Insolvency and Bankruptcy Code Current Affairs - 2019

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PMLA prevails over Bankruptcy Act and Insolvency Code: Delhi HC

The Delhi High Court has ruled that Prevention of Money Laundering Act (PMLA) prevails over the Bankruptcy Act and insolvency code when it comes to attachment of properties obtained as ‘proceeds of crime’.

The Enforcement Directorate (ED) had challenged the orders of PMLA appellate tribunal on the pleas of various banks. PMLA Tribunal had held that third parties, banks in this case, which have legitimately created rights such as a charge, lien or other encumbrances, have a superior claim over such properties.

Observations made by Delhi High Court

  • PMLA, Recovery of Debt and Bankruptcy Act (RDBA), Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act and Insolvency and Bankruptcy Code (IBC) must co-exist and be enforced in harmony.
  • The Delhi High Court has set aside the verdict of the PMLA tribunal and held that the objective of PMLA being distinct from the purpose of RDBA, SARFAESI Act and IBC.
  • RDBA, SARFAESI Act and IBC doesn’t not prevail over PMLA
  • The attachment order under the PMLA will not be illegal only because a secured creditor has a prior secured interest [charge] in the property, within the meaning of the expressions used in RDBA and SARFAESI Act.
  • Also mere issuance of an order of attachment under the PMLA does not ipso facto render illegal a prior charge or encumbrance of a secured creditor, the claim of the latter for release [or restoration] from PMLA attachment being dependent on its bonafides.

Delhi High Court has stated that by the virtue of Section 71, PMLA has the overriding effect over other existing laws in the matter of dealing with “money-laundering” and “proceeds of crime”.

Month: Categories: Bills & ActsUPSC


Supreme Court quashes RBI’s circular Mandating Insolvency Proceedings

The Supreme Court has struck down a February 2018 Reserve Bank of India (RBI) circular which gave lender banks six months to resolve their stressed assets or move under the Insolvency Code against private entities who have defaulted in loans worth over Rs 2000 crore.

The RBI had defended the circular by citing public interest and “in the interest of the national economy to see that evergreening of debts does not carry on indefinitely”. RBI had argued that huge amounts that are due should come back into the economy for further productive use”.

Observations made by the Supreme Court

  • The Court accepted the argument made by the petitioners that the applying the 180-day limit to all sectors, without going into the special problems faced by each sector, would “treat unequals equally” and is violative of Article 14 of the Constitution.
  • The RBI circular sourced its power from Section 35AA of the Banking Regulation (Amendment) Act of 2017. It states that central government may, by order, authorise the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016”.
  • But the RBI circular missed two vital factors viz. authorisation of the government and the general nature of the circular which did not concern a “specific default”.

The Judgment even recorded submission that Rs 34,044 crore of their non-performing assets was primarily due to government policy changes, failure to fulfil commitments by the government, delayed regulatory response and non-payment of dues by DISCOMs and were hardly caused by mismanagement. Hence the power companies had asked the circular to be quashed as it was in the nature of “one-solution-fits-all”.

Month: Categories: Business, Economy & BankingUPSC