a criminal law, the ED investigates money-laundering offences, attaches tainted assets provisionally and restores them to the rightful owners. Special PMLA courts adjudicate such asset attachments and conduct trials.

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The IBC, on the other hand, is a commercial law meant for lenders to hire administrators to run companies that have defaulted on loan repayments, assess creditor claims, invite fresh investors and prepare a rescue plan to be approved by the National Company Law Tribunal within strict timelines so that distressed companies are turned around quickly with minimal cost to the economy.

Primacy clause

The interplay of the two laws has been at the centre of several disputes, given that both the statutes-the PMLA enacted in 2002 and the IBC in 2016-assert their primacy with the clause“notwithstanding anything to the contrary contained" in any other law, explained the second person, who also spoke on condition of not being identified.

“Assets attached by the ED are restored to the rightful owners. However, the time taken by special PMLA courts can interfere with the IBC timeline of completing debt resolution within 330 days. One option could be to have a carveout in the PMLA for housing projects so that the PMLA asset attachments do not delay bankruptcy resolution," the first person said.

A policy decision to ensure the harmonious operation of the two laws has become important given that the real estate and construction sectors together account for more than a third of the almost 8,500 bankruptcy cases admitted in tribunals and their propensity to financial irregularities warranting the ED's involvement.

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The Supreme Court is currently hearing the case of Udaipur Entertainment World Pvt. Ltd. vs Government of India, which involves PMLA asset attachment.

The conflict between PMLA asset attachments and IBC resolution proceedings stems from both statutes containing powerful non-obstante clauses (in spite of anything to the contrary), creating competing claims over the same corporate assets, explained Yogendra Aldak, executive partner at Lakshmikumaran and Sridharan attorneys.

Recent Supreme Court judgments, particularly in Kalyani Transco v. Bhushan Power & Steel, have clarified that insolvency tribunals cannot interfere with the ED's statutory powers, effectively establishing the PMLA's primacy over attachment decisions, said Aldak.

Section 32A

However, the introduction of Section 32A in the IBC provides crucial immunity to resolution applicants from pre-corporate insolvency resolution process liabilities, creating a temporal solution where timing determines which law prevails, he said. The section allows a new owner to take over a financially distressed company without the threat of government agencies seizing its assets for the misdeeds of former promoters.

“The most pragmatic approach lies in legislative amendments that codify asset substitution mechanisms, allowing the ED to maintain attachment rights while enabling resolution processes to continue with equivalent value assets. Without such reforms, we will continue seeing prolonged litigation that serves neither the objectives of money-laundering prevention nor efficient corporate resolution," said Aldak.

Madhav Kanoria, a partner at law firm Cyril Amarchand Mangaldas, said parliament should consider clarifying that once the resolution plan has been approved, the ED must automatically release assets that it attached during or prior to the corporate insolvency resolution process.

“This will ensure that any successful resolution applicant does not have to get entangled in multiple layers of legal proceedings to revive the corporate debtor post-plan approval. This will also uphold the spirit of Section 32A and ensure timely resolution of the corporate debtor," said Kanoria.

When the bankruptcy resolution concludes, the new investor can file an application before the special PMLA court to get the attached property released in its favour, explained Amit Maheshwari, a tax partner at AKM Global, a tax and consulting firm.

“However, the only impediment is that such an application would be maintainable after the special court has framed charges of money laundering under the PMLA and as a consequence, the trial has commenced," said Maheshwari. Before this stage, the resolution professional or the company's successful bidder can also file a writ petition before the jurisdictional high court.

Restored property

As far as homebuyers are concerned, they are always considered bona fide claimants in terms of Section 8 (8) of the PMLA dealing with the restoration of confiscated property to the legitimate owner.

There have been instances where the ED has given its no-objection certificate after investigating that a homebuyer's source of funds is not tainted or, in other words, he/she is not a benamidar (proxy) of the accused real estate developer, Maheshwari explained.

Queries emailed to the finance and corporate affairs ministries and to the IBBI on Tuesday, seeking their comments on the matter remained unanswered at the time of publishing.

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