[Harsh Bansal is a final year B.A., LL.B. (Hons.) student at Rajiv Gandhi National University of Law]
The overlap between the Prevention of Money Laundering Act, 2002 (PMLA) and the Insolvency and Bankruptcy Code, 2016 (IBC) has repeatedly troubled Indian courts and academics alike. Both statutes contain sweeping non-obstante clauses: section 71 in PMLA and section 238 in IBC. The clash becomes most pronounced when the Enforcement Directorate (ED) attaches corporate debtor assets under PMLA, while those same assets form estate of the Corporate Debtor (CD) under IBC, over which the Resolution Professional has custodial rights under section 18(f) of the IBC.
While the IBC pursues the economic objective of maximizing asset value and ensuring time-bound resolution, PMLA is a penal statute designed to deprive offenders of criminal proceeds. Courts have alternately privileged one regime over the other, leaving behind a patchwork of judgments. Commentators note that this legal friction has fueled uncertainty in insolvency proceedings and raised questions about the effectiveness of India’s anti-money laundering architecture in commercial contexts.
I undertake a comprehensive examination of the most common and judicially decided situations of interplay between PMLA and IBC, drawing on key decisions of High Courts, National Company Law Tribunal (NCLT), National Company Law Appellate Tribunal (NCLAT), and the Supreme Court.
Situation 1: Is there a conflict between PMLA and IBC and does section 14 (providing for a moratorium on all proceedings against the CD) of IBC bar PMLA proceedings?
The Delhi High Court (DHC) in Axis Bank v. Directorate of Enforcement (Axis Bank), clarified that the two statutes serve distinct purposes. While the IBC protects creditors’ interests through resolution or liquidation, the PMLA deprives wrongdoers of unlawful gains. Thus, they operate in separate fields and cannot be said to conflict.
The Court further observed that a Resolution Professional (RP) under IBC represents only creditor interests. The moratorium under section 14 does not inhibit statutory powers of ED to seize tainted assets. To hold otherwise would allow offenders to exploit insolvency to discharge debts with illegitimate assets, undermining PMLA’s purpose.
In conclusion, the Court rejected the claim that IBC overrides PMLA.
Situation 2: Can a bona fide third party seek detachment of property attached under PMLA?
In Axis Bank, the DHC clarified that secured creditors like banks often hold mortgages or hypothecation over assets later attached by ED. Such interests, however, are limited as mortgagees or hypothecatees do not own the property but only hold rights to realize their dues by sale.
The Court drew a distinction between two types of property. If the asset is tainted, i.e., directly derived from criminal activity, even a bona fide third party cannot escape confiscation; it must vest in the Government. However, if untainted property of equivalent value is attached, a bona fide creditor who acquired rights before the offence and for lawful consideration may seek release. In such cases, PMLA attachment remains valid but “takes a back seat,” allowing the creditor to enforce its interest first.
The Court also noted that challenges to attachment may be brought before the PMLA appellate tribunal or the special court, with stricter requirements of due diligence where rights are created after the alleged commission of the scheduled offence.
Situation 3: Can a Successful Resolution Applicant (SRA) invoke section 32A when property is attached before CIRP?
Earlier, in Vantage Point Asset Pte. Ltd. v. Gaurav Misra, RP of Alchemist Infra Realty Ltd. (Vantage Point I), the NCLAT had extended the protection of section 32A to the SRA (which restricts the liability of the corporate debtor for offences committed prior to the commencement of the insolvency process) , directing that ED’s attachment over corporate debtor assets be lifted once the plan was approved. However, this ruling was later recalled by the NCLAT in Vantage Point Asset Management Pte. Ltd. v. Gaurav Misra (Vantage Point II), on the ground that the ED had not been impleaded as a party to the appeal. The NCLAT clarified that the resolution plan itself stood approved and unaffected, but the issue of attachment under PMLA required fresh hearing with the ED’s participation.
Around the same time, the Bombay High Court in Shiv Charan v. Adjudicating Authority, had taken the view that section 32A protection could extend to resolution applicants notwithstanding prior ED attachment. However, this judgment itself is under challenge before the Supreme Court.
As things stand, the law on whether section 32A can be invoked to lift attachments made under PMLA prior to CIRP remains unsettled, with the issue pending final clarification from the Supreme Court.
Situation 4: Can the liquidator sell the CD as a going concern during PMLA investigation?
In Pankaj Dhanuka v. Deputy Director, Directorate of Enforcement, the NCLT allowed the liquidator to proceed with sale despite pending PMLA investigation. It directed that any sale proceeds from tainted assets be placed in a separate account, preserving ED’s rights.
The order clarified that such sale does not absolve directors of liability, nor does it amount to review of ED’s orders. It merely permits liquidation to proceed in parallel, ensuring transparency about existing attachments.
Situation 5: Does NCLAT have powers of judicial review over PMLA authorities?
The Supreme Court in Kalyani Transco v. Bhushan Power and Steel Ltd., firmly held that NCLTs/NCLATs lacks jurisdiction to review or invalidate orders of statutory authorities under PMLA. Since PMLA is a public law statute, disputes under it lie outside NCLT/NCLAT’s domain.
Situation 6: Does NCLT have power to direct ED to release attached properties?
Here, jurisprudence diverges. Some benches have recognized NCLT’s authority to issue such directions, but others, relying on Embassy Property Developments Pvt Ltd. v. State of Karnataka, hold that matters arising from public law statutes like PMLA are beyond NCLT’s remit. Recent rulings such as Ramanathan Bhuvaneshwari v. Enforcement Directorate, affirm the latter view. The latter view was also followed in Shailendra Singh, Resolution Professional of Foxdom Technologies Pvt Ltd vs. Directorate of Enforcement. Currently, the issue remains unsettled pending appeals in Shiv Charan.
Situation 7: Does prior attachment under PMLA bar admission of a section 7 IBC application?
In State Bank of India v. R.P. Info Systems Ltd., the NCLT held that prior attachment does not prevent admission under section 7 (which provides for initiation of corporate insolvency resolution process by financial creditor). Even if assets are attached, creditors’ rights are not extinguished; property may still be released under PMLA provisions upon showing bona fide interest.
The NCLT emphasized that attachment under PMLA does not nullify financial debt or creditor rights, and therefore cannot bar CIRP initiation.
Situation 8: Can ED issue a Provisional Attachment Order once liquidation is underway?
The DHC in Nitin Jain, Liquidator of PSL Ltd. v. Directorate of Enforcement, held that ED cannot issue fresh provisional attachment orders once liquidation measures are approved. Section 32A operates as a bar against such post-liquidation actions, insulating assets from attachment to facilitate maximization of value.
Situation 9: Can ED exercise powers once a resolution plan is approved under section 31 IBC?
The DHC in Rajiv Chakraborty, RP of EIEL v. Directorate of Enforcement, held that section 32A operates as a “defining moment.” Once a plan is approved, ED cannot attach corporate debtor property. The statute deliberately provides certainty to resolution applicants, insulating corporate assets from penal claims while keeping past management liable.
Situation 10: Are assets attached after CIRP but based on pre-existing investigations part of debtor’s estate?
In Anil Kohli, RP for Dunar Foods Ltd. v. Directorate of Enforcement, the NCLAT held that even if attachment occurs after CIRP begins, assets under pre-existing criminal investigation (if the investigation was launched pre-CIRP) are excluded from the insolvency estate. Since such property is treated as proceeds of crime, it cannot be made available for resolution purposes.
Conclusion
The judicial engagement with PMLA–IBC interplay underscores a delicate balance between economic revival and penal enforcement. Yet, inconsistencies persist, particularly regarding the powers of NCLT to intervene against ED actions. Until legislative clarification arrives, this uneasy coexistence will continue to generate litigation, uncertainty, and academic debate.
– Harsh Bansal