The Gujarat High Court propounded that if the Authorities were allowed to pass orders of attachment for those properties which are acquired by bidders in a liquidation process, then the same would be contrary to the interest of value maximization of the Corporate Debtor’s assets as it significantly reduces the chances of finding a Resolution Applicant or a bidder in liquidation.
The Bench noted that it is only that property that is obtained directly or indirectly as a result of criminal activity can be classified as proceeds of crime. In the present case, there was no explanation regarding the properties that were sold to the Petitioners being proceeds of crimes especially since these assets were neither overseas nor belonged to the group companies.
It was further enunciated that the “reason to believe” cannot arise from mere suspicion or doubt or rumour or gossip. There must be some tangible and cogent material to suggest the same. Hence, the properties were directed to be released from the attachment.
Brief Facts:
The ICICI Bank filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) against the Corporate Debtor (ABG Shipyard Ltd.) which was accepted by the NCLT. Thereafter, liquidation was ordered against the Corporate Debtor and attempts were made to sell assets, but the public auctions failed.
NCLT allowed the Liquidator to complete the sale of the assets on a composite basis. A bid document was submitted by the Liquidator in this regard and the Petitioners submitted their expressions of interest. Thereafter, one of the bidders from the abandoned Swiss Challenge Process filed an appeal before the NCLAT challenging the order allowing the Liquidator to complete the sale of the assets on a composite basis. The NCLAT upheld the order. Even the Top Court upheld the order and thereafter, the Petitioners became the successful bidders.
In between, the State Bank of India (lender) preferred a complaint against the Corporate Debtor and promoters with the CBI and subsequently FIR was registered under Section 3 of the Prevention of Money Laundering Act, 2002 (hereinafter referred to as “PMLA”).
The Liquidator informed the Petitioners that Respondent no.1 passed an order regarding assets that were to be sold to the Petitioners. A copy of the provisional attachment of orders was also received by the Petitioners. Hence, the present application.
Contentions of the Petitioners:
It was argued that Section 32(A) of the IBC bars Respondent No.1 from having any jurisdiction over the assets that were sold to the Petitioners. Further, it was argued that the provisional order does not reflect “any reason to believe” that property is “proceeds of crime” as required under Section 5 of PMLA. The properties purchased via auction could not be said to be proceeds of crime.
It was contended that the alternative remedy cannot oust the jurisdiction of the Court to exercise discretion in favour of the Petitioner as the absence of jurisdiction is an exception.
Contentions of the Respondent No. 2:
Supporting contentions of the Petitioner, it was submitted that no such finding has been recorded to show that properties are proceeds of crime.
Contentions of the Union of India:
It was argued that the attachment is only provisional and therefore, Petitioner can appear before the Adjudicating Authority under Section 8 PMLA to show that the assets are not proceeds of crime. Further, IBC does not prevail over PMLA and as per Section 71 of PMLA, it is PMLA that has an overriding effect.
Observations of the Court:
It was propounded that if the Authorities were allowed to pass orders of attachment for those properties which are acquired by bidders in a liquidation process, then the same would be contrary to the interest of value maximization of the Corporate Debtor’s assets as it significantly reduces the chances of finding a Resolution Applicant or a bidder in liquidation.
The Bench noted that it is only that property that is obtained directly or indirectly as a result of criminal activity that can be classified as proceeds of crime. In the present case, there was no explanation regarding the properties that were sold to the Petitioners being proceeds of crimes especially since these assets were neither overseas nor belonged to the group companies.
It was further enunciated that the “reason to believe” cannot arise from mere suspicion or doubt or rumour or gossip. There must be some tangible and cogent material to suggest the same.
Regarding the existence of alternative remedies, it was opined that Section 8 of the PMLA shifts the onus on the Petitioners and therefore, it cannot be a ground to deny the Petitioner from securing relief under Article 226 of the Constitution.
The decision of the Court:
Based on the aforementioned reasoning, the High Court directed for the release of assets from the attachment and accordingly allowed the petition.
Case Title: Welspun Steel Resources Pvt. Ltd. V. Union of India
Coram: Hon’ble Mr. Justice Biren Vaishnav
Case No: R/Special Civil Application No. 19387 of 2022
Advocates for Petitioner: Adv. Mr. Mihir Joshi, Mr. Jay Kansara, Ms. Alisha Mehta
Advocates for Respondents: Adv. Mr. Saurabh Soparkar, Mr. Monaal J Davawala, Mr. Devang Vyas, Mr. Parth H Bhatt
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