Understanding the Distinct Roles of PMLA and IBC
The Prevention of Money Laundering Act (PMLA), 2002 serves a critical role in India’s legal framework by ensuring that proceeds of crime, stemming from scheduled offenses, are confiscated and either returned to the state or the victims. Conversely, the Insolvency and Bankruptcy Code (IBC), 2016, is designed to safeguard the interests of lenders and various stakeholders, including debtors. At first glance, these two statutes appear to function autonomously in separate fields with no apparent overlap.
Exploiting IBC to Evade PMLA
However, recent observations by the Supreme Court, the National Company Law Tribunal (NCLT), and enforcement bodies such as the Enforcement Directorate (ED) have spotlighted a concerning misuse of the IBC. It has been revealed that the IBC is being tactically employed to divert assets already attached under the PMLA. This manipulation involves criminals orchestrating the Corporate Insolvency Resolution Process (CIRP) to sidestep lawful attachments executed by the ED. By controlling the resolution professional and the committee of creditors, the accused can design a resolution plan that ostensibly transfers assets to an entity disconnected from them, all while leveraging Section 32-A of the IBC, which nullifies liabilities for offenses committed before the CIRP’s initiation.
Strategic Manipulation of CIRP Stages
At every stage of the CIRP, accused parties exploit legal mechanisms to dodge the consequences of their actions and frustrate statutory proceedings. The primary goal of attachment under Section 5 of the PMLA is to shield tainted properties from being disposed of during investigation and adjudication. Unfortunately, insolvency proceedings often serve as a means to circumvent these attachments. From the initiation of a moratorium under Section 14 of the IBC to the endorsement and execution of the resolution plan, each phase is strategically utilized to delay or obstruct the attachment of assets recognized as ‘proceeds of crime.’
Judicial Interventions and Clarifications
In response to these challenges, the Supreme Court and various High Courts have actively examined the legal dynamics between the two statutes. Their aim has been to prevent the misuse of the insolvency process to undermine PMLA proceedings. Notably, in the case of Directorate of Enforcement v. Alchemist Limited, the NCLT, New Delhi Bench, nullified an earlier admission order and terminated the CIRP against Alchemist Limited, citing fraud and collusion.
Moratorium Misuse and Legal Clarifications
Corporate debtors accused of wrongdoing often argue that ED proceedings should halt during insolvency processes, citing the IBC’s moratorium. This tactic is frequently employed when funds have been diverted through shell companies or related parties before CIRP initiation. Once the ED begins attachment procedures, the CIRP is strategically triggered to claim that attached assets are vital for maintaining the corporate debtor as a ‘going concern.’ However, judicial bodies, including the High Courts and the National Company Law Appellate Tribunal (NCLAT) in cases like Varrsana Ispat Limited v. Deputy Director, Directorate of Enforcement, have consistently ruled that PMLA proceedings are independent and cannot be hindered by IBC’s moratorium.
Combating Legal Exploitation
In some instances, insolvency proceedings are initiated by ‘friendly’ creditors—often shell companies linked to promoters. Applications under Sections 7 or 10 of the IBC are filed not with genuine insolvency resolution intentions but to create legal obstacles against enforcement actions. The Supreme Court, in cases like JSW Steel and Bhushan Power & Steel Limited, has firmly denounced such litigation misuse as an abuse of legal process.
Harmonizing IBC and PMLA
While overlaps between the IBC and the PMLA may occur, the Enforcement Directorate remains committed to restoring attached properties to rightful claimants. The Insolvency and Bankruptcy Board of India has issued a circular advising insolvency professionals to seek special court intervention for asset restitution under PMLA. This guidance also includes safeguards to ensure restituted assets are not transferred to disqualified individuals or those named in the Enforcement Case Information Report (ECIR).
Mayank Makhija and Aditi Singh are associated with the Enforcement Directorate.
