Explained: Are Enforcement Directorate's seizures harming the economy?

ED's move could stall the resolution process, prevent banks from recovering their pending dues

At the centre of the present impasse between National Company Law & Appellate Tribunal (NCLAT) and Enforcement Directorate (ED) is Bhushan Power & Steel, one of the biggest corporate defaulters in India. One of its group companies, Bhushan Steel, was referred by the Reserve Bank of India (RBI) to the National Company Law Tribunal (NCLT) in 2017 for resolution of its bad debts under the Insolvency and Bankruptcy Code 2016. It was acquired by the Tata Group for Rs 35,200 crore, enabling banks to recover almost two-thirds of their dues from the firm. Creditors have claimed Rs 56,079 crore from Bhushan Steel and its group companies. In 2019, Jindal Steel Works (JSW) was allowed to buy Bhushan Power and Steel Ltd for over Rs 19,000 crore. However, the ED which was probing money laundering charges against Bhushan Power & Steel’s promoters attached the company’s properties under the Prevention of Money Laundering Act (PMLA) 2002. NCLAT has said that ED’s move has stalled the resolution process.

Can the ED attach properties of a company which is under the resolution process?

The ED is probing money laundering charges against Bhushan Power and Steel’s promoters and has claimed that it has sufficient proof to prove its allegations. Under section 5 of PMLA, the ED can attach a person’s immovable property if it is convinced the person is in possession of the “proceeds of the crime.” The Section states that the ED may pass an order in writing “provisionally attaching the property for a period not exceeding 150 days from the date of issue of such an order.” Furthermore Section 8 of PMLA states that an adjudicating authority can allow the attachment of the seized property till the legal proceedings are over and that the person’s property would be permanently seized after his guilt is proven in court. The ED has attached properties such as land, buildings and machinery worth over Rs 4,000 crore belong to Bhushan Power and Steel. All these properties are located in Odisha.

Why does NCLAT not want ED to attach these properties?

Simply because when properties are under ED’s possession, JSW would be reluctant to acquire the company, which in turn wouldn’t allow banks to recover their pending dues from Bhushan Power and Steel. This would further hurt many banks that have taken a haircut to recover money from Bhushan Power and Steel. The banks' non-performing assets (NPAs) would continue to remain unresolved, further jeopardising their sustainability and existence in the near future. If the banks can recover the money after JSW acquires Bhushan Power & Steel, it would boost their balance sheets and reduce their stressed assets.

What is NCLAT’s argument against ED attaching the properties?

NCLAT judge S J Mukhopadhya had commented in court that ED can investigate money laundering only against individuals and could, therefore, attach properties belonging only to individuals. In other words, the ED’s move to attach properties and assets held in the name of the company was beyond its powers. Mukhopadhyay is reported to have told the ED in court, “You are going to kill the economy of this country. You are playing with fire. No outsider will come and purchase distressed companies. The IBC cannot be annulled in this manner.” In a hearing on October 14, the NCLAT proposed a solution before posting the matter for further hearing on November 18. It suggested that the ED could be made an ‘operational creditor’ if it lets go of the seized properties. NCLAT suggested that once ED is declared an operational creditor it could file its claims to recover the “proceeds of the crime” once the sale of Bhushan Power and Steel is completed under the resolution process. Before proposing this solution, NCLAT stated, “Before deciding the case on merit, it is desirable if the two wings/departments of the central government sit together and settle the issue.”

What is the Modi government doing to resolve this impasse?

Finance Minister Nirmala Sitharaman had admitted on October 14 that this impasse is an ‘issue’. She is reported to have said, “We are applying our minds to it. Let us see how we can resolve it. The government has recognised there is an issue.” She had stated that she was in talks with revenue secretary Ajay Bhushan Pandey and corporate affairs secretary Injeti Srinivas to arrive at a solution to this issue, which could jeopardise the successful resolution of Bhushan Power and Steel insolvency case.

What happens if the ED is made an operational creditor?

At the end of the day, all the money that the ED gets from auctioning or leasing seized properties of convicted money launderers goes to the central government and is considered its revenue. But the government risks losing that money if the ED is made an operational creditor. There are two types of creditors under IBC -- financial and operational. The Bankruptcy Law Reforms Committee distinguished the two as follows: Financial creditors are those whose relationship with the entity is a pure financial contract, such as a loan or debt security. Operational creditors are those whose liabilities from the entity comes from a transaction on operations.” Section 53 of the IBC creates a ‘waterfall mechanism’, or an order of priority in which the recovered money would be distributed during the resolution process. Topmost priority is given to workmen whose salaries haven’t been paid by the insolvent company, followed by secured creditors. Therefore banks, which are the secured financial creditors to Bhushan Power & Steel, are entitled to get the proceeds first after the employees have been paid their dues. The central government (to whom ED would pay the proceeds after disposing the seized properties) comes only fifth in the eight-stage order of precedence in this waterfall mechanism of distributing the proceeds of the sale of Bhushan Power & Steel.