The Indian Bankruptcy Code (IBC) 2016 and the Prevention of Money Laundering Act (PMLA) 2002 are like two distinct characters in India’s legal drama. The IBC steps onto the stage with the aim of untangling bankruptcy woes, offering a chance for struggling companies to find their footing again. Meanwhile, the PMLA enters, donning the mantle of a stern guardian, determined to strip criminals of their ill-gotten gains. In the intricate tapestry of India’s legal landscape, the convergence of the IBC and the PMLA unfolds as a riveting subplot, fraught with challenges and controversies. This convergence mirrors the dance between economic governance and law enforcement, each legislation adding its unique flavor to the mix. While the courts have attempted to untangle the web of disputes arising from the interaction of these two acts, questions of supremacy linger in the air. The interplay of the PMLA and the IBC adds layers of complexity to India’s legal canvas, demanding a delicate balance between combating financial crimes and facilitating corporate resolution. This article embarks on a journey through the labyrinth of the PMLA, advocating for a pragmatic approach in handling cases involving charged assets. It also ventures into the realm of Section 32A of the IBC, shedding light on the ongoing responsibilities of promoters and directors ensnared in PMLA offenses.

The Prevention of Money Laundering Act (PMLA) of 2002, enforced in India from July 1, 2005, targets the global scourge of money laundering, wherein proceeds of crime are concealed or disguised to appear legitimate. Historically, money laundering dates back centuries but gained prominence in the 20th century with the rise of organized crime, leading criminals to employ various methods, including owning businesses, to legitimize their illegal gains. In India, the age-old Hawala system facilitated large-scale money transfers across borders, serving as a conduit for illicit funds since the 8th century. The PMLA defines money laundering as engaging, aiding, or being involved in concealing, possessing, acquiring, or projecting proceeds of crime as untainted property. It emphasizes that this process is ongoing until the proceeds are enjoyed without detection. As the designated authority under the Prevention of Money Laundering Act (PMLA), the Enforcement Directorate (ED) is endowed with extensive powers. These include the capacity to conduct investigations, seize properties, and commence proceedings for the forfeiture of assets acquired through money laundering activities. The extensive authority granted to the ED highlights the legislature’s strong commitment to addressing the issue of money laundering with utmost seriousness.

Essentially, the PMLA seeks to thwart the cycle of crime by targeting the financial aspect, crucial in funding illegal activities. By criminalizing the laundering of illicit funds, it aims to disrupt criminal networks and safeguard the integrity of the financial system. Through robust enforcement and cooperation with international counterparts, the PMLA endeavors to stem the tide of money laundering, protecting India’s economic interests and maintaining global financial integrity.

The conflict between the Insolvency and Bankruptcy Code (IBC) and the Prevention of Money Laundering Act (PMLA) becomes apparent when competing claims are made on shared properties. Secured creditors with legitimate claims often clash with enforcement agencies seeking to seize assets under PMLA for alleged money laundering offenses. The IBC’s Section 14 moratorium protects corporate debtors during the Corporate Insolvency Resolution Process (CIRP), conflicting with PMLA’s asset confiscation aims. Additionally, IBC’s Section 32A shields debtors from prosecution for preresolution offenses once the resolution plan is approved. Moreover, Section 71 of the PMLA and Section 238 of the IBC are “overriding provisions,” each asserting priority over other laws in their respective applications. This means that in case of a conflict, these sections mandate that their respective acts prevail, complicating the legal landscape further. This interplay underscores the need for a balanced resolution mechanism to address these overlapping jurisdictions effectively.

A Pivotal concept in the IBC regime is the ‘clean slate’ theory, ensuring that entities undergoing insolvency resolution aren’t burdened with unexpected claims. Section 31 of the IBC mandates that an approved resolution plan binds all stakeholders, including government authorities, preventing any claims outside the plan. Section 32A of the act is also provision favouring the clean slate theory, which protects corporate debtors and their assets from actions under other laws, including PMLA, but excludes promoters and directors involved in PMLA offenses. This ensures accountability for wrongdoers while shielding post-resolution corporate debtors.

In Rajiv Chakraborty vs Directorate Of Enforcement , the Delhi High Court ruled that PMLA’s provisional attachment of a corporate debtor’s accounts does not override IBC provisions. The court underscored that Section 32A of the IBC grants immunity to corporate debtors and their assets post-approval of a resolution plan. This ensures the resolution or liquidation process proceeds smoothly, protecting stakeholders’ interests and encouraging resolution applicants by shielding them from penalties for prior offenses. The

In Directorate of Enforcement v. Axis Bank, the court determined that there is no inherent conflict between PMLA and IBC provisions. It was noted that a third party acting in good faith can request the adjudicating authority to release attached property by demonstrating their legitimate and fair interest in the property. The court however refused to grant moratorium order and held that it does not affect legal actions or quasicriminal proceedings related to “proceeds of crime”.

The conflict arose with the NCLAT decision in Rotomac Global Private Limited vs. Deputy Director where the court reiterated the position held in Varrsana Ispat Ltd v. Deputy Director of Enforcement (2019) , to hold that moratorium under section 14 of IBC act will not create any hindrance in PMLA action proceedings. The court made a clear distinction between the PMLA proceedings which deal with ‘proceeds of crime’ and other legal proceedings.

The NCLAT Delhi however, in Directorate of Enforcement v. Manoj Kumar Agarwal departed from the position in Rotomac and observed that post-moratorium under IBC, the Enforcement Directorate is prohibited from seizing goods under PMLA. Courts affirm that PMLA actions don’t conflict with IBC; assets attached under PMLA should be available for IBC objectives until resolution or liquidation, per Section 32A

In a recent case, Ashok Kumar Sarawagi Vs. Enforcement Directorate and Anr., the Supreme Court addressed a similar issue regarding the Enforcement Directorate’s asset attachment order after CIRP initiation. The court issued a notice to the ED, allowing the CIRP to proceed under the IBC without alteration. However, the court clarified that the NCLT’s approval of the decision plan is subject to its orders. While this could have been a golden opportunity for the Supreme Court to resolve to settle the conflict, its decision did not fully address the issue.

The interaction of multiple rulings regarding PMLA and IBC, like Rajiv Chakraborty, Varrsana Ispat Limited Vs. Deputy Director, and Directorate of Enforcement Vs. Sh. Manoj Kumar Agarwal, indicates that IBC and PMLA can harmonize, with IBC holding precedence during CIRP. These cases illustrate particular situations, such as pre-CIRP attachments not falling under Section 14 of IBC.

However, PMLA authorities must acknowledge that IBC insolvency proceedings are not intended to protect individuals from legitimate legal actions related to financial crimes. Instead, these proceedings offer a structured method for resolving financially distressed entities. Securing assets for banks increases the likelihood of a successful resolution, thereby maintaining the strength and stability of the financial system.

The judiciary, facing the challenge of conflicting statutes, has endeavored to interpret and reconcile the differing objectives of the Insolvency and Bankruptcy Code (IBC) and the Prevention of Money Laundering Act (PMLA). Frequently, the judiciary leans towards safeguarding the interests of resolution applicants and advancing the efficacy of the insolvency resolution procedure. However, the absence of explicit legislative direction has amplified ambiguity and legal disparities. This highlights the pressing need for legislative amendments to offer precise guidance and rectify the deficiencies within the existing legal framework. The judiciary’s struggle with conflicting provisions underscores the complexity of balancing the objectives of the IBC, focused on corporate resolution, and the PMLA, aimed at combating financial crimes. While efforts are made to protect the rights of resolution applicants and streamline insolvency proceedings, the lack of legislative clarity exacerbates legal uncertainties. Consequently, judicial interpretations vary, leading to inconsistent outcomes and procedural challenges. In response, legislative reforms are imperative to provide a cohesive legal framework that effectively addresses the overlapping jurisdictions of the IBC and PMLA. Clear legislative guidance would facilitate a more coherent interpretation of the statutes, ensuring consistent application across judicial decisions. Such reforms would not only enhance legal certainty but also bolster the efficacy of both insolvency resolution processes and efforts to combat financial crime.