IBC vs PMLA: Resolution professionals hope for timely resolution

The IBBI circular allows resolution professionals to seek restitution of assets attached under PMLA, but experts say its success depends on timely court orders and clear legal backing

The latest circular by the insolvency regulator to resolve the long-standing friction between Insolvency and Bankruptcy Code (IBC) and the Prevention of Money Laundering Act (PMLA) has provided a clear direction to resolution professionals (RPs) but experts believe that its effectiveness would depend on legislative amendment or judicial pronouncement.

 

In the circular dated November 4, the Insolvency and Bankruptcy Board of India (IBBI) enabled RPs to approach the special courts handling PMLA cases involving financial crimes.

 

“The restitution of such attached assets can significantly enhance the value of the Corporate Debtor, thereby leading to higher realisation,” the IBBI said.

 

The RPs would be required to submit an undertaking that restituted assets would be used only for the benefit of creditors, no advantage would flow back to the accused or promoters, and that full reporting and compliance safeguards would remain in place until resolution is completed.

 

“Even with the undertaking, there is no definite timeline for special courts under PMLA to pass orders lifting the attachments or restituting the assets. The circular does not fully resolve the issue of clarity of liability for resolution applicants, who take over assets previously attached under PMLA,” said Vijay K Singh, senior partner at S&A Law Offices.

 

IBC practitioners said that the conflict between PMLA and IBC is not only about asset attachment, but also arises from issues such as prosecution of directors and promoters, rights of secured creditors versus the enforcement directorate (ED), and priority of claims, among others.

 

“The effectiveness of the circular will depend on how the special court under PMLA implements the applications for restitution of attached assets as it does not set a timeline for the adjudication of restitution applications,” Singh added.

 

IBC and PMLA have often clashed with each other in cases where the assets of an entity undergoing insolvency have been attached by the ED for money laundering activities. IBC promises a clean slate to the winning resolution applicant, and aims at resolving stressed companies by giving a moratorium on assets during insolvency proceedings.

 

Section 14 of IBC provides a moratorium for assets under insolvency against all recoveries. It does not, however, automatically protect the assets of a company undergoing insolvency proceedings from attachment under PMLA.

 

“The success of this measure will depend on how promptly special courts act on such applications, and how consistently the ED and IPs (insolvency professionals) coordinate in practice,” said Vipin Upadhyay, partner, King Stubb & Kasiva, Advocates and Attorneys.

 

Experts said that balancing transparency obligations with protection of commercially sensitive information could also become a challenge.

 

Stressing that the IBBI circular does not override ED’s powers, and that restitution will still depend on court discretion, Piyush Agrawal, partner, AQUILAW, said: “Sharing of sensitive information with the ED could also raise confidentiality concerns. The real impact will depend on how proactively special courts and the ED support its implementation.”

 

Provisions of both PMLA and IBC provide for an overriding effect, which has often led to conflicts.

 

Section 71 of PMLA provides an overriding effect, stating: “The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force”

 

On similar lines, Section 238 of IBC says provisions of this Code will override other laws. “The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law,” it says.