ED swoop on BPSL has lenders wary of IBC route for debt resolution

The attachment of Bhushan Power & Steel’s (BPSL’s) assets by the Enforcement Directorate (ED) has made lenders wary of taking the Insolvency and Bankruptcy Code (IBC) route for debt resolution.

“As bankers, we are all concerned about the implication of the Prevention of Money Laundering Act (PMLA) on IBC. It would be very difficult to arrive at a resolution under the IBC and this will derail the entire process. For smaller cases, we are not keen on taking companies through the IBC route and waiting indefinitely for resolution,” says Ashok Kumar Pradhan, managing director at United Bank of India (UBI).

The attachment by the ED was made under PMLA and is being legally tested before the National Company Law Appellate Tribunal (NCLAT) at a time when it is in the final lap of resolution under IBC. BPSL was bagged by JSW Steel. On Friday, the NCLAT asked the ED and the Union ministry of corporate affairs (MCA) to reach consensus on the issue. The ED is an investigative agency under the finance ministry; MCA is entrusted with administering the IBC.

The head of a public sector bank said if the PMLA is tested on IBC, close to 90 per cent of non-performing asset (NPA) cases in the banking system will turn out to be fraudulent. “This would mean no resolution under the IBC mechanism,” he observes.

Most IBC cases were facing investigation under PMLA. Further, the ED has said in the BPSL case, insolvency tribunals do not have the jurisdiction to direct the release of assets attached under PMLA. 

With two laws locking horns, a senior with State Bank of India says the central government might need to get the IBC amended.

Suharsh Sinha, partner at legal firm AZB & Partners, said there was huge concern among bidders and lenders on the attachment of assets under PMLA. “Suddenly (with this development), a bidder is getting into a company completely blindfolded, as more liabilities can crop up even after NCLT (National Company Law Tribunal, where the IBC process is implemented) approval. This can create ground for bidders to pull out or for revising of bids. A process of consultation is required between the ED and MCA.”

Vidisha Krishan, partner at MV Kini & Co, said it would be ideal if the Supreme Court could clearly demarcate when the PMLA can come in, for cases of debt resolution. 

“The timing has gone sour in the case of Bhushan Power & Steel. While the PMLA is a criminal Act and any asset created from the proceeds of crime should not be allowed in either liquidation,  resolution or a one-time settlement under the IBC, the timing is important. The ED should not come in at the last minute and attach assets. This is essential, as otherwise any procedure at the last stage can be unravelled and leave bonafide bidders unsettled,” she said.

Krishan says one remedy could be a no-objection certificate under PMLA at the point of NCLT approval for resolution. However, Sinha says, all resolution plans have clauses that any attachment of assets shall be subordinated.

The controversy around PMLA and IBC has stemmed from overriding clauses. Sudipta Routh, partner, IndusLaw, says the simplest rule of statutory interpretation in the case of two conflicting statutes is that the latter statute gains primacy, even if the date is  only of the latest amendment.  

“PMLA was amended in August 2019, on the teeth of the confusion created by three different fora (PMLA Appellate Tribunal, Delhi high court and the NCLAT). Sadly, the amendments do not appear to address conflict resolution between IBC and PMLA. Where we ought to come out on this, therefore, is the order of the PMLAT. It (should) be the IBC that will gain primacy, until the legislature opts to amend,” he said.

When legal horns lock

Section 71 of PMLA 
 

Act to have overriding effect — The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force

Section 238 of IBC 
 

Provisions of this Code to override other laws — The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law