The Uneasy Coexistence of PMLA and IBC

The Prevention of Money Laundering Act, 2002 (PMLA) is a penal statute designed to combat money laundering and the financing of terrorism, granting the Enforcement Directorate (ED) extensive powers to attach, seize, and confiscate assets derived from criminal activities including those deemed proceeds of crime. In contrast, the Insolvency and Bankruptcy Code, 2016 (IBC) is an economic law focused on the timely resolutions of insolvent corporations, aiming to maximise the value of a corporate debtor’s assets, protect the interests of creditors, and facilitate the revival or orderly liquidation of distressed entities. The conflict arises because PMLA seeks to deprive wrongdoers of illicit gains by attaching debtor’s assets, while the IBC aims to preserve the debtor’s assets estate for the benefit of all stakeholders during the resolution process. This tension is most pronounced when the ED assets under PMLA and IBC, potentially undermining the IBC’s moratorium and the Resolution Professional’s (RPs) custodial rights, leading to legal disputes over which law takes precedence. This blog covers key judicial provisions of both the legislations, judicial precedents, the current standing on the conflict and what stakeholders should out watch for.

Legal Provisions & Mechanisms at Play

a. Non-Obstante Clauses

Section 238 of the IBC grants the IBC overriding effect over any other inconsistent law or instrument, ensuring its provisions prevail even if they conflict with other statutes. This clause is interpreted as operating in the widest terms possible to prevent any other law from impeding the IBC’s operation. Section 71 of the PMLA provides that the provisions of PMLA shall have an overriding effect over any other law, regardless of any inconsistent provisions in other statutes. It ensures that PMLA proceedings, particularly those involving the attachment of proceeds of crime, are not hindered by other legislative frameworks.

b. Section 14 IBC (Moratorium) vs PMLA’s Attachment Powers

Section 14 of the IBC imposes a moratorium that generally halts most legal proceedings and enforcement action against a corporate debtor during the corporate insolvency resolution process (CIRP), aiming to preserve and maximise the value of the company’s assets for resolution. However, this moratorium does not bar the ED from attaching properties under the PMLA, as such proceedings are distinct criminal confiscation measures focused on recovering proceeds of crime, not debt enforcement.

c. Section 32A IBC — Clean Slate/Immunity Provision

Section 32A provides a “clean slate” by extinguishing the liability of a corporate debtor for offences committed prior to the commencement of the CIRP upon approval of a resolution plan, and protects the corporate debtor’s property from attachment, seizure, or confiscation related to those past offences. This immunity applies only if the resolution plan results in a change of control or management to a person who was not a promoter, in control, or a related party of the former management, and who did not abet or conspire in the commission of the offence. However, it does not protect individuals, such as former promoters, directors, or officers who were involved in the wrongdoing. Such individuals remain personally liable for prosecution and can have their personal assets attached under laws like the PMLA.

Key Judicial Decisions & Interpretations

The National Company Appellate Tribunal (NCLAT) in the Dunar Foods case, ruled that the moratorium under section 14 of the IBC does not apply to assets attached under the PMLA if they are alleged to be proceeds of crime, and such attachments remain valid even after the approval of a resolution plan. It further held that the protection under section 32A of the IBC does not apply if the PMLA attachment was confirmed before the resolution plan was approved, meaning the ED’s attachment cannot be lifted solely based on the plan’s approval. The Delhi High Court in Rajiv Chakraborty v. The Directorate of Enforcement held that the ED’s power to attach properties under the PMLA is not affected by the moratorium under section 14 of the IBC. The court emphasised that PMLA and IBC serve distinct legislative objectives, with PMLA aimed at confiscating proceeds of crime, and thus, its powers are subordinate to the IBC moratorium. Further, the Gujarat High Court held that the protection granted under Section 32A and Section 33(5) of the IBC overrides the power of the ED to attach properties under section 5 of the PMLA. This ruling ensures that once a resolution plan is approved, the ED’s attachment on a corporate debtor’s assets ceases, as section 32A acts as a non-obstante provision, superseding conflicting laws like PMLA. The Supreme Court set aside JSW Steel’s resolution plan for Bhushan Power and Steel Ltd (BPSL), directing the NCLT to initiate legal proceedings, and ruled that the NCLT and the NCLAT lack jurisdiction to review actions taken by the ED under PMLA, as such matters fall under public law. The court emphasized that decisions by statutory authorities like the ED in public law matters are beyond the purview of NCLT or NCLAT, and the NCLAT’s order staying the ED’s provisional attachment of BPSL’s assets under section 32A of the IBC was deemed coram non judice and without jurisdiction.

Nature of the Conflict

When ED attaches or provisionally attaches a debtor’s assets before or during the initiation of CIRP, the attachment generally remains in force, and the ED’s authority to act under PMLA is not automatically extinguished by the commencement of CIRP. However, once a resolution plan is approved under the IBC, section 32A of the IBC mandates that all attachments related to offences committed prior to the commencement of CIRP cease to have effect, thereby removing a major obstacle to resolution. This ensures that the debtor;s assets are available for the resolution process and protects the new management from past liabilities, effectively mitigation the tension between PMLA and IBC by creating a “defining moment” at the approval of the resolution plan. Hence, the risk of conflicting interpretations across Courts, NCLTs, and NCLATs with some saying PMLA overrides IBC, others giving effect to IBC’s protections.

Analysis: What is the Current Legal Position?

Post-approval of a resolution plan under the IBC, section 32A grants immunity to the corporate debtor’s assets for offences committed prior to the commencement of CIRP, effectively preventing further attachment, seizure, or confiscation of such assets by the ED. This immunity is automatic upon approval of the resolution plan, provided there is complete change in management and control, and the new management is unrelated to the former promoters or those involved in the predicate offence. The Supreme Court has affirmed that Section 32A is a non-obstante provision, meaning it overrides conflicting provisions in other laws, including PMLA. However, before the resolution plan is approved, the moratorium under section 14 does not bar the ED from attaching properties under the PMLA, especially if those assets are subjected to be proceeds of crime or their equivalent in value. This is because PMLA operates as a public law statute with distinct objectives of criminal confiscation and public interest, which are suspended by the IBC’s moratorium. Further, judicial bodies have said NCLT or NCLAT do not have power to review decisions under PMLA in certain contexts.

Implications for Stakeholders

For Resolution Professionals and Resolution Applicants: RPs and resolution applicants must conduct thorough due diligence to identify any assets of the corporate debtor that are subject to pre-existing PMLA attachments, thereby limiting the professional’s control and the applicant’s ability to enforce rights over them. It is crucial to verify whether proposed resolution assets are encumbered or already vested under penal statutes like the PMLA, as inclusion in the information memorandum or resolution plan without disclosure may expose the process to legal challenge.
For Creditors: Attachments under PMLA may reduce the asset base available for creditors, as the ED may attach assets believed to be proceeds of crime, thereby limiting the pool of assets for resolution or liquidation.
For Enforcement Agencies: They must be more aware of IBC’s protections once the resolution plan is approved. They must recognise that once a resolution plan is approved under the IBC, section 32A provides a legal shield protecting the corporate debtor and its assets from further prosecution of attachment, even if the property is later identified as proceeds of crime.
For Policy: Introducing legislative amendments can clarify the priority between conflicting laws to reduce disputes, as courts generally favour harmonizing provisions when statues are capable of co-existence

Possible Ways Forward / Reforms

Amending the PMLA or the IBC to explicitly state clarifications regarding the conflict between the two, such as that IBC protections under Section 32A override PMLA attachments once resolution plan is approved.
The lack of judicial uniformity can be resolved through the Supreme Court, as their judgements can settle inconsistencies.
There needs to be protocols for coordination between the ED and the NCLT or RPs to avoid surprise attachments harming the resolution process.
To ensure more transparency, it is critical to introduce advance disclosures of PMLA proceedings, investigations to be considered in CIRP valuation, etc.

Conclusion

The PMLA and the IBC have overlapping but sometimes conflicting objectives, with the PMLA focused on confiscating proceeds of crime and the IBC dedicated to maximizing creditor value through corporate resolution, Section 32A of the IBC provides a partial solution by extinguishing a corporate debtor’s liability for pre-CIRP offenses and shielding its property from PMLA actions upon approval of a resolution plan. However, an uneasy coexistence persists, particularly during the pre-resolution stage, as PMLA authorities retain the power to attach assets under section 5 and 8, even during the moratorium period, which is not a bar to criminal proceedings. This tension is underscored by judicial rulings that affirm the distinct purposes of both laws, with PMLA operating independently to strip wrongdoings of illicit gains, and the IBC’s moratorium aims to preserve assets for resolution.

FAQs

Q1. What does Section 32A of the IBC do in relation to PMLA attachments?

Section 32A of the IBC automatically extinguishes PMLA attachments on a corporate debtor’s assets upon approval of a resolution plan, ensuring a clean slate for the new ownership and preventing the continuation of such attachments when the corporate debtor is immune from prosecution.

Q2. Does the moratorium under Section 14 stop ED from attaching assets under PMLA?

No, the moratorium under Section 14 does not stop ED from attaching assets under the PMLA.

Q3. Can ED attachments made before CIRP be released after resolution plan approval?

Yes, as section 32A of the IBC mandates the automatic extinguishment of liability for offences committed prior to CIRP.

Q4. Do NCLT / NCLAT have power to interfere with PMLA adjudicatory decisions?

No, the NCLT/ NCLAT do not have the power to interfere or review decisions made by statutory authorities under the PMLA, as they lack jurisdiction over public law matters and are not vested with powers of judicial review in such cases.

Q5. Which statute has priority when assets are attached under PMLA and CIRP is ongoing?

The priority between the IBC and the PMLA remains contested, with conflicting rulings. Some tribunals hold that the IBC’s non-obstante clause under section 238 prevails, allowing the moratrum to override PMLA attachments, while others, have ruled that the IBC cannot override PMLA, meaning that PMLA attachments cannot be undone solely due to ongoing CIRP