It is settled law that where attachments are made by the ED and the said property is vested in the central government prior to initiation of the CIRP of a company, the protection available to the company by virtue of different IBC provisions will not come to the aid of the company, and the insolvency professional shall not be able to take control over such assets of the company by virtue of IBC sections 18 and 25.

Any such attachment made by the directorate, and consequent vesting of the said asset in the central government shall hold good, and the company or the insolvency professional in charge of the company may not receive any favourable order from the court or tribunal.

However, it is important to emphasise that an attachment that is made prior to initiation of the CIRP, or made during the subsistence of the CIRP but is pending conclusion of trial, would only continue until approval of a resolution plan submitted for the company by the National Company Law Tribunal (NCLT). The said protection is being given to the new management by virtue of section 32A of the IBC.

Section 32A will be attracted only when a resolution plan is approved by the NCLT that results in a complete change in the character of ownership and control of the corporate debtor.

When the conditions mentioned in section 32A(2) are fulfilled, any action taken by the directorate (including any attachment, seizure, confiscation or retention of the property) in relation to an offence committed prior to commencement of the CIRP shall not hold good. Similarly, any action taken by the directorate after an order of the NCLT approving the resolution plan for the distressed entity, for an offence committed prior to the CIRP, would also not hold good as long as the conditions mentioned in section 32A are fulfilled.

No bidder would capitalise in a distressed entity that is already canopied by various investigations, and whose assets and properties are attached by investigating authorities, leading to never-ending litigation to acquire the same. Section 32A provided protection to the new bidders against the past liabilities of the company and stimulated them to be a part of the resolution process.

Since the protection under section 32A is available on approval of a resolution plan, whether any attachment made prior to the CIRP or during the CIRP of a company could be released during the subsistence of the moratorium is yet to be settled in view of the divergent views taken by courts/tribunals.

Certain courts and tribunals have held that since the assets of the company are from proceeds of crime, it is always open to the ED to seize such assets and act under the PMLA. However, the National Company Law Appellate Tribunal on several occasions has held that since proceedings under the PMLA are civil in nature, in view of section 14 of the IBC, the proceedings before the PMLA cannot continue.

An objective of the IBC, among other things, is to protect all the assets and properties of the company undergoing a CIRP in order to ensure value maximisation and a smooth resolution of the distressed entity.

However, due to the scattered position of law taken by courts/tribunals, the insolvency professionals are running to and fro to de-attach the properties/assets in order to lead a successful resolution of the distressed entity. Hence, in order to ensure a successful resolution of the company, there is a need to balance the two specialised pieces of legislation, and to resolve the conflict between section 14 and the power of the ED to effect new attachments or continue old attachments under the PMLA during the CIRP.

This article was originally published in Asia Business Law Journal on 29 April 2024 Co-written by: Anoop Rawat, Partner; Devansh Rathi, Associate. Click here for original article

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