The Confluence of Corporate Rescue and Criminal Proceeds: A Critical Analysis of the IBC-PMLA Conflict in India and a Comparative Look at the UK Approach
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Introduction
The contemporary economic landscape is increasingly characterised by a complex interplay of corporate financial distress and the imperative to combat financial crimes. This intersection often gives rise to complex legal issues, particularly when corporate assets are simultaneously subject to insolvency resolution and criminal forfeiture actions. India’s Insolvency and Bankruptcy Code, 2016 (“IBC”), the primary framework for resolution of corporate debtors in a time-bound manner, is frequently put in direct conflict with the Prevention of Money Laundering Act, 2002 (“PMLA”), a specialised penal statute aimed at tracking, freezing, and finally confiscating assets regarded as being “proceeds of crime”.
The resultant legal conflict between the IBC’s recovery mechanisms and the PMLA’s penal machinery reflects a systemic conflict between value maximisation for creditors and asset restraint suspected as proceeds of crime. This uncertainty has sweeping implications for resolution professionals (“RPs”), creditors, and prospective bidders under the IBC regime. In most cases, secured assets are frozen as proceeds of crime, rendering revival and value maximisation a remote possibility if there is no prompt clarity regarding the release or seizure of assets. Section 32A of the IBC plays the key role of bridging this conflict. By protecting the corporate debtor and bona fide acquirers from prosecution for prior offences once control has passed into new hands, Section 32A functions as the key statutory clean slate principle, albeit in an application that remains arguable and subject to continued judicial clarification. The existing regulatory context shows the imperative necessity of harmonised methods so that India’s insolvency framework can live up to its potential of economic resurgence while respecting the mandate of fighting financial crime.
A key development in this jurisprudential debate is the recent decision of the National Company Law Appellate Tribunal (“NCLAT”) in Anil Kohli v. Enforcement Directorate. This analysis disentangles the legal reasoning of the judgment, evaluates its broader policy ramifications, and examines comparative models, specifically the United Kingdom’s, for mediating these competing statutory goals.
The Case in Brief: Dunar Foods’ Dance with Two Laws
Dunar Foods Ltd., an exporter of basmati rice, was admitted to the Corporate Insolvency Resolution Process (“CIRP”) under the IBC on an application filed by State Bank of India on account of significant defaults, which was admitted on 22nd December, 2017. A moratorium pursuant to Section 14 of the IBC was invoked from that date, and an RP was appointed.
The Enforcement Directorate (“ED”) had launched in 2013 an investigation under the PMLA against an associate company of Dunar Foods Ltd. (PD Agroprocessors Pvt. Ltd.), tracing suspected tainted funds to Dunar Foods Ltd. As a result, the ED, on 26th December, 2017, served a Provisional Attachment Order (“PAO”), attaching assets of Dunar Foods Ltd. in excess of Rs. 177 crores. Thus, this attachment followed soon after CIRP had started. The assets involved were allegedly acquired as proceeds of money laundering.
The RP, through written communications on 14th February, 2018, had sought de-attachment from the ED under the IBC moratorium and its overriding effect, but without success. The RP then approached the NCLT on 16th February, 2018, seeking to set aside the attachment, which was rejected. The NCLT determined that attachments under PMLA were beyond the ambit of the moratorium and that it did not have jurisdiction over confirmed orders of PMLA. Thereafter, the PMLA Adjudicating Authority confirmed the provisional attachment.
Aggrieved by the NCLT’s order, the RP appealed to the NCLAT, stating that the attachment defeated the moratorium and thwarted CIRP’s intentions. The main issue before the NCLAT was whether PMLA attachments take precedence over the IBC moratorium.
The NCLAT’s Ruling: Dividing the Domains
The NCLAT ruled that the POA issued by the ED under PMLA was not violative of the moratorium under Section 14 of the IBC. It explained that although the PAO was ordered after the commencement of CIRP, PMLA proceedings are not ordinary recovery proceedings but are covered by criminal law enforcement. Assets purported to be proceeds of crime are not included in the freely available resolution estate for CIRP. The Tribunal followed Varrsana Ispat Ltd. judgment, reaffirming that established PMLA attachments, based on existing criminal investigations, are not subject to interference by the IBC.
The NCLAT further held that Section 238 of the IBC does not supersede the PMLA where tainted assets are involved. It emphasised three key propositions:
(i) assets derived from criminal activity cannot be included in the resolution estate,
(ii) the IBC, aimed at commercial revival, and the PMLA, a penal statute targeting criminal proceeds, operate in distinct spheres, and
(iii) Section 238 applies only where there is an explicit and irreconcilable conflict between the two laws.
The Tribunal clarified that the (i) Section 238 applies only where there is an explicit inconsistency and both laws operate in the same sphere; (ii) Tainted assets cannot be included in the resolution estate, as reaffirmed by referring to the Axis Bank decision; (iii) The ED, as a public enforcement agency, can act independently; and (iv) Section 32A of the IBC does not apply when the attachment of assets is confirmed before the resolution plan is approved.
Clarity Achieved, But at What Cost?
The ruling is a milestone in demarcating the jurisdictional boundaries between the IBC and the PMLA. On the one hand, it makes criminal law safe from attempts to water down enforcement through insolvency procedures. On the other hand, it poses both practical and philosophical issues regarding the efficacy of the IBC in reviving distressed companies when prime assets are frozen in criminal litigation.
From a positive standpoint, the judgment provides much-needed certainty to RPs, successful resolution applicants, and enforcers. It reaffirms that the IBC is not an abode for economic offenders and that proceeds of crime cannot be whitened simply by going through CIRP. It also safeguards the ED’s mandate under PMLA and harmonises India’s international commitments under the Financial Action Task Force to prevent money laundering.
Despite its merits, the judgment presents several challenges, particularly concerning the practical application of the “clean slate” doctrine. By restricting retrospective application of Section 32A and maintaining pre-resolution plan attachments, the ruling effectively weakens the “clean slate” principle for assets that may be proceeds of crime. This leaves significant uncertainty for resolution applicants who might end up with encumbered assets, despite the approval of a resolution plan.
This volatility, in turn, has the risk of discouraging genuine investor confidence. The possibility of assets being levied by the ED, during or even after CIRP, may deter prospective resolution applicants, particularly those with complex financial pasts or operating in industries with a history of scrutiny. This could shrink the market of prospective investors, resulting in reduced recovery percentages for creditors and inhibiting the IBC’s primary goal of extracting maximum value from distressed assets.
For instance, in past cases like ABG Shipyard Insolvency, enforcement agency attachments instilled apprehension among prospective bidders and led to reduced recovery rates. Even when attachments were warranted, the risk associated with encumbered assets deterred competitive bidding, eventually impacting recoveries. Hypothetically, if such enforcement actions are repeated more often, investors might find insolvency processes riskier, which would make India a less desirable place for restructuring. This worry is epitomised in India’s performance on insolvency. Although India has undertaken impressive reforms, it placed 52nd in the World Bank’s 2020 Doing Business Report for resolving insolvency. Uncertainty from tensions between insolvency and enforcement legislation has the potential to jeopardise these advances, discourage investment, and drag out restructuring. Relieving these practical concerns by having clearer judicial or legislative direction may promote investor confidence without undermining anti-money laundering enforcement integrity. The ruling also highlights a significant procedural gap: how can RPs and potential investors gain clarity on potential PMLA actions early in the CIRP to accurately value assets and formulate viable plans? The current system appears to place the onus on the RP to discover and challenge, often retrospectively.
Towards a “Conditional Clean Slate” with Enhanced Transparency
The existing judicial approach, with its penchant to create a dichotomy between the IBC and PMLA, is not best suited to the sophisticated reality of corporate resolution. Instead of making a forced zero-sum decision, a more pragmatic system would be a “conditional clean slate”, one that appreciates the priority of the PMLA’s over proceeds of crime while also allowing effective corporate rescue. This would necessitate a combination of procedural change and statutory interpretation.
Firstly, the Corporate Debtor and the RP should be mandated to disclose all outstanding ECIRs and provisional attachments at the beginning of the CIRP. The same should be made a part of the Information Memorandum to allow resolution applicants to evaluate legal risk prior to bidding.
Secondly, in the case of assets attached under CIRP, the PMLA Adjudicating Authority ought to have an expedited procedure to approve or release attachment within a specified period, ideally between 30 to 60 days, to avoid prolonged uncertainty regarding the availability of assets.
Thirdly, assets found to be “proceeds of crime” should be segregated from the resolution estate. Resolution plans ought to be formulated only with respect to unencumbered assets so that successful resolution applicants have clarity.
Lastly, Section 32A could be interpreted or amended to provide conditional immunity where the resolution plan guarantees the preservation of tainted asset value and its transfer to the ED after resolution. This would enable firms to remain as going concerns as the state recovers illegal value through other mechanisms, including future earnings or escrowed payments.
This model is consistent with both economic resurgence and enforcement objectives, redirecting attention away from asset freezing (which tends to devalue) and towards value recovery, meeting state interest and corporate viability.
Comparative Perspective: Corporate Rescue and Asset Tracing in the UK
The United Kingdom provides an organised framework for controlling the overall crossover between corporate rescue and recovery of criminal assets, mainly regulated by the Insolvency Act 1986 and Proceeds of Crime Act 2002 (“POCA”). Tools such as Company Voluntary Arrangements and Administration under the Insolvency Act can trigger business renewal, and POCA allows confiscation of assets to ensure criminal proceeds are not kept by criminals.
UK asset tracing is strong, based on public records and legal measures that enable effective identification and recovery. POCA provides for Restraint Orders and Confiscation Orders to prohibit dissipation and facilitate recovery of assets which are considered to be criminal proceeds. Most importantly, the UK law requires that clearly identifiable assets having criminal origin are removed from the insolvent estate, in order to remove uncertainty.
Furthermore, POCA safeguards bona fide third-party interests so that they can retain value if established, drawing parallels to, but with more precision than, India’s Section 32A of the IBC.
India may learn three important lessons, namely: (1) properly codifying the treatment of “proceeds of crime” within insolvency cases; (2) allowing corporate rescue to continue on legitimate assets while enforcement is directed against tainted ones; and (3) more effectively shielding good-faith investors after resolution. Moreover, POCA’s civil recovery regime, which allows for asset recovery without a criminal conviction, may encourage Indian reforms to find a balance between enforcement and business continuation. Civil recovery under POCA enables authorities to recover assets by establishing, on the balance of probabilities, that the assets are the proceeds of crime, without requiring a criminal conviction. In contrast to criminal confiscation, which requires proving guilt beyond a reasonable doubt, civil recovery has a lower evidentiary standard, a balance of probabilities, so that the court is content that it is more probable than not that the assets are criminal gains (POCA, sections 304-305).
For instance, where a business firm goes into administration and some funds are believed to have come through fraud, the authorities can recover through civil action without waiting for criminal indictment or conviction. This is a flexibility which will allow faster enforcement while keeping genuine operations going on, which is an appealing model for India to borrow in striking a balance between effective insolvency resolution and recovery and tracing.
Thus, the UK system provides a workable, open model, one that India could draw on to better harmonise its insolvency and enforcement regimes.
Conclusion: Towards a Harmonised Future
The Dunar Foods judgment upholds the pre-eminence of PMLA over IBC in cases of established attachments of proceeds of crime, providing legal certainty but revealing a structural conflict between corporate rescue and criminal enforcement. While the decision strengthens state power, it undermines the ‘clean slate’ principle and deters bona fide investors. India needs to shift towards a balanced regime, through legislative change, inter-agency coordination, and thoughtful judicial interpretation, to protect both economic recovery and the struggle against financial crime. Borrowing from international models such as the UK, the need for a harmonised statutory framework is critical in order to promote predictability and investor confidence in the insolvency regime. Without such reform, India stands the risk of generating a hostile environment in which enforcement and recovery efforts operate at cross-purposes, undermining both financial integrity and economic growth. A well-constructed framework will guarantee that enforcement activity is targeted, while legitimate businesses are afforded the space to rebuild and flourish. This is not a policy option; it is necessary for establishing a robust and credible insolvency environment. It is now imperative for Parliament to amend the IBC, for the ED and IBBI to develop joint protocols, and for the judiciary to interpret these statutes harmoniously.
*The author is a Fourth-year B.A., LL.B. (Hons.) student at Hidayatullah National Law University, Raipur.
