Reconciling the Irreconcilable: An Analysis of PMLA–IBC Conflict Post-Section 32A

[Ria and Nandini are students at Amity Law School, Noida.]

The conflict between the Prevention of Money Laundering Act 2000 (PMLA) and the Insolvency and Bankruptcy Code 2016 (IBC) represents a long-standing challenge for legal and economic policy of India. Both the statues are designed as specialized legislations to deal with different areas of economic misconduct. The PMLA targets the proceeds of crimes and ensures their confiscation, while the IBC is intended to facilitate timely resolution and revival of distressed assets in order to safeguard creditor interests. Yet, the overlapping jurisdictions of both the legislations have led to significant legal dilemmas and uncertainty, particularly regarding the treatment of assets attached during the corporate insolvency resolution process (CIRP). 

The Legal Conflict Between PMLA and IBC

The primary friction between the statutes arises from three critical provisions: one is Section 14 of the IBC which imposes a moratorium barring any legal actions against a corporate debtor during the CIRP; second is Section 238 of the IBC, which provides an overriding effect to the code in case of inconsistencies with other laws; and third is Section 71 of the PMLA, which similarly declares that in case of any conflict the PMLA will prevail over any other contrary legislation.

The introduction of Section 32A to IBC in 2019 further deepened the legislative complication by granting immunity to the corporate debtor and its assets from prosecution for offences committed prior to the commencement of the CIRP, provided that the resolution plan has been successfully approved. While the intent was to provide certainty to the resolution applicants and prevent past liabilities from sabotaging the revival process, this significant change raises a concern about whether criminal acts might be overlooked in the process of corporate rehabilitation. 

Judicial Responses and Doctrinal Developments

The Indian judiciary over the years has attempted to strike a balance between the two specialized legislations. While courts have largely shown deference to the IBC’s broader economic goals, especially after the introduction of Section 32A, they have also recognized the necessity for enforcing laws that protect public interest. A recurring and central dilemma before the courts lie in the interpretation of Section 14 of IBC. 

As section 14 of IBC imposes a moratorium on “institution or continuation of proceedings” against the corporate debtor from the insolvency commencement date, the purpose behind the section was outlined in the 2015 Vishwanathan Committee Report, that is, to create a protective environment around the distressed entity, allowing for an uninterrupted restructuring process. The report noted:

“The moratorium aims to maximize the value of the assets for the corporates to continue its business and to prevent the entity from being subjected to any additional strain when its viability is being assessed during the Insolvency Resolution Process.”

However, the protective scope of Section 14 has encountered limits, especially where enforcement under other statutes, such as PMLA, is involved. In Varrsana Ispat Limited v. Deputy Director, Directorate of Enforcement, the National Company Law Appellate Tribunal (NCLAT) held that criminal proceedings arising from violations of public policy were outside the scope of Section 14. It was also asserted by the tribunal that the enforcement proceedings under PMLA are directed towards individuals such as directors and other officers rather than the corporate debtor itself. This distinction has facilitated PMLA to continue its action despite the moratorium, since here the liability was personal rather than corporate. The above rationale has been reiterated in the case of Manish Kumar v. Union of India, where the intent of the legislation has been clarified, which was to protect the corporate debtor, while fixing accountability on those inculpated. This demarcation between the corporate debtor and its management highlights the different approach under PMLA and IBC. Therefore, strictly speaking PMLA proceedings can be enforced against both the companies and individuals, as covered under the ambit of the definition of ‘person’ under Section 2(1)(s) of the PMLA. However, both the courts -- the NCLAT and the apex court -- have leaned on the distinction that for insolvency, PMLA proceedings are treated as attaching individuals because Section 32A of the IBC set asides the corporate debtor post resolution. The court also observed that enforcement proceedings under PMLA are fundamentally different in nature from civil or commercial litigation and hence cannot be simply stayed while moratorium under IBC is operative. 

Similarly, in Rajeev Chakraborty v. Enforcement Directorate, the Delhi High Court examined whether the moratorium under Section 14 would halt the proceedings initiated by the ED under the PMLA. The court ruled that moratorium does not bar such enforcement actions, noting that the attachment of tainted assets under PMLA is not a form of debt recovery, but rather a punitive and preventive measure rooted in criminal law, therefore lies outside the ambit of Section 14. The court also emphasized that the IBC’s overriding effect must be read in light of Section 32A, which specifically refines the extent of immunity provided to the corporate debtor. This reasoning reflected an understanding that financial crimes have consequences far beyond the corporate debtor and directly affect national and international financial stability.

However, these precedents predate the full implications of Section 32A. This issue was deeply examined in Directorate of Enforcement v. Manoj Kumar Aggarwal, where the Bombay High Court gave primacy to Section 32A and upheld that once the resolution plan is approved, the corporate debtor enjoys statutory immunity from prosecution under any law, including PMLA. The decision indicated a clear tilt in favor of finality in insolvency proceedings and protecting resolution applicants from the burden of previous misconducts.

The apex court, while examining the said issues in Maruti Udyogi Limited v. Ram Lal, applied the principle of Leges posteriores priores contrarias abrogant, held that when both statues are special and contain overriding provisions, the one enacted later in time prevails. The rationale lies in the presumption that the legislature ought to have known the existence of earlier statue and its overriding effect and still enacted the newer statute with an intention for it to prevail. Therefore, the introduction of Section 32A to the IBC in 2019 signifies its overriding effect over any other law.

Impact on Operational and Economic Scenario

The tension between two statutes creates a grey zone, with one having far-reaching ramifications for investor confidence and creditor recoveries and the other causing damage to the broader economic ecosystem of the country.

There is a high chance that the resolution applicants seeking to revive a distressed company may face uncertainty regarding whether assets acquired are free from criminal taint. In case, due diligence fails to detect money laundering-related issues, unknowingly acquiring such assets will prove to be prejudicial to their interests, as these assets may later get confiscated, thereby exposing the applicants to reputational damage and legal implications.

The issue also lies with the broad interpretation and blanket application of Section 32A of IBC, which could undermine the rule of law by allowing corporate debtors with serious financial misconduct to walk away from any accountability, thereby creating a dangerous precedent for corporates, establishing the CIRP as a safe haven for companies facing criminal scrutiny, rather than as a tool for legitimate economic recovery that would benefit the public at large.

Despite this, unchecked PMLA enforcements during the insolvency proceedings also present serious concerns for the parties. The attachment of key operating assets by the ED during the CIRP could result in failure of the resolution plan and liquidation of the corporate debtor. This would jeopardize the interests of creditors as well as employees, suppliers, and potential investors. The uncertainty surrounding such enforcements would completely discourage bidding which would lower valuations and postpone recoveries.

Toward a Harmonious Interpretation: Recommendations

Legislative clarity

A considerable ambiguity is created by the existing lacunae under Section 32A, wherein there is no explicit exception defined for the treatment of assets judicially determined to be proceeds of crime under laws like PMLA. While there have been judicial precent that have attempted to fill in such a gap, the Supreme Court of India has timely emphasized the primacy of IBC over any other legislation in terms of insolvency. In order to ensure protection of genuine resolution applicants and attachment of tainted assets, legislative clarification remains desirable therefore an amendment of Section 32A must be considered. An express amendment to Section 32A must conclusively state that immunity granted under this provision would not extend to assets that are conclusively proven to be proceeds of crime. In a 2020 paper, SEBI proposed amending Section 32A to ensure that creditors do not endorse resolution plans that are funded through illegally diverted public money to resolve the insolvency and pay themselves. Therefore, a precedent surely serves as a helpful interpreter, a statutory reform would set and cement a uniform standard for such proceedings. 

Judicial oversight during CIRP

In order to prevent Section 32A of the IBC from inadvertently granting blanket immunity to assets involved in money laundering, balanced approach must be adopted between the resolution professional and the adjudicating authority. The resolution professionals are entrusted with duties as outlined under Sections18 and 25 of the IBC and have the duty of conducting due diligence over the assets and liabilities of the corporate debtor and determining the asset pool for resolution. However, the judicial scrutiny stands essential where the assets of the corporate debtor are attached under the PMLA, and any disputes regarding inclusion or exclusion of such assets in the resolution process shall be examined and determined under judicial scrutiny. Adequately empowered tribunals and a time-bound process must be employed in determining whether an attached asset is crucial to the corporate debtor’s revival or whether such attachment would serve a greater public interest. Therefore, this dual mechanism allows the resolution professionals to perform their statutory duty while ensuring a judicial oversight. 

Protocols for separate asset treatment

A compelling argument can be drawn for implementing a statutory framework that permits “ring fencing” of assets suspected to be proceeds of crimes to reduce the friction between insolvency proceedings and ongoing enforcement under the PMLA. The purpose is that such assets once provisionally attached by the Enforcement Directorate under the PMLA should not be immediately factored into the corporate debtor’s asset pool during CIRP. Alternatively, such assets can be temporarily set aside, thereby excluding them from the valuation process conducted during the CIRP. 

Inter-agency coordination

In the current legal landscape, there is a noticeable lack of systematic coordination between institutions involved in parallel proceedings, such as the IBBI, IPs, and the ED. Mechanisms such as inter-agency review panels, well defined standard procedures and provisions facilitating mandatory exchange of information that are incorporated into the PMLA and IBC procedural frameworks could be implemented to facilitate formal communication. 

The methods suggested, would enable a more nuanced application of both the specialized legislations without establishing a rigid hierarchy among the laws. The proactive role of the judiciary also highlights the potential for creating a functional overlap in which both the statues continue to serve their functions without one statute frustrating the purpose of the other.

Conclusion

The persisting conflict between the PMLA and the IBC represents a classic dilemma in modern legal systems: the issue of balancing conflicting policy objectives of two specialized legislations without rendering either of the statutes ineffective in its operation. After the insertion of Section 32A, although the courts seem to be increasingly inclined towards securing the revival of the corporates under IBC, this trajectory is not uniform. In the case of Varrsana Ispat, the NCLAT clarified that PMLA proceedings against individuals and promoters may continue despite the moratorium in action, since they do not fall within the ken of corporate debtor’s protection. Similarly, the apex court in Manish Kumar upheld Section 32A but emphasized that such immunity extends only to the corporate debtors and not to those responsible for underlying misconducts. Most recently, the court expressly clarified that NCLT lacks jurisdiction over the matters relating to PMLA, reiterating that PMLA proceedings may proceed in parallel. This case also highlights the case-specific nature of the judicial approach towards addressing the conflict.

Taken together, these rulings imply that judiciary is not strictly in favor of IBC at the cost of enforcement, but it is rather grappling with the tension of ensuring economic revival while preserving the deterrent effect of anti-money laundering laws. In such a scenario a binary approach in interpreting statutes, where one always takes precedence over the other, is neither adequate nor constructive. The need of the hour is a legislative and administrative framework that balances conflicting objectives. India's dual objectives of preventing financial misconduct and creating an insolvency regime that is investment-friendly can only be fully supported by such an integrated approach.