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Insolvency and Bankruptcy Code, 2016 (IBC), and the Prevention of Money Laundering Act, 2002 (PMLA), address different issues and were created for distinct purposes.
PMLA was implemented to address the criminal act of legitimizing income or profits derived from illegal activities. It aims to curb money laundering, combat the diversion of funds into illegal activities, and confiscate property linked to money laundering. It also establishes penalties for offenders and sets up an adjudicating authority and appellate tribunal to handle related matters.
IBC was enacted to simplify the existing legal framework and establish an effective system for debt recovery. It introduces a structured institutional setup and a two-step procedure for corporate insolvency. IBC aims to simplify and unify the legal framework for insolvency and bankruptcy, replacing complex processes with a more efficient mechanism for recovering dues from both corporate and non-corporate debtors. The Insolvency and Bankruptcy Board of India (IBBI) has played a vital role in raising awareness and regulating the process. The IBC’s strength lies in its well-structured institutional framework, which includes the IBBI, insolvency professionals, information utilities, and adjudicatory bodies like the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT). It ensures timely, formal resolution of insolvency cases while promoting corporate governance. The Code outlines a two-step process for corporate debtors with a minimum default of Rs. 1,00,00,000: the Insolvency Resolution Process (Sections 6-32), where creditors assess the feasibility of business revival, and Liquidation (Sections 33-54), where assets are distributed among creditors if revival is not possible.
Both the PMLA and IBC are specialized laws that include non-obstante clauses (PMLA under Section 71 and IBC under Section 238), which ensure that the provisions of these statutes take precedence over any other conflicting laws. In cases where there is a conflict between two statutes containing non-obstante clauses, the year of enactment of each statute is an important consideration as held by the Hon’ble Delhi High Court in Rajiv Chakraborty Resolution Professional of EIEL v. Directorate of Enforcement which clearly states that:
“103. While there can be no doubt that where two special statutes incorporate non obstante clauses it is the later enactment which would ordinarily or normally prevail, the same cannot possibly be recognised as constituting the solitary principle of interpretation which would apply or an inviolable rule. It must be fundamentally borne in mind that a non obstante clause in any statute is looked at principally in case of an asserted irreconcilable conflict between statutes. However, that does not preclude courts from identifying or discerning the core objectives of the competing statutes. This would be manifest from the following pertinent observations that were made by the Supreme Court in Maruti Udyog Vs. Ram Lal–
- The said Act contains a non obstante clause. It is well settled that when both statutes containing non obstante clauses are special statutes, an endeavour should be made to give effect to both of them. In case of conflict, the later shall prevail…..”
However, this rule isn’t universally applicable, and other factors such as the purpose and intent of the statute must also be taken into account when resolving such conflicts. Therefore, the resolution of conflicts between the provisions of the IBC and PMLA cannot be determined solely by the year in which these laws were introduced. Below are a few cases that highlight the conflict between the IBC and PMLA:
NCLAT Mumbai, in the matter of Varrsana Ispat Limited Vs. Deputy Director, Directorate of Enforcement, observed that PMLA addresses the proceeds of crime and the offense of money laundering, which leads to the seizure of property linked to or involved in money laundering. As a result, it was concluded that Section 14 of the IBC does not apply to such cases. The NCLAT further pointed out that the punishment for money laundering, which includes a minimum of three years of rigorous imprisonment, applies to individuals such as former directors and shareholders of the corporate debtor, who cannot seek protection under Section 14 of the IBC. Additionally, the NCLAT noted that the attachments occurred before the initiation of the Corporate Insolvency Resolution Process (CIRP), meaning the Resolution Professional cannot benefit from Section 14. It was also highlighted that the PMLA and the IBC are distinct legal frameworks that do not override each other, leading to the rejection of the appeal.
NCLAT Mumbai took a similar view in the matter of Rotomac Global Private Limited vs. Deputy Director, wherein the Hon’ble Tribunal observed that that the provisions of Section 14 of the IBC, which imposes a moratorium on legal actions against a corporate debtor during the Corporate Insolvency Resolution Process (CIRP), do not extend to proceedings under the PMLA. The Tribunal explained that the PMLA focuses on penal measures related to money laundering, while the IBC deals with corporate insolvency, meaning the two laws function in distinct areas. Additionally, the Tribunal clarified that penalties under the PMLA, including a minimum of three years imprisonment, apply to individuals such as former directors and shareholders of the corporate debtor, rather than the corporate entity itself. These individuals are not shielded by Section 14 of the IBC and cannot use the corporate insolvency process to evade or postpone punitive actions under the PMLA.
Additionally, the Tribunal highlighted that the Directorate of Enforcement’s attachments under the PMLA were made prior to the initiation of the CIRP, reinforcing the non-applicability of Section 14 to such proceedings. The appeal was ultimately dismissed, aligning with the judgment in Varrsana Ispat Limited, which affirmed that the provisions of the PMLA and IBC can proceed concurrently without one overriding the other.
Although a different view has been taken by NCLAT Mumbai in the matter of The Directorate of Enforcement Vs Manoj Kumar Agarwal & Ors, wherein the Hon’ble Tribunal held:
“42. In our view, there is no conflict between PMLA and IBC and even if a property has been attached in the PMLA which is 11 belonging to the Corporate Debtor, if CIRP is initiated, the property should become available to fulfil objects of IBC till a resolution takes place or sale of liquidation asset occurs in terms of Section 32A.”
A similar view has been taken by the NCLAT New Delhi in Kiran Shah, RP of KSL and Industries Ltd. Vs. Enforcement Directorate, Kolkata, wherein the Hon’ble Tribunal held that the Adjudicating Authority (NCLT) lacks the jurisdiction to handle issues that fall under the authority of another body, such as those governed by the PMLA.
Further in the matter of Nitin Jain, Liquidator, PSL Limited Vs Enforcement Directorate, the Hon’ble Delhi High Court held that:
“102. Accordingly, and for all the aforesaid reasons, this writ petition shall stand allowed in the following terms. The Liquidator is held entitled in law to proceed further with the liquidation process in accordance with the provisions of the IBC. The respondent shall hereby stand restrained from taking any further action, coercive or otherwise, against the liquidation estate of the corporate debtor or the corpus gathered by the Liquidator in terms of the sale of liquidation assets as approved by the Adjudicating Authority under the IBC. The Court grants liberty to the petitioner to move the Adjudicating Authority for release of the amounts presently held in escrow in terms of the interim order passed in these proceedings.”
Further, the Hon’ble Delhi High Court in Rajiv Chakraborty Resolution Professional of EIEL v. Directorate of Enforcement held that:
“101…………..” The aforesaid discussion leads the Court to conclude that the provisional attachment of properties would in any case not violate the primary objectives of Section 14 of the IBC.’’
In conclusion, the issue at hand revolves around the potential conflict between the provisions of the PMLA and the IBC both of which have non-obstante clauses that could give rise to jurisdictional overlaps. PMLA focuses on the prevention of money laundering and the attachment of assets linked to criminal activities, while the IBC seeks to resolve insolvency and facilitate debt recovery. Courts have generally taken the stance that there is no inherent conflict between these laws. In cases where assets are attached under PMLA, the judiciary has upheld that such assets may still be available for resolution or liquidation under the IBC, provided the due process is followed. However, certain rulings, such as those from the Delhi High Court, have emphasized that the adjudicating authority under IBC cannot interfere with matters under the jurisdiction of PMLA authorities. Moving forward, a clearer framework or legislative clarification might be needed to streamline the interaction between these two laws, ensuring that both the objectives of combating money laundering and resolving insolvency are effectively achieved without undermining each other.
Authors: Mr. Anil Tiwari, Partner and Ms. Nishi Kashyap, Associate.