INTRODUCTION
One of the major concern in the Indian economy was to deal with failing businesses and their non-performing assets which added huge burden on the economy of India. To deal with corporate insolvency and to provide businesses an easy exit, the government introduced the Insolvency and Bankruptcy Code, 2016 hereinafter referred to as IBC1, 2016. It lays down a comprehensive framework for insolvency and bankruptcy of corporate businesses and firms replacing the old fragmented and outdated insolvency and bankruptcy regime.
The primary concern for introducing this law was to streamline the duration of insolvency and bankruptcy proceeding in a time-bound manner, maximising the assets’ value of the corporate debtor. One of the most significant provision of this code is Section 14 of IBC which imposes moratorium or a calm period while the distressed company is undergoing corporate insolvency resolution process (CIRP). During this period, any legal proceeding that is on-going against the distressed company or corporate debtor will come to a halt and no new legal action can be taken against the company until the moratorium comes to an end. This is done so to preserve the value of the distressed company as a going concern which would not have been possible if it is embroiled in multiple legal suits.
The Prevention of Money Laundering Act (hereinafter referred to as PMLA) was enacted back in the year 2002 with the sole purpose to deal with money laundering. The term money laundering refers to an act of converting black money generated from illegal activities and sources into legitimate money in order to show that the money is generated from legitimate sources. This can be done through the Hawala system, smuggling, trafficking, terrorism, etc.
The act of money laundering is illegal and hence the Prevention of Money Laundering Act, 2002 was enacted in order to prevent money laundering, confiscate and seize the property which is acquired through money laundering and to deal with any other issue related to money laundering. The enforcement directorate (ED) is empowered under this legislation to attach, confiscate and seize the properties acquired or related via money laundering. This is ensured by section 4 which punishes the act of money laundering and section 5 which provides for provisional attachment of the property 2.
These two legislations have contrary objectives to each other and so they are often in conflict with each other. On the one hand, IBC aims to protect the assets of the distressed company or the corporate debtor by virtue of Section 14 of the IBC3 and focuses on reviving the distressed companies as a going concern or liquidating them. However, PMLA, on the other hand, aims at deterring and punishing all acts related to money laundering which includes attaching the property of the person involved in money laundering by virtue of Section 5 of the act. This provision of PMLA act causes disruptions in the CIRP process and raises the following questions:
• What happens if the PMLA proceeding begins before the insolvency proceedings and the assets are attached before the CIRP application is submitted?
• What happens when the assets are attached for PMLA proceedings while the CIRP process is ongoing?
• How much immunity does section 32A of the IBC grant the corporate debtor from the PMLA attachment process?
KEY PROVISIONS IN INTERPLAY BETWEEN MORATORIUM UNDER IBC AND PMLA PROCEEDINGS
Moratorium under section 14 of IBC, 2016
Section 14 of the IBC, 2016 provides for a ‘calm period’ during which there can be no legal proceeding against the corporate debtor and any ongoing proceeding against the corporate debtor comes to a halt. This calm period begins once the NCLT admits the petition to initiate Corporate Insolvency Resolution Process or CIRP filed by either financial creditors, operational creditors or the corporate debtor itself.
According to section 14(1) of IBC, when the NCLT declares moratorium, the following activities are prohibited during this period, namely:
• The institution or continuance of any legal proceeding against the corporate debtor including the execution of any order, judgement or decree by any court;
• Any sort of transfer, encumbrance, alienation or disposal of assets of the corporate debtor;
• Any action in order to foreclose, recover or enforce any sort of security interest that is created by the corporate debtor;
• Any action for recover of property that is occupied or in possession of corporate debtor by an owner/lessor
Moreover, section 14(2) permits the supply of essential goods or services to corporate debtor when it is essential to keep the distressed company as a going concern and section 14(3) excludes agreements and transactions related to surety in a contract of guarantee. Section 14(4) lays down the duration of moratorium that it will cease to exist either on the successful completion of CIRP or when the order of liquidation is passed against the corporate debtor. The total duration of CIRP is 330 days including the extensions and moratorium is imposed in this total duration of 330 days.
The rationale behind calm period is to preserve the value of the assets of the corporate debtor and keeping the distressed company as a going concern. By imposing moratorium on the corporate debtor, the IBC ensures these four aspects:
• Preserving the value of the assets of the corporate debtor;
• Provide time and space for all the stakeholders involved in the company to assess and negotiate in accordance to the situation of the corporate debtor;
• All creditors are treated equally and there is no undue advantage taken by one creditor over the other creditor;
• Ensures that there is business continuity by keeping the corporate debtor as a going concern.
Section 32A of IBC, 20164:
This section was added through an amendment made in 2020 to provide the corporate debtor a clean slate from criminal prosecution if the corporate debtor has committed any offence prior to the initiation of the CIRP process. It strikes off any liability that arose from the actions of corporate debtor prior to the commencement of the CIRP and provides the corporate debtor with the immunity against criminal proceedings against that action. However, to invoke this section the resolution plan has to be approved by the NCLT and it should incorporate
• The resolution plan should ensure a complete change in the management and control of the corporate debtor. This offers the corporate debtor a break from the existing faulty management that led the corporate debtor to its insolvency;
• The new management that is appointed should not be the promoter, a related party to the promoter, or any person in-charge of the corporate debtor when the offence was committed;
• The new management of the corporate debtor has the duty to co-operate with the authorities and provide all kinds of necessary assistance to them.
The goal of this section is to provide a chance to the corporate debtor a clean start free of any stain of criminal proceedings. Further, it also offers the prospective resolution applicant a genuine chance to acquire the corporate debtor and revive it from its distressed state.
The conflict between this section and PMLA proceedings is that since it offers a shield to the corporate debtor from all the criminal proceedings against actions committed by the ex-management of the CD, the assets that are covered by the resolution plan cannot be attached in the PMLA proceedings, regardless whether the property was attached before or after the initiation of CIRP proceedings. This conflict will be dealt in further detail in the next part of the paper.
PREVENTION OF MONEY LAUNDERING ACT, 2002
As mentioned before, the goal of PMLA is to prevent money laundering, confiscate and seize the property which is acquired through money laundering and to deal with any other issue related to money laundering. In accordance with this objective of the act, Section 5 of PMLA empowers the Enforcement Directorate (ED) to provisionally attach any property if they have a reason to believe:
• that the person is in possession of money that has been obtained through the proceeds of crime;
• that the property is likely to be hidden, transferred or handled by the person in such a way that it would make confiscation of such property more difficult.
The order of attachment is to be confirmed by the Adjudicating Authority under PMLA and the order is valid up to 180 days.
Now, this provision of PMLA is in stark conflict with Section 14 of IBC. An important factor in the IBC-PMLA dispute is the nature of the attachment. It would be prohibited by Section 14 if it were thought to be similar to civil recovery or execution. The moratorium would not apply if it were considered a component of a criminal law system to deny criminals unjustly obtained wealth.
Additionally, it should be taken into account that if the enforcement directorate temporarily seizes any corporate debtor property under Section 5 of the PMLA, this will interfere with CIRP proceedings because the PMLA attachment prohibits the corporate debtor’s property from being moved, transferred, converted, or disposed of. Therefore, the Interim Resolution Professional (IRP) inherits the company’s assets, including the already-attached property, together with the management of the business. The IRP cannot seek claims for the resolution plan against that property that has been attached, and any potential resolution applicant would be reluctant to participate if the property is already attached, so this will lead to a dispute.
The Adjudicating authority under IBC as well as higher courts faced dilemma while deciding that whether attachment of property would amount to proceedings or recovery actions or enforcement actions that is stayed by IBC under section 14 while the moratorium is imposed or whether such proceedings or recovery actions are outside the ambit of moratorium by virtue of their penal and preventative nature.
In the case of P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd5 the court held that directors and promoters of the corporate debtor cannot be prosecuted under section 138 of the Negotiable Instruments Act as the checks were given to the corporate debtor after the initiation of CIRP and during that time moratorium had already been imposed on all the legal proceedings against the corporate debtor and the interim resolution professional had taken over the affairs of corporate debtor. Hence, the corporate debtor had been unable to encash the checks given to them. The court also interpretated the term ‘proceedings’ in this case gave the reason that since the rationale behind moratorium is to preserve the company’s asset by putting stay on all the recovery mechanisms and legal proceedings and keep it as a going concern, the scope of moratorium also covers check bounce cases under section 138 of NI Act as well.
The interpretation of whether PMLA procedures are covered by Section 14 is significantly impacted by this ruling as the PMLA proceedings during CIRP are seen as actions for “recovery” or the enforcement of claims against the debtor. However, they can be outside the scope of the moratorium if they are viewed as punitive or preventive measures for economic offenses.
INTERPLAY BETWEEN NON-OBSTANTE CLAUSES IN PMLA AND IBC
Section 238 of the Insolvency and Bankruptcy Code, 2016 (IBC)6 and Section 71 of the Prevention of Money Laundering Act, 20027 both have non-obstante clauses that give each law precedence over other laws in the event of a conflict. Because of this overlap, judges are now closely examining which clause applies when enforcement actions under the PMLA and insolvency proceedings under the IBC collide.
In general, courts have used a contextual and purposeful approach, focusing on the timing of proceedings and the intent of the legislature. In cases like Varrsana Ispat Ltd. v. Deputy Director, Directorate of Enforcement (NCLAT, 2019)8, courts have ruled that PMLA applies when the Enforcement Directorate (ED) seizes property prior to the start of insolvency proceedings because the seizure occurs before the moratorium and is a component of a criminal procedure that aims to recover the proceeds of crime. Such assets cannot be taken over by the Resolution Professional, and the PMLA adjudicatory process must be used to request any release.
Conversely, when the ED attaches property during an ongoing CIRP, courts have increasingly inclined toward the IBC’s overriding effect under Section 238, reasoning that continuation of attachment proceedings violates the Section 14 moratorium and disrupts the resolution process. Thus, the interplay between Sections 71 and 238 is resolved primarily by the timing and nature of proceedings, balancing the goals of economic revival under IBC with criminal justice enforcement under PMLA.
ATTACHMENT OF PROPERTY BEFORE AND DURING CIRP
Attachment before CIRP proceeding is initiated:
As mentioned above, the enforcement directorate is empowered to attach the property if it is suspected to be a tainted property or “proceeds of crime”. Conversely, the nature of such attachment is preventive and penal. It is not a recovery action. The legal position of this attachment before filing of an application for CIRP against the corporate debtor is unaffected since the moratorium is not imposed.
However, all of the corporate debtor’s assets will be under the IRP’s custody once the CIRP application is submitted against the corporate debtor, and a moratorium will be placed on any new or ongoing recovery suits. It should be noted, nonetheless, that the moratorium does not render the actions carried out prior to the start of CIRP void.
In the case of Varrsana Ispat Ltd v. Deputy Director of Enforcement9, The ED had seized some of the corporate debtor’s properties and the IRP in that case requested those properties to be released. As the order of attachment was issued prior to the imposition of the moratorium, the NCLT reject the IRP’s application on this ground. The IRP then requested the same relief in an appeal to the NCLAT. The IRP contended that the moratorium under section 14 of the IBC supersedes the relevant PMLA provisions and that government officials cannot halt the CIRP proceedings if the ED is unable to confirm the attachment order during the period of moratorium. The respondent argued that during the moratorium, PMLA proceedings can still go on. The issues before the NCLAT were as follows:
i. Does the moratorium apply to the proceedings or actions regarding attachment of properties of the corporate debtor under the PMLA, 2002? And
ii. Can the IRP file for the discharge of those properties against which PMLA proceedings are ongoing even before the moratorium was imposed?
The NCLAT decided that the moratorium under section 14 of the IBC does not apply to PMLA proceedings after taking into account the nature and purpose of the PMLA. Further, the NCLAT stated that the ED had already attached the properties of the corporate debtor even before the CIRP was initiated, thus, the IRP cannot include those properties against the claims of creditors. Moreover, the tribunal stated that the punishment for money laundering would only be applicable to suspended directors and shareholder under IBC and it will not be applicable on the corporate debtor itself. Lastly, the tribunal said that both IBC and PMLA run parallelly in their specified domain and one act does not supersede the other.
Similarly, in the case of Deputy Director, Directorate of Enforcement v. Axis Bank & Ors10, the High Court of Delhi set aside the decisions given by the NCLT and NCLAT of giving primary importance to Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002, Recovery of Debts and Bankruptcy Acts (RDBA),1993, and IBC, 2016. It upheld the overriding effect of PMLA over Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002, Recovery of Debts and Bankruptcy Acts (RDBA),1993, and IBC, 2016 when the attached property is acquired through proceeds of crime. It also stated that the process of confiscation and attachment of the property of corporate debtor is a civil act and will not come under criminal punishment.
Attachment during the CIRP proceedings:
This section of the paper deals with the legal position of the assets that are attached by the ED under PMLA proceedings during the ongoing CIRP process wherein moratorium is already imposed and there can be no new suits against the corporate debtor. The following cases show the tussle between the two acts during the on-going CIRP process:
In the case of Directorate of Enforcement v. Manoj Kumar Agarwal11 the enforcement Directorate had attached the assets of the corporate debtor and its group companies by the virtue of order dated 29 May 2018. Subsequently, an application for CIRP was filed against the corporate debtor in July, 2018. The NCLT admitted the application and the CIRP proceedings started. The resolution professional appointed in this case filed a petition to the NCLT asking for the release of the attached assets so that it could be included under the CIRP proceedings. The NCLT granted the relief sough by the resolution professional and declared the attachment order null and void. Thereafter, the ED filed an appeal against the judgement of the NCLT, stating that the order of attachment was valid.
The following are the issues before the NCLAT:
• Whether NCLT, in accordance with IBC Section 60(5), has the authority to impede on PMLA-issued attachment orders for corporate debtors’ properties during CIRP.
• should PMLA procedures and attachments be subjected to the moratorium under IBC Section 14(1)(a).
• whether, in the context of CIRP, Section 238 of the IBC supersedes PMLA requirements, including Section 71.
• if linked properties are protected during CIRP under Section 32A of the IBC.
• The application of the IBC moratorium depends on whether PMLA proceedings are civil or criminal.
The tribunal held the following:
• NCLT’s authority under IBC Section 60(5)12: includes all matters pertaining to insolvency, as stated in Section 60(5)(c). Embassy property is distinct, and RP is required to work in the best interests of the corporate debtor.
• The applicability of IBC Section 32A: Corporate Debtor’s property is protected from pre-CIRP offenses by Section 32A; attachments impede resolution. upheld in the Union of India v. Manish Kumar case.
• Attachments’ Impact on CIRP: Attachments limit RP’s management, hinder CIRP, and reduce value.
• Applicability of Section 14 (Moratorium): Pareena Swamp and P. Mohanraj13 have affirmed that the moratorium prevents PMLA proceedings after CIRP.
• Predominant Section 238’s effects: PMLA is superseded by Section 238; RP must get possession.
• There is no conflict between IBC and PMLA: Properties that are attached support IBC’s goals until they are resolved or liquidated.
CONCLUSION
The intersection between the Prevention of Money Laundering Act (PMLA) and the Insolvency and Bankruptcy Code (IBC) represents the wider conflict between the goals of economic policy and the application of the criminal justice system. The PMLA stresses the deterrent and punishment of financial crimes through the attachment and confiscation of unlawful assets, but the IBC places a higher priority on economic regeneration, value preservation, and the protection of creditors’ interests. When the same assets are the focus of concurrent procedures under both acts, this duality frequently causes conflict.
But the evolving legal system has attempted to find a workable balance. In order to maintain the integrity of the criminal justice system, courts have come to understand that assets that are actually obtained from or implicated in money laundering must continue to be under attachment. At the same time, assets that are not tainted by illegality—those that are essential to maintaining business operations and facilitating resolution—have been granted protection under the IBC framework. The recognition that criminal culpability and economic rehabilitation do not necessarily have to conflict is reflected in this judicial balancing.
A key component of resolving these contradictory statutory goals is appropriate sequencing. Actions and attachments made before to the start of the Corporate Insolvency Resolution Process (CIRP) are governed by the PMLA. The success of resolution plans is ensured by Section 32A of the IBC, which protects the corporate debtor and its assets from prosecution for prior offences after resolution takes place. Courts assess whether attachment impedes insolvency goals or has a legitimate criminal purpose during CIRP. A legislative clarification outlining cooperation mechanisms between the NCLT and PMLA authorities would encourage uniformity, legal certainty, and procedural concord in order to avoid jurisdictional overlaps.
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Footnotes
1. Insolvency and Bankruptcy Code, No. 31 of 2016, § 14, Acts of Parliament, 2016 (India).
2. Prevention of Money Laundering Act, No. 15 of 2003, §§ 4–5, Acts of Parliament, 2003 (India).
3. Insolvency and Bankruptcy Code, No. 31 of 2016, § 14, Acts of Parliament, 2016 (India).
4. Insolvency and Bankruptcy Code, No. 31 of 2016, § 32A, Acts of Parliament, 2016 (India).
5. Govind Prasad Todi v. Gov’t of NCT of Delhi, (2023) ibclaw.in 1059 (Del. HC).
6. Insolvency and Bankruptcy Code, No. 31 of 2016, § 238, Acts of Parliament, 2016 (India).
7. Prevention of Money Laundering Act, No. 15 of 2003, § 71, Acts of Parliament, 2003 (India).
8. Varrsana Ispat Ltd. v. Deputy Director, Directorate of Enforcement, (2019) ibclaw.in 67 (NCLAT).
9. Varrsana Ispat Ltd. v. Deputy Director, Directorate of Enforcement, (2019) ibclaw.in 67 (NCLAT).
10. Deputy Director, Directorate of Enforcement v. Axis Bank, (2019) ibclaw.in 06 (Del. HC).
11. Directorate of Enforcement v. Manoj Kumar Agarwal, RP, (2021) ibclaw.in 182 (NCLAT).
12. Insolvency and Bankruptcy Code, 2016, § 60(5) (India).
13. Pareena Swamp and P. Mohanraj