NCLT Affirms Insolvency Proceedings Cannot Bypass PMLA Process in Shakti Bhog Snacks Case

The National Company Law Tribunal (NCLT) has ruled that proceedings under the Insolvency & Bankruptcy Code (IBC) cannot be used to bypass the Prevention of Money Laundering Act (PMLA). This decision came as NCLT dismissed a plea for the dissolution of Shakti Bhog Snacks, which is under investigation by the Enforcement Directorate (ED). The tribunal stated that allowing dissolution would hinder the ED's investigation and recovery efforts.

Shakti Bhog Snacks Ltd (SBSL), a group company of Shakti Bhog Foods Ltd (SBFL), was once prominent in the wheat flour market. Insolvency proceedings against SBSL began in January 2023 after a creditor default was confirmed. An interim resolution professional was appointed, forming a Committee of Creditors (CoC) as per IBC guidelines. However, the ED had sealed SBSL's assets, preventing control transfer.

Legal Jurisdiction and Proceedings

The NCLT emphasised that it lacks jurisdiction to interfere with PMLA proceedings or orders, including attachment orders or criminal prosecutions. The Supreme Court has previously ruled that neither NCLT nor the appellate tribunal NCLAT can intervene in such matters. The tribunal noted that dissolving SBSL would impede the ED's ability to complete its investigation and pursue legal action.

The tribunal highlighted that Shakti Bhog Snacks is named as an accused in ongoing investigations. Its assets, though limited, are under attachment. The character of these proceedings, rather than their scale, is crucial, according to NCLT members Sanjeev Ranjan and B V Balram Das.

Financial Irregularities and Investigations

The ED opposed SBSL's dissolution due to ongoing PMLA proceedings. It reported that SBFL defaulted on loans, with outstanding dues of approximately Rs 3,269.42 crores as of March 31, 2020. The investigation revealed money laundering activities involving both Shakti Bhog Snacks and Shakti Bhog Foods.

SBSL allegedly acquired Rs 97.87 crore in crime proceeds from six SBFL group entities. Between FY08 and FY15, Rs 127.81 crore was transferred to these entities under false pretences of investment and sales. The ED claimed these transactions were conducted without actual goods movement.

Implications for Corporate Debtors

The NCLT order recorded that SBFL used Shakti Bhog Snacks' name to rotate loan funds against fake invoices. The company allegedly layered and diverted crime proceeds to directors, promoters, and their relatives. These actions inflated SBFL's financials to secure more bank credit facilities.

NCLT agreed with ED's submission that dissolving SBSL under Section 54 of the IBC would nullify its legal existence. This would undermine ongoing criminal prosecution under PMLA and weaken the Special Court's authority over related attachments and confiscation proceedings.

The CoC recommended SBSL's dissolution instead of liquidation due to asset unavailability and operational cessation. However, with only SBI as a member, liquidation wasn't feasible due to missing assets, records, operations, and personnel.

With inputs from PTI