Delhi HC stops coercive action by ED against firms under liquidation in IBC

In a detailed ruling on interplay between IBC and PMLA, the court allowed a writ petition by a liquidator to proceed with the liquidation process of a corporate debtor

The Delhi high court in its latest ruling has backed the legitimacy of the insolvency and bankruptcy law restraining any coercive action by the Enforcement Directorate against a company undergoing liquidation process approved by the national company law tribunal.

In a detailed ruling on interplay between IBC and Prevention of Money Laundering Act (PMLA), the Delhi HC has allowed a writ petition by a liquidator to proceed with the liquidation process of the corporate debtor.

The court has stopped the Enforcement Directorate from taking any further action, coercive or otherwise, against the liquidation estate of the corporate debtor or the corpus gathered by the Liquidator in terms of the sale of liquidation assets as approved by the Adjudicating Authority under IBC.

“The power otherwise vested in the respondent under the PMLA to provisionally attach or move against the properties of the corporate debtor would stand foreclosed once the Adjudicating Authority comes to approve the mode selected in the course of liquidation. To this extent and upon the Adjudicating Authority approving the particular measure to be implemented, the PMLA must yield,” the HC order read.

Section 32A of the IBC assures the resolution applicant or the bidders that it shall not be held liable for any offense that may have been committed by the corporate debtor prior to the initiation of the CIRP.

It similarly extends that warranty in respect of the properties of the corporate debtor once a resolution plan stands approved or in case of a sale of liquidation assets. The court ruled that if it were held to be otherwise, it would place the entire process of resolution and liquidation in jeopardy.

The judgement could have an impact on other liquidation cases facing similar issues due to ED action, such as Deccan Chronicle.

The Delhi high court in February had stayed the provisional attachment order of the Enforcement Directorate, confiscating the properties of Deccan Chronicle Holdings after the resolution plan was approved by National Company Law Tribunal, Hyderabad. However IBC lawyers said that a positive judgement in favour of liquidation is likely to pave the way for the sale of its assets now.

Experts believe that this judgment would resolve all the issues not just under liquidation but also the corporate insolvency resolution process.

“This will resolve the major concern of interplay between section 32A of IBC and ED’s powers in such companies. This will also clear up the way for bidders to acquire companies which are impacted because of ED and PMLA issues,” said Anshul Jain, partner, PwC India.

The petition was filed by Nitin Jain, liquidator for PSL Limited against the enforcement directorate after it sent an attachment notice against the assets and factories of the company under PMLA provisions. Lucky Holdings, which was one of the bidders, had also been named by ED in its notice.