The Insolvency and Bankruptcy Code, 2016 (IBC) and the Prevention of Money Laundering Act, 2002 (PMLA) are landmark legislation, enacted with separate objectives. The IBC aims to consolidate and resolve insolvency processes within a specific time frame to maximise asset value. The PMLA is concerned with identifying and attaching the proceeds of crime, ensuring criminal accountability and deterring money laundering. The meeting of these statutes has led to the recurring legal question as to which law prevails when insolvency proceedings under the IBC are underway, and attachment proceedings are initiated by the Enforcement Directorate (ED) under the PMLA.

The IBC was introduced to streamline the process of insolvency resolution and liquidation. Once the insolvency process is triggered, it imposes a moratorium, which freezes all legal proceedings or recovery efforts against the corporate debtor. This creates a period of calm, during which the resolution professional (RP) can evaluate and manage the corporate debtor’s assets without interference. The PMLA was enacted to combat the criminal aspects of economic offences, specifically the laundering of proceeds of crime. It empowers the ED to attach, seize, and confiscate any property that it has reason to believe represents the proceeds of crime and is likely to be concealed or transferred.

The conflict arises when the ED attaches the property of a corporate debtor under the PMLA, treating it as proceeds of crime. At the same time, such assets fall within the scope of insolvency proceedings under the IBC. The IBC and the PMLA both contain notwithstanding clauses and frequently clash. Courts are often called upon to decide which statute prevails in any given case.

Courts and tribunals in a number of pivotal judgments have adopted a nuanced approach, balancing the economic goals of IBC against the sovereign interest and penalising financial crime under the PMLA. In Varrsana Ispat Limited Through the Resolution Professional Mr Anil Goel v Deputy Director, Directorate of Enforcement, reaffirmed in Rotomac Global Private Limited v Deputy Director, Directorate of Enforcement, the National Company Law Appellate Tribunal (NCLAT) held that neither statute took precedence over the other. However, if the property is the proceeds of crime, it is not a debtor’s asset and cannot be part of the corporate insolvency resolution process. If it proves not to be the proceeds of crime, the resolution professional may apply at a later stage for it to be so included.

The NCLAT and the Bombay High Court took the opposite view in Directorate of Enforcement v Manoj Kumar Agarwal and Ors. However, in Rajiv Chakraborty v Enforcement Directorate, the Delhi High Court, relying on its own decision in Deputy Director v Axis Bank, recognised the public interest objectives of both statutes, emphasising that attachment under PMLA is not a transfer of title but a restraint designed to preserve suspected proceeds of crime while awaiting adjudication. Such an attachment does not extinguish existing legal rights in the property, including those of creditors proceeding under the IBC. The attached property is neither a debt nor an asset and is not subject to the IBC moratorium. PMLA actions relate to the enforcement of criminal law, and not to the corporate insolvency resolution of insolvent companies.

The Supreme Court in Kalyani Transco v Bhushan Power and Steel Limited made it clear that neither the National Company Law Tribunal nor the NCLAT have power of judicial review to direct the ED to release attached property. Their powers derive solely from the IBC. Actions under the PMLA are within the domain of public law, the only appropriate forums for challenging actions of the state under the PMLA being the high courts or the special courts designated under the statute.

The revival of companies under the IBC cannot come at the cost of nullifying proceedings under the PMLA, unless such proceedings lack a legal basis or violate constitutional safeguards. In that case, the high courts remain the appropriate forums.

The evolving case law seeks a balance between the public interest in economic revival and the punishment of financial crimes. Although economic legislation and penal statutes must co-exist, those administering them must recognise each others’ rights.

Anju Shree Nair is an Associate at SNG & Partners