Treatment of Attachment Orders under the Indian Insolvency Regime
Core Conflict: Statutory Attachment vs. Custodial Mandate of Resolution Professional
“The Insolvency and Bankruptcy Code (“IBC” or “Code”) requires the Resolution Professional (“RP”) to take control of the assets of the corporate debtor. Amongst other reasons, the RP has been entrusted with this duty for safeguarding the assets from being disposed off by erring promoters or by creditors and to enlarge the pool of assets that are available for maximization of value. While exercising this power given under the Code for taking control and custody of the assets of the corporate debtor, the RP on multiple occasions has to face the issue of attachment of the assets of corporate debtor by regulatory/statutory authorities. The issue gets further complicated when the authorities while exercising their power of attachment, take control of the assets prior to the insolvency commencement date (“ICD”). Consequentially, the conflict arises in respect of the power of attachment with the authority and the power of control and custody of the RP under the Code.”
1. The Non-Obstante Clause (Section 238) and the Three Regulatory Spheres
Judicial pronouncements of various Courts and Tribunals as discussed in the current write-up have mostly relied on the non-obstante clause in section 238 of the Code. Section 238 of the Code states that the provisions of the Code shall have the effect, notwithstanding anything inconsistent therewith contained in any other law for time being in force or any instrument.
Supreme Court Precedent in K. Kishan: Further, Hon’ble Supreme Court in K. Kishan V. Vijay Nirmal Company (p) ltd (2018) 146 CLA 1 (SC) has held that section 238 of the Code would prevail in case there is an inconsistency between the Code and consequent statute which is in question under the dispute in the immediate case.
In light of the above context, this article has mainly dealt with the act of attachments by three statutory/regulatory authorities, namely:
Customs Authority
Central Board of Indirect Taxes and Customs under the Customs Act, 1962.
Enforcement Directorate
Under the Prevention of Money Laundering Act (PMLA), 2002.
PF Commissioner
Under the Employees’ Provident Funds and Miscellaneous Provisions Act (EPF Act), 1952.
The following sections review recent pronouncements by the judicial authorities that have established the current law and practice.
2. Customs Authority: Central Board of Indirect Taxes and Customs (Customs Act, 1962)
The Milestone Dispute: Sundaresh Bhatt, Liquidator of ABG Shipyard v. CBIC (Supreme Court of India)
In the matter of Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs (Civil Appeal No. 7667 of 2021), the customs authorities had seized the goods of the corporate debtor. The seizure in question had taken place prior to the ICD. On commencement of the liquidation, the liquidator filed an interlocutory application (I.A.) under section 60(5) of the Code seeking a direction from the Hon’ble NCLT against the custom authorities to release the goods which belonged to the corporate debtor.
In the immediate I.A., the Hon’ble NCLT allowed the prayer of the liquidator and directed the customs authority to release the goods of the corporate debtor which were seized by the customs authority. The Hon’ble NCLT reached the said conclusion by virtue of section 238 of IBC having an overriding effect on the Customs Act, 1962 due to the IBC, 2016 being enacted later in time than the Customs Act, 1962.
NCLT’s Doctrine of Subsequent Enactment:
The reason for a later enactment having an overriding effect over an earlier enactment is that the legislature while passing the Code in the year 2016 is deemed to be aware of the earlier legislations passed such as Customs Act, 1962 along with the conflict that might arise due to interplay of Customs Act, 1962 and the Code. Being cognizant of the said conflict, the legislature had put the non-obstante clause in form of section 238 of IBC from which legislative intent of giving an overriding effect to the subsequent law may be inferred.
NCLAT’s Reversal and the Relinquishment Theory under Section 48:
The order of NCLT was challenged before NCLAT (Appeal No. M.A. 1280/2018 in C.P. 405/2018). The Hon’ble NCLAT set aside the NCLT order by deciding whether the assets that the liquidator was seeking control over were assets of the corporate debtor or not. The issue raised was that if ownership of assets had passed to the customs authority, the power of the liquidator to take control and custody of “assets of corporate debtor” becomes redundant; thus no question of inconsistency between the Customs Act and the Code survives to be dealt via Section 238.
NCLAT referred to Section 48 of the Customs Act, 1962, which grants thirty days’ time from the date of unloading at the customs station for clearing imported goods (home consumption, warehousing, or transshipping). If goods are not cleared, after notice, the customs authority may sell off the goods seized. NCLAT held that title over the seized goods was deemed relinquished by the corporate debtor’s failure to remove the goods from customs custody. Furthermore, customs duty was held not to be a liability, but a consequence of importing the goods, so title could not pass without paying customs duty.
Hon’ble Supreme Court Ruling: Section 142A & Constitutional Property Rights (Article 300A):
The primary issues before the Hon’ble Supreme Court were twofold: (1) The overruling effect of the Code over the Customs Act, 1962, and (2) The relinquishment of title to the goods by the corporate debtor in favour of customs authorities.
- Subordination under Section 142A: The Supreme Court referred to section 142A of The Customs Act, 1962, which provides that the Customs Authority shall have first charge on any amount of duty, penalty, or sum payable except as otherwise provided in section 529A of Companies Act, 1956, RDDBFI Act, SARFAESI Act, and the IBC. Thus, the Customs Act itself statutorily yields priority to the IBC!
- No Automatic Abandonment: Regarding relinquishment of title over seized goods, the Supreme Court held that goods cannot be held to be abandoned without such declaration being passed by an authority after giving a reasonable opportunity of being heard to the aggrieved.
- Article 300A of the Constitution of India: The Supreme Court relied on Article 300A to hold that the right to property is a constitutional right and cannot be taken away without hearing or adjudication.
3. Enforcement Directorate (ED): Prevention of Money Laundering Act (PMLA), 2002
1. Sterling SEZ and Infrastructure Limited Vs. Deputy Directorate of Enforcement (NCLT Mumbai)
In Sterling SEZ (Appeal No. M.A. 1280/2018 in C.P. 405/2018), Hon’ble NCLT Mumbai by order dated February 12, 2019, held that considering Section 14(1)(a), Section 63, and Section 238 of IBC, the order of the PMLA Court passed for attachment of assets of the corporate debtor is null, and the RP was allowed to take charge of the assets which were under attachment of ED prior to ICD.
2. Deputy Director, Directorate of Enforcement Delhi V. Axis Bank & Ors. (Delhi High Court)
In Axis Bank (Appeal No. CRL.A. 143/2018), the Hon’ble Delhi High Court vide order dated April 2, 2019, held that as the objects of the two pieces of legislation are different, the question of inconsistency between PMLA, 2002 and the Code does not arise. Hence IBC does not prevail over PMLA, 2002. The Court also held that any contrary view would defeat the objective of PMLA, 2002 by opening an escape route for money launderers.
3. Mr. Anil Goel (Liquidator of Varsana Ispat Limited) Vs. Deputy Director, ED (NCLT Kolkata)
In Varsana Ispat Limited (C.P.(IB) No. 543/KB/2017), an order of attachment passed under PMLA was challenged by the RP before NCLT Kolkata, which was dismissed because the attachment was made prior to initiation of CIRP. The appeal before NCLAT and Supreme Court was also dismissed.
Thus, the liquidator filed another I.A. before NCLT Kolkata pleading relief under Section 32-A(2) of the Code for the sale of assets without seeking any detachment orders against ED. The liquidator argued that no detachment is required because by virtue of Section 32-A(2), immunity is provided to assets of CD undergoing CIRP or liquidation. Once sold in liquidation, Section 32-A(2) applies, and the buyer who purchases the attached assets can plead detachment.
4. Nitin Jain (PSL Ltd.) and Rajiv Chakraborty (EIFL): Harmonization of Separate Spheres
In Nitin Jain Liquidator PSL Ltd. Vs. Enforcement Directorate (W.P. (c) 3261/2021, dated Dec 15, 2021), the Hon’ble Delhi High Court held that there is no inconsistency between PMLA, 2002 and the Code as both operate in separate spheres that do not coincide. The legislative intent of Section 32-A is that a resolution applicant and the property acquired are insulated from prosecution for pre-CIRP offences of the corporate debtor.
This view was reaffirmed in Rajiv Chakraborty RP of EIFL Vs. Directorate of Enforcement (2022/DHC/004739), holding that: “PMLA would cease to have the power to attach or confiscate only when a Resolution Plan had been approved or where a measure towards liquidation had been adopted.”
The Jurisprudential Distinction: Debt Recovery vs. Penal Confiscation
The judicial pronouncements make it clear that the question of overriding effect arises when consequent statutory enactments are acting in the same sphere. Such was the dispute in Sundaresh Bhatt (ABG Shipyard) where the object of section 48 of the Customs Act is to recover pending dues by selling seized assets (debt recovery conflict), and thus Section 238 resolved which law overrides the other.
Further, one may suggest that PMLA, 2002 is not a debt recovery act and the Enforcement Directorate is not an authority whose objective is to set off their own dues by selling attached assets. The ED does not provide any services to the corporate debtor in respect of which unpaid dues would accrue. Thus, PMLA and IBC do not necessarily operate in the same sphere.
Moreover, relinquishment of title does not arise under PMLA. Under PMLA, the corporate debtor does not have the option to take back assets from ED by paying off embezzled proceeds within a timeline failing which title transfers to ED. PMLA is a criminal legislation enacted to prevent money laundering, whereas the Customs Act, 1962 is a revenue legislation.
Note: As on date, the Enforcement Directorate has challenged orders of NCLT passed on grounds of Section 32-A. The finality of the interpretation of Section 32-A vis-à-vis PMLA remains to be settled by the Hon’ble Supreme Court.
4. Provident Fund Commissioner: Employees’ Provident Funds Act, 1952
1. Regional P.F. Commissioner Vs. T.V. Balasubramanian (RP) (Sholingur Textiles Ltd) (NCLAT)
In Sholingur Textiles Ltd (Company Appeal (AT) (Insolvency) No. 1521 of 2019), an attachment order was passed by the Regional Provident Fund Commissioner and post initiation of CIRP, detachment was prayed for by the Resolution Professional. The Hon’ble NCLAT rejected the RP’s prayer and reversed the order of the Hon’ble NCLT (which had cancelled the attachment). The ground for reversal was that the order of attachment under the EPF Act, 1952 was passed much prior to the initiation of CIRP.
2. RPFC Ahmedabad Vs Ramchandra D. Chaudhary affirmed in Kushal Limited (Supreme Court)
In Regional Provident Fund Commissioner-1, Ahmedabad Vs Ramchandra D. Chaudhary (Company Appeal No. 1001 of 2019), the Hon’ble NCLAT held that the EPF Act, 1952 is not in conflict with IBC.
The order of Hon’ble NCLAT was thereafter affirmed by the Hon’ble Supreme Court in Kushal Limited vs The Regional Provident Fund Commissioner and others (Civil Appeal No. 1920 of 2020). Though NCLAT in the immediate case was not ruling on attachment of assets but ruling on there being no conflict between the acts, this ruling is critical for future disputes arising from EPF attachment orders.
5. Comparative Statutory Synthesis & Conclusion
| Statutory Authority | Governing Statute | Judicial Position on Attachment | Legal Rationale |
|---|---|---|---|
| Customs Authority | Customs Act, 1962 (Sec 48, 142A) | IBC prevails; attachment subordinated to RP/Liquidator custody | Operates in same debt-recovery sphere; Sec 142A yields priority to IBC; Art 300A bars automatic title loss. |
| Enforcement Directorate | PMLA, 2002 (Sec 5, 8) & IBC Sec 32-A | PMLA power ceases upon approval of Resolution Plan or Liquidation sale | Different spheres (penal vs resolution); Sec 32-A(2) insulates new buyers/resolution applicants from tainted past. |
| PF Commissioner | EPF Act, 1952 (Sec 8B-8G, 11) | Pre-ICD attachment upheld; no conflict with IBC moratorium | PF dues do not form assets belonging to Corporate Debtor; held in trust for vulnerable workmen/employees. |
In the case of PMLA, 2002, the explicit legislative amendment of section 32-A (2) of the Code has helped the cause of the successful resolution of the corporate debtor and ensured value maximization, as Courts prior to the amendment had ruled against the overriding effect of section 238 of Code over PMLA, 2002.
In the case of attachment by the Provident Fund authorities, there is no such similar legislative enactment till date. Further, an attachment is made to recover the provident fund dues which have time and again been held as assets not belonging to the corporate debtor. Thus, any such recovery by the PF authorities through attachments per se is not conflicting with the provisions of moratorium under the Code, particularly in cases wherein attachments were made prior to the ICD.
“To conclude, while the aim of the Code and the above judicial rulings is value maximization, there is also a reminder to all to necessarily balance the priorities of other stakeholders, particularly the vulnerable class of employees and workmen and their legitimate dues.”